Earlier this year we learned that an historic settlement had been reached in a large and long-running legal case. The total value of the settlement is USD 3 billion (ie. USD 3,000,000,000).
This is a genuinely historic settlement for a case of this kind – it’s the largest securities/investments class action settlement in over a decade, and is the largest settlement ever in a class action involving a non-US issuer (ie. Petrobras). It is the fifth largest class action settlement ever in the US.
At its heart, the case was about investors – like USS – who had invested in the Brazilian oil company Petrobras. Petrobras found itself at the centre of a huge corruption and political scandal in Brazil, which has been much covered in the international press. In particular, Petrobras’s management was involved in some of the most serious corruption problems, via large-scale procurement fraud. Investors were seeking compensation for the loss in value of their investments as a result of the scandal.
The legal case
The New York Stock Exchange
Specifically, the basis of the claim was that we believed we had bought shares issued by Petrobras in New York at artificially inflated prices; and that those prices did not recognise accurately the true financial impact on the company of the alleged large-scale procurement fraud. And we also believed that we had bought Petrobras bonds based on offering documents which did not disclose accurately the position of the company.
USS was just one of those investors, but our role in this case was very important: the US court (the Southern District Court of New York) hearing the case nominated us as the lead plaintiff (or lead representative for claimant investors) in the US class action.
When appointing USS as lead plaintiff, the New York presiding judge took into account our independence from other claimants and legal representatives, and our ability to pursue the case diligently due to our scale and expertise.
A class action means representative claimants bring the case on behalf of a much larger group of potential victims; any damages awarded, or financial settlement reached, is then divided among all those who are part of the ‘class’. USS was the lead plaintiff and was supported by two sister pension funds: USS represented equity investors (ie. shareholders), while the North Carolina Department of State Treasurer and Employees’ Retirement System of the State of Hawaii were appointed as class representatives for the bondholders.
In January 2018 Petrobras (Petróleo Brasileiro S.A. – Petrobras), Petrobras International Finance Company, certain Petrobras former executives and directors, and a number of banks which acted as underwriters to issues of Petrobras bonds reached a settlement in the case for USD 2.95 billion. This was followed in February 2018 by a further settlement with Petrobras’s auditor in Brazil - PwC (PricewaterhouseCoopers Auditores Independentes) for USD 50 million, bringing the total settlement to USD 3 billion.
Why does this case matter to USS members?
Firstly, it means that – eventually – your pension fund will get back some compensation for losses that were incurred as a result of the financial and reputational damage inflicted on Petrobras by the corruption scandal. In other words, USS has fought a determined and enduring legal battle on your behalf to get back some or all of what should have been received had the Brazilian company’s management behaved in the way we would expect of any company in which we invest.
Secondly, it’s a reflection of the extensive expertise within USS and the dedication we have to work steadfastly in your interests. The USS in-house legal team has pursued this case doggedly, working closely with expert and tenacious lawyers in the New York law firm of Pomerantz. It’s taken over three years to get from the initial claims to this year’s settlement agreements, so this has required more than patience. It’s also involved some complex legal work, across different jurisdictions (including the US and Brazil, of course), with the challenges and intricacies inherent in any class action. You should rightly be proud of what they have achieved on your behalf.
Not just about the money
Throughout the Petrobras case we have not just focused on the financial and legal aspects (important though they are). USS is a dedicated responsible and active investor. We aim to use our position as a major shareholder or owner in companies to influence boards in their behaviour. We encourage them to make decisions and act in ways which will lead to sustainable growth and value over time, and to treat all their stakeholders – which can include customers, employees and society at large – equally.
So the in-house legal team and USSIM’s responsible investment team have worked together to engage with corporate governance issues at Petrobras.
This meant commissioning a report in 2015 from Simon Wong, Visiting Fellow at the LSE and Adjunct Professor of Law at Northwestern University School of Law, to identify the corporate governance changes which could prevent a repetition of the problems that contributed to the scandal. The report made 13 recommendations.
There have also been a number of notable developments at the market-level which have led to improvements at State Owned Enterprises within Brazil. The passage of the State-Owned Enterprise Act, for example, which was signed into law by President Michel Temer on 30 June 2016, was no doubt partly in response to recent corporate scandals such as Petrobras. This was coupled in September 2016 with the removal of the requirement by the Brazilian government for Petrobras to take a 30% interest in Brazilian offshore oil developments.
There is still work to do on the Petrobras case. Preliminary approval for the settlement was granted in February 2018, but the court has yet to agree final approval of the settlement (we anticipate this will happen during the summer). Then there will be the matter of determining who is an eligible investor and therefore part of the ‘class’; and finally a basis for apportioning the settlement amount among all the eligible investors will need to be agreed. This will need further oversight and engagement by the USS legal team. Vigilance in maintaining the corporate governance improvements will also be needed.
But the agreements to settle at the start of this year close an important chapter in the case, and more importantly reflect serious principles about investor protection, corporate governance and justice which lie at the heart of USS’s approach to investment and which should matter to all USS members.