The disclosure of Petrobras’s fraud, which was engineered by its senior-most executives and pervaded all aspects of the company’s sprawling operations, has rocked the Brazilian economy and caused the value of Petrobras securities to plummet. In the wake of this revelation, Kessler Topaz has filed several individual shareholder actions on behalf of institutional investors who suffered substantial losses in Petrobras stock and bonds.
The Kickback Scheme
The securities fraud actions filed by Kessler Topaz are based largely on evidence uncovered by Brazilian authorities during their 15-month investigation into the Petrobras kickback scheme. Brazilian prosecutors stumbled upon the scheme almost by accident during the course of an investigation into Alberto Youssef, a convicted black market money launderer known as the “central banker” of Brazil’s black market. The investigation — dubbed Operation “Car Wash” because Youssef’s money laundering activities were conducted through a network of car washes and gas stations — revealed that Youssef had given a $110,000 Range Rover Evoque to Paulo Roberto Costa. Costa was widely known as the “public face” of Petrobras between 2004 and 2012, serving as its Chief Supply Officer and as a member of its vaunted “Executive Directorate,” which consisted of Petrobras’s most senior executives. When police raided Costa’s home in March 2014, they found him and his family members hiding bags of money in suitcases along with incriminating documents showing the details of an elaborate bribery arrangement involving Costa and other Petrobras officials. Police seized documents, millions of dollars in cash and 25 luxury cars from Costa’s home. Though he initially denied any involvement in corruption, Costa and another Petrobras executive swept up in Operation Car Wash — Pedro Barusco — turned state’s evidence and began revealing the complex intricacies of a scheme that, according to Barusco’s testimony, had been “endemic” and “institutionalized” within the company for a decade.
During his 42 hours of sworn testimony to Brazilian prosecutors, Costa explained that numerous construction contractors, which Petrobras relied upon to build its multi-billion dollar oil refineries, had formed an unlawful cartel and conspired, with Petrobras’s knowledge and assistance, to rig bids for company projects. Due to this “cartelization” of contractors, Costa testified that Petrobras knowingly executed contracts that were inflated by as much as 20 percent. In particular, the “Cartel” members met in advance of bidding on Petrobras contracts to determine which companies would bid on a particular contract, and which particular Cartel member would prevail. The agreed-upon list of bidders, along with the predetermined winner, was then provided to Petrobras executives like Costa who had the authority to approve bids. The Cartel’s anti-competitive bid-rigging caused the company to incur billions of dollars in excess contract payments.
Petrobras and its executives were not only aware of the Cartel’s bid-rigging scheme, they profited handsomely from it. In exchange for executing these inflated construction contracts, Petrobras executives — including Costa, Barusco, Renato Duque (the former Chief Services Officer and Executive Directorate member) and Nestor Cerveró (the former Chief International Officer and Executive Directorate member), among others — received a 3 percent “bribe fee” from the Cartel, which they split among themselves and various Brazilian politicians. Several contractors have testified that the payment of a 3 percent bribe was a “rule of the game” when dealing with Petrobras, meaning that Petrobras would not do business with contractors who refused to pay bribes. Evidence obtained by Brazilian prosecutors has confirmed that Petrobras executives received millions of dollars in bribes through the scheme — Barusco testified that he alone pocketed $100 million in bribes during his tenure at Petrobras, and stated that certain government officials likely earned twice that amount.
The Cover-Up
While Barusco and Costa have testified that the bribery scheme was widely known within Petrobras, the company went to great lengths to conceal it from the public. For instance, rather than disclosing these inflated contract costs and bribes as expenses in its publicly-filed financial statements (as was required by U.S. and international accounting standards), Petrobras capitalized the overpayments and bribes as assets. This improper accounting treatment concealed the fraudulent payments from the market and made the company appear more attractive to investors, as it decreased Petrobras’s reported expenses and increased its reported assets and net income.
In a further attempt to cover up its misconduct, Petrobras and its executives, including Chief Executive Officer Maria de Gracas Foster, silenced numerous employees who tried to blow the whistle on the scheme. For example, Venina Velosa da Fonseca, a Petrobras executive who reported to Costa and worked closely with Foster, has revealed that, beginning in 2008, she repeatedly tried to alert Foster and Sergio Gabrielli de Azevedo (Foster’s predecessor as CEO) to the scheme, but Foster and Gabrielli rebuffed Velosa’s efforts. Instead, Velosa was removed from her job and exiled to the company’s Singapore office. In addition, Velosa and her daughters were repeatedly threatened; at one point Velosa even had a gun pointed to her head. Similarly, after Fernando de Castro Sa — an attorney working within the Supply Division — uncovered evidence indicating significant pricing irregularities at the company, he too was the victim of retaliation. Ultimately, Sa was fired and informed that Petrobras had erased all electronic documents identifying his concerns.
The Fallout
Despite repeatedly denying the existence of any fraud, bribery, overpricing or irregularities in its construction contracts, Petrobras finally acknowledged the corruption scheme on October 27, 2014 — after Costa’s arrest. A month later, the Company shocked investors when it disclosed that, due to its fraudulent accounting for the bribes and overpayments, the scheme would likely have a material impact on its financial condition. On April 22, 2015 Petrobras disclosed a $19.4 billion asset write-down, which consisted of over $2.5 billion in bribes alone, and nearly $17 billion in additional write-downs to Petrobras’s refineries.
Additionally, in April, Costa and Youssef were sentenced to 7½-year and 9-year prison terms, respectively, for their roles in the fraud at Petrobras, though both of their sentences were later reduced given their cooperation with Brazilian authorities. Cerveró received a five-year prison sentence in May, and Barusco recently agreed to return the $100 million in bribes he received during his tenure at Petrobras. Scores of additional Petrobras employees, contractors, and politicians remain under investigation, while the fallout from the scheme has caused at least three of Petrobras’s contractors to file for bankruptcy. Litigation stemming from the scandal in both Brazil and the U.S., particularly lawsuits by investors, is expected to proliferate.