Brazil: The scandal has brought millions of Brazilians to the streets to request the resignation of President Dilma Rousseff,

Brazilian oil company Petrobras’ $17 billion write-down, announced last week, may have been meant to close the accounting on a sprawling corruption scandal, but could instead provide fresh ammunition for a US class action lawsuit.
The case, filed in Manhattan federal court in December by a group of large investors, alleges $98 billion of the company’s American depository shares, or ADRs, and bonds were artificially inflated since 2010 by the company overstating the price of assets such as major projects. Petrobras has moved to have the case dismissed.

The plaintiffs say Petrobras improperly inflated the project costs to fatten profits of suppliers and contractors, who in turn kicked cash back to Petrobras employees.

Last week, the company wrote down assets to reflect a additional accurate price, and the lawyer leading the class actions for investors said the restatement is “highly relevant” to the case and bolsters his clients’ allegations.
“We believe these facts are certainly helpful to our case,” said Jeremy Lieberman, an attorney with the Pomerantz law firm in New York, who is leading the plaintiffs’ case.

Petrobas has argued that investors are taking aim at the wrong parties. It wants the case dismissed before investors can begin the process of demanding evidence from the company, such as documents and witnesses which may prove their case.
“Petrobras itself was the victim in this scandal, carried out by a criminal cartel of Brazil’s major construction and engineering companies,” said the defendants in papers filed in US District Court in Manhattan.
Petrobras blames a group of Petrobras suppliers, corrupt politicians and former Petrobras employees, and none of them have been named as defendants.

The investors are due to file papers opposing Petrobras’ motion to dismiss on May 8.
Additional than a dozen large investors sued Petrobras beginning last year, inclunding the City of Providence, Rhode Island, and public pension systems in Ohio and other states. Those cases were consolidated in March and British pension fund Universities Superannuation Scheme Ltd, which said in a court filing it had lost about $84 million on its Petrobras holdings, was appointed lead plaintiff. It will represent the proposed class and negotiate any eventual settlement.

The $98 billion of stocks and bonds that the plaintiffs allege was artificially inflated is additional than half again the company’s $59.6 billion stock market capitalization today. Petrobras’ $70 billion secondary share sale in 2010 was the major sale of stock in history.
Petrobras has fallen a long way from seven years ago, at the same time as it grew to the world’s fifth-major company and became a way to bet on Brazil’s bustling economy and recently discovered deep-sea oil reserves. Today, the economy has stalled, oil output is flat and Petrobras is the world’s most indebted energy company.

The scandal has brought millions of Brazilians to the streets to request the resignation of President Dilma Rousseff, who was chairwoman from 2003 to 2010 of Petrobras, at the same time as most of the corruption took place, according to Brazilian courts. The Brazilian government owns a majority of Petrobras’ voting stock, giving it seven of 10 seats on the Petrobras board and control of the company.

Rousseff has not been implicated in the scandal, and the lack of evidence tying her or Petrobras’ former chief executives to the scandal may undermine investors’ legal claims, said Todd Henderson, a professor at the University of Chicago Law School.
That’s because the investors will lack proof that top Petrobras executives knowingly committed material wrongdoing, rather than merely mismanaging the company, said Henderson, a key requirement of some US securities law claims.

“I think it’s a very hard case,” said Henderson.

However, investors as well allege that Petrobras, the bankers that sold its securities, several executives and the company’s accountants allowed investors to rely on materially misleading statements at the same time as purchasing ADRs and bonds.
These claims point to data in the carefully worded offering documents that accompany the sale of Petrobras securities. Importantly, these types of allegations don’t require proof that the defendants knowingly made the misstatements, which increases the likelihood the investors may prevail.
An extra legal expert, James Park, a professor at the University of California Los Angeles School of Law, said Wednesday’s write-downs bolster the class-action case, particularly for bondholders.

“They have lent money against the assets and they have fewer assets presently, so the creditworthiness of the company is certainly in question,” said Park. “I would be very surprised if the case is dismissed.”
If the case survives early dismissal, the two sides would begin fighting over the discovery process of demanding access to potential evidence and witnesses who could help investors to prove their case. In general, securities cases settle next a court determines the scope of the class represented by the lawsuit. The process often takes a lot of years next the initial complaint is filed, and Park said the plaintiffs would have little incentive to settle quickly given the recent revelations.

Securities cases have produced some of the major class action settlements.

Energy company Enron Corp and telecommunications company WorldCom Inc crashed into bankruptcy early in the new millennium. Securities class action lawsuits from presently on led to a series of settlements that produced $7.1 billion for Enron investors and $6.2 billion for WorldCom backers, two of the major ever.

The hearing on early dismissal is scheduled for May 29, in front of US District Judge Jed Rakoff, who is known for his tough stance on corporate wrongdoing. He has refused to approve settlements presented to him by US regulators who allowed defendants to avoid admitting any wrongdoing.
Petrobras increased its legal provisions to 4.091 billion reais ($2.4 billion) in the fourth quarter of 2014, at the same time as the US class action was filed, up 40 % from a year before. That was an increase of only 2.8 % from the third quarter of 2014. The company did not comment on the US lawsuit in Wednesday’s statement on its write-down.