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Providence v. Petrobras | The Revenge of the Retirement Plan

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GRID is a new fuel mixture being heavily advertised to retail customers of Petrobras gas stations.

Source: Época NEGÓCIOS (Globo)

Ironically, the inline banner ad for this story is a version of the Petrobras GRID downstream advertising program, pointing out the difference with other mixtures. The company’s gas stations also employ pleasant and industrious young men and woman, IMHO. Are the days of the “service station” returning?

On Christmas eve, the city of Providence, capital of the U.S. state Rhode Island, filed suit against Petrobras, Petrobras management, two subsidiaries, and a number banks involved in issuing the company’s fixed income instruments. The news comes on the heels of three other suits filed in the U.S. in December, by funds and groups of individual investors.

Providence claims that the city was harmed by its investment in Petrobras bonds, which have lost value because of the allegations of corruption and bribery. As in the other cases, it is asserted that Petrobrás did not inform the market of the corruption cases inside company management, deliberately putting the money of investors at risk. Sought for comment, Petrobras said it had not been”notified” about  the case in question.

The suit was filed in a New York federal court, where the other suits against the oil company are in progress. The difference is that investors are questioning the falling value of the company’s American Depositary Receipts (ADRs), which consist of receipts exchanged for shares of Brazilian companies listed by NYSE-Euronext, while the city of Providence alleges it was damaged by fixed income paper issued by Petrobras to finance its investment plan.

Another difference is that the suit brought by investors are suing Petrobras, while Providence also names top management; foreign subsidiaries that  paid out a bonus outside the U.S; and banks that backed the company’s fixed income issues.

Thus, the name Graça Foster, who took over as CEO in early 2012, appears in the filings.

The Providence suit covers the period from January 2010 to November 2014. During this period, Petrobras issued nearly US$ 98 billion in commercial paper, according to the city’s estimates. One of the charges in the suit is that, from within the corruption scheme, Petrobras employees inflated the value of assets in its accounting in order to conceal the receipt of bribes.

Graça Foster and 16 others on the defense

The suit names 13 company executives, two foreign subsidiaries and 15 banks involved in issuing Petrobras bonds. Named as defendants are Petrobras CEO Graça Foster and CFO Almir Barbassa, according to a copy of the 70-page document obtained by Broadcast, a real-time news service of the Agência Estado.

It is possible to access public records from various tribunals, including the Federal Court for the Southern District of New York, using an online tool called PACER.

It is not user-friendly, and charges per page as though it were a coin-drop copying machine from Kinko’s — $0.15? — but it still makes court filings more accessible.

Another good standard source is EDGAR, a database managed by the SEC — our CVM — with all of the statutory filings of listed companies.

You can see, for example, that Petrobras normally files its 6-K like clockwork, and has not issued a Form 20-F since April 30 of this year, covering 2013. It has filed a handful of 6-K/As to report on fresh discoveries in the pre-salt layer.

Along with the executive, the suit brought by Labaton Sucharow, a New York based law firm, points the finger at 15 banks that participated in the issue of US$ 98 bilhões in commercial paper by Petrobras to finance its investment projects. The list includes Itaú BBA, Bradesco BBI, Morgan Stanley, Citigroup, Santander Investment Securities, JPMorgan and Morgan Stanley.

The collective action alleges that the value of the instruments sold by Petrobras reflect inflation of value by the company in order to cover up the bribes received from public works contractors and other service providers. And finally, the material distributed to investors during the offering, is said to contain a number of fallacies and distortion, such as omitting to mention the problem of bribery.

When whistleblowers began to reveal the scheme, according to the Providence suit, the value of Petrobras paper plunged, harming investors. Other investors, buyers of the bond issue and others, suffered similar losses, and may join Providence in its suit.

Providence is also suing foreign two subsidiaries of the Brazilian company: Petrobras International Finance Company (Luxembourg) and Petrobras Global Finance BV, registered in the Netherlands. The distribution of bonuses to foreign investors was handled by these two companies. The former company, for example, sold US$ 7 billion in commercial paper in 2012.

Providence has a retirment plan for civil servants, both serving and retired. It was this fund that selected  Petrobras paper and which alleges having been harmed by the Car Wash case. The fund contains US$ 300 million invested in stocks, fixed income and other investments.    To date, the class-action suits filed by investors have named the company and not its executives and subsidiaries.

Providence also cites Petrobras projects designed to increase investments, including investments applied to the extraction of oil from the pre-salt layer.  One example cited is the purchase of a refinery in Pasadena, Texas, for US$ 360 million. In order to finance various projects, the company issued US$ 98 billion in  Brasil, in addition fixed income and stock.