Doubleline Capital LP v. Construtora Norberto Odebrecht, S.A.

• Decision Date: 22 September 2019
• Docket Number: 1:17-cv-4576-GHW
• Parties: DOUBLELINE CAPITAL LP, DoubleLine Income Solutions Fund, and DoubleLine Funds Trust (on behalf of its: 1) DoubleLine Core fixed Income Fund Series; 2) DoubleLine Emerging Markets Fixed Income Fund Series; and 3) DoubleLine Shiller Enhanced Cape® Series), Plaintiffs, v. CONSTRUTORA NORBERTO ODEBRECHT, S.A., Odebrecht Engenharia E Construção S.A., and Odebrecht, S.A., Defendants.
• Court: U.S. District Court — Southern District of New York

413 F.Supp.3d 187

DOUBLELINE CAPITAL LP, DoubleLine Income Solutions Fund, and DoubleLine Funds Trust (on behalf of its: 1) DoubleLine Core fixed Income Fund Series; 2) DoubleLine Emerging Markets Fixed Income Fund Series; and 3) DoubleLine Shiller Enhanced Cape® Series), Plaintiffs,

v.CONSTRUTORA NORBERTO ODEBRECHT, S.A., Odebrecht Engenharia E Construção S.A., and Odebrecht, S.A., Defendants.

1:17-cv-4576-GHW

United States District Court, S.D. New York.

Signed September 22, 2019

Filed September 23, 2019

Karl P. Barth, Steve W. Berman, Hagens Berman Sobol Shapiro LLP, Seattle, WA, Jason Allen Zweig, Hagens Berman Sobol Shapiro LLP, New York, NY, for Plaintiffs.

Michael Barry Carlinsky, Jacob J. Waldman, Quinn Emanuel Urquhart & Sullivan, New York, NY, Eric C. Lyttle, Michael Ethan Liftik, Quinn Emmanuel Urquhart & Sullivan, LLP, Washington, DC, for Defendants.

MEMORANDUM OPINION AND ORDER

GREGORY H. WOODS, United States District Judge:

After Defendants Construtora Norberto Odebrecht ("CNO"), Odebrecht Engenharia e Construção S.A. ("OEC"), and Odebrecht, S.A. ("OSA") joined the ranks of the many other Brazilian construction and engineering conglomerates accused of bribing government officials to secure lucrative contracts, Plaintiffs, substantial purchasers of Notes issued by Odebrecht Finance Ltd. ("Odebrecht Finance") and guaranteed by CNO and OEC, saw the value of their holdings drop precipitously. Plaintiffs sued, asserting claims under Section 10(b) and 20(a) of the Exchange Act, as well as various state law claims. This Court dismissed many of Plaintiffs' claims on Defendants' motion, and permitted Plaintiffs an opportunity to replead those dismissed without prejudice. Because Plaintiffs remedied most of the failures of their second amended complaint—including adequately pleading the concealment of CNO's involvement in the bribery scheme and the materialization of that risk when auditors refused to certify CNO's financial reports—many of its claims survive Defendants' motion to dismiss.

I. BACKGROUND

The Court assumes familiarity with the facts and procedural posture of this case as broadly outlined in DoubleLine Capital LP v. Odebrecht Fin., Ltd. , 323 F. Supp. 3d 393 (S.D.N.Y. 2018) (the "August 2018 Opinion"). There, the Court partially granted and partially denied Defendants' motion to dismiss, granting Plaintiffs permission to replead all claims denied without prejudice. Plaintiffs then filed a third amended complaint ("TAC"), alleging new claims and supplementing the record accordingly. Dkt. No. 61. Defendants, however, again moved to dismiss. Defs.' Mem. in Supp. Mot. to Dismiss, Dkt. No. 77 ("MTD").

Many of the facts asserted in the third amended complaint are substantially identical to those asserted in the prior version of the complaint. In response to the Court's August 2018 Opinion, Plaintiffs have bolstered a number of allegations. The principal categories of those expanded allegations are described below. Some of the new facts alleged in the third amended complaint indicate that CNO violated Brazilian generally accepted accounting principles ("GAAP"). Others support claims that statements in the Notes issued by Odebrecht Finance were false. Still more advance Plaintiffs' claims for compensation for CNO's alleged federal and state law violations from both OEC—under New York's successor liability law—and OSA—as a control person and a co-conspirator. The Court addresses each in turn.

A. CNO's GAAP Violations

Plaintiffs allege that many of Defendants' public statements were false or misleading as a result of their undisclosed participation in the massive bribery scheme that entangled many Brazilian corporations and politicians. Among those statements are CNO's quarterly and annual financial statements. In the offering memoranda for the 7.50%, 7.125%, 4.375%, and 5.250% Notes, CNO asserted that it had prepared its financial statements in accordance with Brazilian GAAP. TAC ¶¶ 122-124, 141-43, 158-160, 179-181. According to Plaintiffs, the controlling GAAP regulations are those issued by the Brazilian Accounting Pronouncements Committee (Comitê de Pronunciamentos Contábeis ), which promulgates accounting standards using the prefix "CPC," and the International Financial Reporting Standards ("IFRS"), which promulgates the International Accounting Standards ("IAS"). TAC ¶¶ 93 n.12, 95. According to Plaintiffs, CNO's statements were false and misleading because they did not, in fact, comply with Brazilian GAAP requirements in three ways. TAC ¶ 95.

