With reference to our KNOETZL alert of January 19, 2017, we are again reminded that, whenever violations of criminal laws and internal compliance regulations by executives and directors of the company come to light – particularly if they are sizable and systematic – rapid action is key: immediate and extensive internal investigation should result in the implementation of effective ameliorative consequences. In such cases where the company is listed, due, timely and compliant information to the shareholders and appropriate securities regulatory authorities is imperative.
PETROBRAS (Petroleo Brasileiro S.A.), the Brazilian state-controlled oil company with reach across the globe, has had to learn this lesson the hard way: in the fifth largest civil class action settlement of all time in the U.S., and the largest settlement of a securities lawsuit filed following bribery and corruption investigations, PETROBRAS will be paying almost USD 3 billion to class action investors in the U.S., provided the settlement announced in the first days of January is approved by the court. As a consequence of the U.S. settlement, Brazilian shareholders are petitioning a Brazilian court to match the terms. An additional class action has been initiated in the Netherlands.
Multi-jurisdictional and multi-departmental investigations of the Petrobras scheme, dubbed "Operation Carwash" had exposed more than USD 2 billion in bribes. These allegedly included gifts of expensive watches and wine, yachts, helicopters and escort services and were given to politicians and civil servants over decades in exchange for granting lucrative contracts to private companies that overcharged Petrobras. The investigations resulted in over 40 indictments on racketeering, bribery and money laundering charges in the largest corruption scandal in the history of Brazil. PETROBRAS regards itself as a victim of the kickback scheme and estimates the costs to the firm to amount to USD 1.8 billion. The company has recovered almost half a billion dollars from senior politicians, civil servants and businessmen co-operating with the investigation.
The investors' claims against the company were based largely on false statements made to investors in the offering documents and in subsequent public statements about the value of PETROBRAS' assets, allegedly necessitating writedowns of 30 billion dollars, and the failure to inform investors of material weaknesses in its compliance and financial reporting systems.
General Counsel and directors will do well to makes sure they have a functioning, updated, proactive and alert, compliance system in place, that they are well-informed about compliance risks and that they make appropriate decisions based on all relevant information that is made available to them through such system.
Once violations have come to light, negative consequences can explode if not dealt with rapidly, comprehensively and with appropriate expert support from both legal and accounting specialists.
Originally published January 19, 2018
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