By Rebecca Kahn, J.D.
A Brazilian petrochemical company’s SEC filings detailing certain prices, while omitting the long-running bribery scheme that kept those prices low, sufficiently pled Exchange Act 10(b) and 20(a) claims to survive motions to dismiss, a New York district court ruled. Rule 12(b)(6) dismissal was granted, however, regarding more general representations made in the ordinary course of business ( In re Braskem Securities Litigation, March 30, 2017, Engelmayer, P.).
Shareholders sued Latin America’s largest producer of petrochemicals, Braskem S.A., claiming that the Brazilian company’s failure to disclose a price-fixing bribery scheme violated Exchange Act Sections 10(b) and 20(a). The shareholders claimed that the scheme, allowing Braskem to purchase the key material naphtha at below-market prices from Petroleo Brasileiro S.A. (Petrobras), artificially inflated the share price by false, misleading statements in the company’s Form 20-F and Form 6-K filings (specifying naphtha purchases and price details). The shareholders alleged further misrepresentations in Braskem’s sustainability reports and code of conduct and against major shareholder Odebrecht, S.A., Brazil’s largest infrastructure company.
Criminal proceedings. In March 2016, Marcelo Odebrecht was sentenced to 19 years for bribery in the price-fixing scheme. The Brazilian court found the naphtha supply contract with Petrobras involved payment by Braskem of $35 million in bribes over a six-year period.After media reports of a DOJ investigation into Braskem for FCPA violations, Braskem responded publicly (without disclosing it had also received an SEC subpoena) by stating that the company initiated its own internal investigation. Braskem finally disclosed the SEC subpoena in May 2016. Resolving the largest Foreign Corrupt Practices Act bribery case in history, Braskem and Odebrecht pled guilty in December 2016 to FCPA violations and admitted to bribing Petrobras and Brazilian officials to secure favorable naphtha prices for Braskem.
Shareholders’ SAC. The shareholders’ second amended complaint (SAC) brought Exchange Act claims against Braskem and Odebrecht, S.A., and Braskem officers including CEO and former CFO Carlos Jose Fadigas de Souza Filho (Fadigas). The SAC alleged that when the media exposed the bribery scheme on March 11, 2015, share prices fell more than 20 percent. All defendants moved to dismiss under Rule 12(b)(6). In addition, Odebrecht sought dismissal for lack of personal jurisdiction under Rule 12(b)(2).
Price control scheme. Seventy percent of Braskem’s naphtha was supplied by its Brazilian shareholder Petrobras. The SAC alleged that Braskem controlled the price of naphtha by paying Petrobras officials and Brazilian politicians bribes, drawing many allegations from individuals’ testimony in the Brazilian criminal court proceedings that implicated Braskem in the scheme.
Actionable representations. Braskem was not obliged to publicly address the components and determinants of naphtha prices paid to Petrobras. But having made such specific public representations about the prices, the court ruled that Braskem could not selectively omit the central determinant of the price: the corrupt arrangement struck with the Petrobras officials that it bribed. Therefore, statements detailing naphtha pricing in Braskem’s Form 20-F and 6-K filings were fairly alleged to be materially misleading and the case was allowed to proceed only as to these statements. Although these statements were not false, and contained no affirmative misstatements they were misleading because they failed to reveal that the favorable purchase price that Braskem secured was substantially due to its bribery of Petrobras and public officials. The court called this omission of the price-fixing side deal with Petrobras a "classic half-truth."
Fadigas responsible for Forms 20-F. As Braskem’s CEO during the relevant class period who personally signed the Forms 20-F, the court sustained both the Section 10(b) and Section 20(a) claims against Fadigas, but only regarding omissions in these particular filings. The SAC failed to plead he had any concrete role in the Forms 6-K, even though he was CFO at the time, so the claims based on these filings (and corresponding Section 20(a) claims), were dismissed.
Scienter. The SAC detailed how executives from Braskem and Odebrecht coordinated payments to Petrobras and political officials to obtain favorable naphtha pricing for Braskem.As for Fadigas, the court looked to testimony in Brazilian court that he "knew what was going on" and helped to set the bribe amounts. Such allegations of actual knowledge sufficiently pleaded scienter to survive a Rule 12(b)(6) motion to dismiss.
Context of general statements. Braskem’s sustainability reports and code of conduct, detailing the company’s commitment to transparency and ethics were too vague and general to be actionable. These statements were not alleged to have been made other than in the ordinary course of business, and the SAC did not allege that the statements were made to quell controversy or reassure investors.
No personal jurisdiction over Odebrecht. The court dismissed allegations against Odebrecht for want of personal jurisdiction as the SAC made only sweeping and conclusory allegations about Odebrecht’s ability to "influence and control" Braskem’s SEC statements.