Wash. State Inv. Bd. v. Odebrecht S.A.
| Decision Date | 20 May 2020 |
| Docket Number | 17 Civ. 8118 (PGG) |
| Citation | 461 F.Supp.3d 46 |
| Parties | WASHINGTON STATE INVESTMENT BOARD, Plaintiff, v. ODEBRECHT S.A., Construtora Norberto Odebrecht S.A., Odebrecht Engenharia E Construção S.A., and Odebrecht Finance Ltd., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Christopher Chagas Gold, Robbins Geller Rudman & Dowd LLP, Boca Raton, FL, Douglas R. Britton, Matthew James Balotta, Robbins Geller Rudman & Dowd LLP, San Diego, CA, Samuel Howard Rudman, Robbins Geller Rudman & Dowd LLP, Melville, NY, for Plaintiff.
Victor L. Hou, Luke Ashe Barefoot, Michael Barry Carlinsky, Thomas S. Kessler, Cleary Gottlieb Steen & Hamilton LLP, Jacob J. Waldman, Quinn Emanuel Urquhart & Sullivan, New York, NY, for Defendants.
This is a securities fraud action arising out of a massive bribery scandal. Plaintiff Washington State Investment Board has sued Odebrecht, S.A., a Brazilian corporation, and three of its subsidiaries for violations of Section 10(b) of the Securities Exchange Act and Rule 10b-5, Section 20(a) of the Securities Exchange Act, Washington state law, and New York state law.
Defendants Construtora Norberto Odebrecht S.A., Odebrecht Engenharia E Construção S.A., and Odebrecht Finance Ltd. ("Defendants") have moved to dismiss pursuant to Fed. R. Civ. P. 9(b) and 12(b)(6). (Dkt. No. 47) For the reasons stated below, Defendants’ motion to dismiss will be granted in part and denied in part.
Plaintiff Washington State Investment Board (the "Board") "is a state agency responsible for the prudent investment and management of public trust and public employee retirement funds." (Am. Cmplt. (Dkt. No. 35) ¶ 22)
Defendant Odebrecht "is a holding company headquartered in Brazil that, through various subsidiaries and operating entities, conducts business in construction, engineering, infrastructure, chemicals, utilities and real estate ... in Brazil and throughout 27 other countries, including the United States." (Id. ¶ 23)
Defendant Construtora Norberto Odebrecht S.A. ("Norberto") is "a wholly-owned subsidiary of Defendant Odebrecht, primarily engaging in the construction of large-scale infrastructure and other public works projects" around the world. (Id. ¶ 24)
Defendant Odebrecht Finance Ltd. is a Cayman Islands corporation that "is a wholly-owned subsidiary of defendant Odebrecht and was created for the sole purpose of raising money for Odebrecht and [Norberto] through the issuance of bonds ...." (Id. ¶ 26) Odebrecht Finance and Norberto solicited investors through public statements and offering memoranda.
On March 31, 2015, Odebrecht reorganized, and Defendant Odebrecht Engenharia e Construção S.A. ("Engenharia") "took over [Norberto's] role as the consolidator of Odebrecht's construction subsidiaries." (Id. ¶ 25) Norberto is currently a subsidiary of Engenharia that "focuses solely on projects within Brazil." (Id. ¶ 24) Before March 2015, Norberto was the guarantor for Odebrecht Finance's debt – including certain notes purchased by Plaintiff – and Odebrecht Finance "relie[d] primarily upon [D]efendant [Norberto's] reported financial results and business prospects to sell bonds to investors." (Id. ) Engenharia has since become "a guarantor of the Notes bought by [P]laintiff." (Id. ¶ 25)
In 2006, Defendants created "a standalone division within [D]efendant [Norberto] called the Division of Structured Operations," which was utilized to conceal communications and the movement of funds in furtherance of a massive international bribery scheme. (Id. ¶ 34-40) During the bribery scheme, Defendants paid "approximately $788 million in bribes to government officials to improperly influence the award of more than 100 large construction contracts to [D]efendants in Brazil and at least 11 other countries in Central and South American and Africa," bringing in $3.336 billion in improperly accounted for ill-gotten gains. (Id. ¶ 34)
Defendants’ illicit activities did not begin with the creation of the Division of Structured Operations. From "2003 to approximately 2016, [D]efendants paid $349 million in bribes to various Brazilian officials and political parties in order to secure an improper advantage in obtaining lucrative public construction contracts ...." (Id. ¶ 41) Similarly, "[b]etween approximately 2001 and 2016, [D]efendants paid illicit bribes of about $439 million to foreign officials and political parties in various countries outside of Brazil," including in North America, South America, and Africa. (Id. ¶ 46)
(Id. ¶ 48) As the Lava Jato investigation began, Defendants deleted records of their illegal activity, bribed officials to prevent their cooperation with investigators, and made "numerous false and misleading statements denying [D]efendants’ participation in the bribery and kickback scheme, undermining the validity of the investigations and misrepresenting salient facts to investors and the public." (Id. ¶¶ 48-49)
