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Wednesday, June 19, 2024 | Back issues
Courthouse News Service Courthouse News Service

Brazilian Oil Company Beseiged by Shareholders

MANHATTAN (CN) - Bribery allegations have led to an investigation of Brazil's "largest corporation," Petroleo Brasileiro, as stock prices fall, a federal class action alleges.

The city of Providence, R.I., hopes to represent the class of investors suing Petrobras, as its name is abbreviated in the 69-page complaint filed in the Southern District of New York.

It notes that Petrobras has sold $98 billion in securities on the New York Stock Exchange during the class period, which it puts from Jan. 22, 2010, to Nov. 21, 2014.

That end date marks the most public reprisal of Petrobras for its scheme: an announcement that the Securities and Exchange Commission had subpoenaed Petrobras and was investigating it "relating to material weaknesses in its internal controls," according to the Dec. 24 complaint.

Common and preferred American depository shares of Petrobras fell in the wake of that announcement to close at $10.50 and $11.06, Providence says.

Petrobras, which began in 1953 as a corporate vehicle for the Brazilian federal government, had allegedly been eyeing "substantial capital investment" to fund the expansion of production capacity.

For that purpose, Petrobras paid $360 million in 2006 for a 50 percent interest in an oil refinery in Pasadena, Texas, according to the complaint. Providence also says that the 2010 expansion of a Petrobras construction project in Brazil more than quadrupled the price tag to $26.87 billion. The Portuguese name of this Rio de Janeiro facility is abbreviated in the class action as COMPERJ.

Investors say what is now becoming clear to them is that these projects came at a hidden cost.

Providence says people with influence at Petrobras took bribes from contractors for the lucrative contracts, and Petrobras returned the favor "by paying inflated amounts under the contracts."

Petrobras allegedly treated these "bribe repayments" as construction-related costs, recording them as assets on corporate balance sheets.

The company is now in regulatory hot water for calculating its net income based in part on such expenses, Providence says.

"Had the illegal bribe-related repayments been properly accounted for, the company would have recognized materially greater expenses and less net income in certain periods," the complaint states.

Providence says earlier disclosures hinted at scheme, pointing to a March 17, 2014, press release in which Petrobras noted that one director had objected to the approval of the company's 2013 financial statements based in part on the "lack of information and apparent accounting inadequacy of refinery investments."

Days later a former Petrobras senior executive was arrested in Brazil in connection to a money-laundering scheme that law enforcement there had code-named Lava Jato, or Car Wash, according to the complaint.

In April, the CEO of Petrobras, Maria das Gracas Silva Foster, testified before the Brazil Senate about allegations of bribery in the company's purchase of the Pasadena refinery, the complain continues.

Providence says Brazil's federal accountability office in October criticized the construction of the COMPERJ facility "identifying concerns about inflated contract costs."

Reaction to such reports allegedly caused company stock to fall as much as 7.87 percent.

In the weeks before the SEC investigation was announced, Petrobras revealed that it had to delay the release of its third quarter earning results, Providence says.

PricewaterhouseCoopers, its auditor, had refused "to approve the company's financial reports for the third quarter of 2014 due to concerns related to the accounting effects of the bribery scheme involving Petrobras, according to the complaint.

This allegedly led to a two-day decline of 5.78 percent in share prices.

Stock fell 6.23 percent when Petrobras acknowledged during a Nov. 17, 2014, conference call that it faced the risk of asset write-downs where asset values had been inflated by corruption," Providence says.

In addition to Petroleo Brasileiro, and its wholly owned subsidiary Petrobras Global Finance, the complaint names various individuals and underwriters as defendants.

BB Securities Ltd.; Citigroup Global Markets Inc.; Itau BBA USA Securities Inc.; J.P. Morgan Securities LLC; Morgan Stanley & Co. LLC; Santander Investment Securities Inc.; Banco Votorantim Nassau Branch; Mitsubishi UFJ Securities (USA) Inc.; HSBC Securities (USA) Inc.; Merrill Lynch Pierce Fenner & Smith Inc.; Standard Chartered Bank; Bank of China (Hong Kong) Ltd.; Banco Bradecso BBI Sa; Banca IMI SpA; Scotia Capital (USA) Inc.; are all named as defendants.

The class is represnted by Michael Stocker with Labaton Sucharow.

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