First, Plaintiffs allege that the 2009 through 2015 financial statements failed to disclose the bribery scheme and any expected financial costs of the bribery scheme as contingent liabilities. The provisions of Brazilian GAAP that address the reporting and disclosure of contingent liabilities are CPC 25—or the substantially similar IAS 37. TAC ¶ 97. According to IAS 37, contingent liabilities are possible obligations whose existence will be confirmed by uncertain future events that are not wholly within the control of the entity. TAC ¶ 98. Those standards, Plaintiff alleges, demand that a contingent liability "more likely than not" to result in a loss—namely, slightly more than fifty percent likely—be footnoted. TAC ¶ 99.

The bribery and kickback scheme presented substantial risk to CNO. If exposed, Plaintiffs claim, the company faced many foreseeable consequences, including downgrades by ratings agencies, deteriorating liquidity, regulatory investigations and actions leading to massive fines or penalties, criminal prosecution, and increased auditor scrutiny precluding CNO from timely filing required financial statements. Any of those events would result in losses. TAC ¶ 100.

The volume of bribes increased by an order of magnitude between 2006 and 2014. TAC ¶ 101. In 2006, OSA created a Division of Structured Operations to manage the bribery scheme. TAC ¶¶ 63-64. As early as 2009, the head of that division warned OSA's Chief Executive Officer, Marcelo Odebrecht, that the escalating level of bribes constituted "financial suicide" and posed extreme risk to the company. TAC ¶ 102. By 2014, Marcelo Odebrecht had instructed the Division of Structured Operations to flee Brazil to evade Brazilian investigators, and Defendant OSA was assisting Division members in acquiring visas and paid their relocation expenses. TAC ¶¶ 84-85. Plaintiff alleges that these facts demonstrate that the potential legal troubles and financial loss was certainly more likely than not, and should have been disclosed in CNO's financial statement footnotes. TAC ¶ 103.

Second, Plaintiffs assert that CNO violated CPC 00 when it failed to separately disclose the amount of revenue it obtained through its use of bribes. TAC ¶ 105. CPC 00 (Conceptual Structure for the Preparation and Presentation of the Financial Statements ) explains that the common practice is to separately disclose different types of revenue "to assist investors in assessing the ability of a business to generate cash in the future and distinguish revenues that arise in the normal course of the entity's business from revenues stemming from contingent activities that may not be repeated on a regular basis." TAC ¶ 106. Plaintiffs allege that investors and others would not necessarily have expected contract revenue obtained by fraud to be a reliable indicator of future revenue. TAC ¶ 109.

Third, CNO's failure to report bribes as costs to obtain its reported revenue, according to Plaintiffs, violated IAS 11. TAC ¶¶ 110-17. Specifically, Plaintiffs argue that CNO should have reported the bribes used to secure a specific contract as "contracting costs" incurred the year that the bribe was paid. TAC ¶¶ 111-13. The third amended complaint highlights several of those bribes Plaintiffs paid out to officials in the hope of receiving awards for various contracting projects, including $23 million paid to a director at Petrobras in 2010 to obtain the construction contract for Brazil's Abreu e Lima Refinery. TAC ¶ 75.

B. Offering Memoranda Statements

In addition to those already alleged in their second amended complaint and previously identified in the August 2018 Opinion, Plaintiffs assert several more statements that CNO made in the Odebrecht Finance Notes' offering memoranda about the company that were false and misleading. These statements span everything from a discussion of CNO's financial strength, to its dexterity in avoiding political risk, and its compliance with local regulations.

Plaintiffs argue that the offering memoranda made false and misleading statements when discussing CNO's success in navigating political risk without mentioning that its principal strategy was bribing officials to the tune of more than $3.3 billion. See TAC ¶¶ 132, 151 168, 189. Ultimately, these statements in the offering memoranda concealed the existence of the bribery scheme and its attendant risks. The applicable language follows:

Managing Political Risk

We have operated for more than two decades in many countries that have significant levels of political risk. We are currently active in numerous countries, including Angola, Argentina, Brazil, Colombia, the Dominican Republic, Libya, Mozambique, Panama, Peru, Portugal, the United States and Venezuela. We attribute our success in certain countries with significant levels of political risk to the following competitive strengths:

* * *

We attempt to mitigate political risk through our experience and knowledge of the markets in which we are active and by entering into joint ventures with local companies and using local subcontractors, suppliers and labor. By establishing these partnerships with local entities, we also seek to integrate our operations into the communities in which we operate.

We generally seek to establish long-term operations in countries in which we are active and seek appropriate project opportunities that meet our rigorous risk management criteria. Our long presence in countries such as Peru (34 years),

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