As part of this effort, on October 2, 2014, Odebrecht issued a press release denying any improper payments to Petrobras. (Id. ¶ 108) And on May 1, 2015, Marcelo Odebrecht – then Odebrecht's chief executive officer – publicly stated that corruption allegations against the company were "false." (Id. ¶ 110) On June 19, 2015, Defendant Norberto issued a press release stating that it was cooperating with the Lava Jato investigation. (Id. ¶ 112) At that time, however, Norberto was directing employees to delete records, bribe government officials in Antigua, and destroy encryption keys necessary to access evidence. (Id. ) Until at least December 10, 2015, Odebrecht continued to issue press releases denying corruption allegations, claiming innocence, and professing cooperation with the Lava Jato investigation. (Id. ¶¶ 113-127)
On December 21, 2016, Odebrecht pleaded guilty in the U.S. District Court for the Eastern District of New York to conspiring to violate the anti-bribery provisions of the Foreign Corrupt Practices Act ("FCPA"). In connection with its guilty plea, Odebrecht agreed to pay a fine of $2.6 billion. (Id. ¶¶ 6, 15; Britton Decl., Ex. C (Plea Agreement) (Dkt. No. 29-3) ¶¶ 3, 21) In its plea agreement with the U.S. Department of Justice, Odebrecht admitted to using a business unit within Norberto – the "Division of Structured Operations" – to pay "nearly $800 million in bribes in connection with 100 projects in 12 countries in exchange for ill-gotten benefits of more than $3.3 billion." As part of Odebrecht's guilty plea, it "accepted responsibility ‘for the acts of its affiliates, subsidiaries, officers, directors, employees, and agents,’ including [Norberto], and pled guilty so the U.S. government would ‘not file additional criminal charges against [Odebrecht] or any of its direct or indirect subsidiaries or joint ventures,’ including [Norberto]." (Am. Cmplt. (Dkt. No. 35) ¶¶ 6, 15; Plea Agreement (Dkt. No. 29-3) ¶¶ 14-15)
During the bribery scheme, Defendants – acting through Odebrecht Finance – marketed to investors notes (the "Notes"). (Am. Cmplt. (Dkt. No. 35) ¶ 2) "The Notes include the following securities issued by defendant Odebrecht Finance and guaranteed by [Norberto]: (i) 7.125% notes due 2042 (the ‘7.125% Notes’); (ii) 4.375% notes due 2012 (the ‘4.375% Notes’); (iii) 8.25% notes due 2018 (the ‘8.25% Notes’); and (iv) 5.25% notes due 2029 (the ‘5.25% Notes’)." Plaintiff purchased more than $100 million of the Notes between June 21, 2012 and February 4, 2015. (Id. ¶¶ 2, 28-31)
Defendants "began soliciting investors to buy the 7.125% Notes" in about June 2012. (Id. ¶ 52) "In connection with these efforts, Defendants [Norberto] and Odebrecht Finance issued an offering memorandum." (Id. ) The 2012 offering memorandum contains Defendants’ financial results and statements, and advises that "price generally is the most important factor" in the "competitive" bidding processes that Norberto engages in to win construction contracts. (Id. ¶ 53) The 2012 offering memorandum does not disclose Defendants’ bribery scheme. (Id. )
Norberto's 2009, 2010, and 2011 annual financial statements are included in the 2012 offering memorandum, and they likewise do not disclose Defendants’ bribery scheme. (Id. ¶¶ 78-81) Norberto's 2011 annual financial statement touts "consecutive upgrades" of Norberto's credit by "the main credit rating agencies." (Id. ¶ 82)
The 2012 offering memorandum also includes Norberto's first quarter 2012 interim quarterly consolidated financial statement. (Id. ¶ 84) This financial statement also does not disclose Defendants’ bribery scheme. (Id. ¶ 85)
Odebrecht's 2012 Annual Report – which was not included with the 2012 offering memorandum but which was then available on Odebrecht's website in English – discusses Odebrecht's financial results but does not disclose Defendants’ bribery scheme. (Id. ¶¶ 100-101)
In ten transactions between June 21, 2012 and February 4, 2015, Plaintiff purchased 7.125% Notes with a face value of $63 million from Credit Suisse Securities LLC, BNP Paribas Securities Corp., Barclays Bank PLC, and Deutsche Bank Securities Inc. (Id. ¶ 29) For these and all subsequent Notes purchases, Plaintiff acted through its "internal investment managers," who "undertook issuer-specific research to identify companies in which to invest." (Id. ¶ 149) In connection with this research, Plaintiff's investment managers consulted "financial information disclosed by defendant Odebrecht and [ ] financial statements included...
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