Author Archives: Danielle Young

About Danielle Young

Danielle Young is a student at Harvard Law School. She previously worked as a human rights advisor to multinationals operating in emerging markets, and in the Special Litigation Unit of the World Bank Integrity Vice Presidency.

Claims Against Petrobras Highlight Prospects for Shareholder Enforcement in US Courts

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The fallout continues from the ongoing investigation of corruption at Petrobras, Brazil’s giant state-owned oil company. (See New York Times coverage here, and helpful timelines of the scandal here and here.) In March of 2014, Brazilian prosecutors alleged that Petrobras leadership colluded with a cartel of construction companies in order to overcharge Petrobras for everything from building pipelines to servicing oil rigs. Senior Petrobras executives who facilitated the price-fixing rewarded themselves, the cartel, and public officials with kickbacks, and concealed the scheme through false financial reporting and money laundering. The scandal has exacted a significant human toll: workers and local economies that relied on Petrobras contracts have watched business collapse: several major construction projects are suspended, and over 200 companies have lost their lines of credit. One economist predicted unemployment may rise 1.5% as a direct result of the scandal.

The enormous scale of the corruption scheme reaches into Brazil’s political and business elite. The CEO of Petrobras has resigned. As of last August, “117 indictments have been issued, five politicians have been arrested, and criminal cases have been brought against 13 companies.” In recent months, the national Congress has initiated impeachment proceedings against President Dilma Rousseff, who was chairwoman of Petrobras for part of the time the price-fixing was allegedly underway. And last month, federal investigators even received approval from the Brazilian Supreme Court to detain former President Luiz Inácio Lula da Silva for questioning. (Lula was President from 2003 to 2010—during the same period of time that Ms. Rousseff was chairwoman of Petrobras.) Meanwhile, the House Speaker leading calls for President Rousseff’s impeachment has himself been charged with accepting up to $40 million in bribes.

As Brazilian prosecutors continue their own investigations, another enforcement process is underway in the United States. Shareholders who hold Petrobras stock are beginning to file “derivative suits,” through which shareholders can sue a company’s directors and officers for breaching their fiduciary duties to that company. Thus far, hundreds of Petrobras investors have filed suits. In one of the most prominent examples, In Re Petrobras Securities Litigation, a group of shareholders allege that Petrobras issued “materially false and misleading” financial statements, as well as “false and misleading statements regarding the integrity of its management and the effectiveness of its financial controls.” (For example, before the scandal broke, Petrobras publicly praised its Code of Ethics and corruption prevention program.) The claimants allege that as a result of the price-fixing and cover-up, the price of Petrobras common stock fell by approximately 80%. In another case, WGI Emerging Markets Fund, LLC et al v. Petroleo, the investment fund managing the Bill & Melinda Gates Foundation has alleged that the failure of Petrobras to adhere to U.S. federal securities law resulted in misleading shareholders and overstating the value of the company by $17 billion. As a result, the plaintiffs claim they “lost tens of millions on their Petrobras investments.”

Thus, in addition to any civil or criminal charges brought by public prosecutors, private derivative suits offer a way for ordinary shareholders to hold company leadership accountable for its misconduct. In these derivative suits, any damages would be paid back to the company as compensation for mismanagement; the main purpose of the suits is not to secure a payout for shareholders, but to protect the company from bad leadership. The Petrobras cases illustrate how derivative suits can offer a valuable mechanism for anticorruption enforcement, but they also face a number of practical challenges.

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Judge Sullivan Calls Out the DOJ: What Corporate Settlements Reflect About The Broader Criminal Justice System

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After the DOJ released the Yates Memo last September, I suggested that the DOJ was probably very serious about focusing attention on prosecuting individuals involved in corporate misconduct (including FCPA violations). This would constitute a significant shift away from the DOJ’s recent practice of resolving most allegations of corporate wrongdoing through deferred or non-prosecution agreements (known as DPAs and NPAs). Some proponents of DPAs and NPAs claim that such settlements—which allow companies to avoid formal legal charges if they cooperate with a DOJ investigation, disclose desired information, improve compliance measures, and perhaps pay a fine—are actually a “a more powerful tool” than convictions in changing corporate behavior. But many critics—such as Judge Rakoff—have argued that settlements usually obscure who is actually responsible for the misconduct, and “ever more expensive” compliance programs may do little to prevent future misconduct. As Judge Rakoff suggested:

“[T]he impact of sending a few guilty executives to prison for orchestrating corporate crimes might have a far greater effect than any compliance program in discouraging misconduct, at far less expense and without the unwanted collateral consequences of punishing innocent employees and shareholders.”

Federal judges, including Judge Rakoff, are responsible for approving the DOJ’s settlements with corporations. The scope of their review is quite limited, and they are required to defer to the prosecution decisions of the DOJ. But even before the Yates Memo, judges had begun reviewing settlements more carefully when individuals were not charged. At least one federal judge is still dissatisfied with the DOJ’s enforcement strategy, and recently took the opportunity—in a corruption case—to urge the DOJ to adhere to the Yates Memo and deal directly with individual wrongdoers. Moreover, he suggested this could have broader significance for how we think about the rest of the criminal justice system.

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Is Corruption an Emerging Cause of Action in Investor-State Arbitration?

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The Trans-Pacific Partnership Agreement (TPP) has attracted unprecedented public interest in investor-state arbitration—also known as investment treaty arbitration, investor-state dispute settlement, or ISDS. Sovereign nations and foreign investors may choose this process as an alternative to ordinary litigation in domestic courts, by submitting their claims before a panel of expert judges applying international law. Though some critics seem to suggest that ISDS imposes a static list of economic rules, arbitration actually applies a complex system of legal principles which balance investor security against the sovereign autonomy of host states. Over time, investor-state arbitration has proven to be an emerging space for enforcing international norms—including transparency and anticorruption. Indeed, the TPP demonstrates this growing influence of anticorruption norms in ISDS. Not only is the TPP the first multilateral trade agreement to explicitly require anticorruption commitments from its members, its ISDS chapter will also commit members to the anticorruption rules emerging in investor-state arbitration.

Since long before the earliest discussions of the TPP, arbitral panels have sometimes used anticorruption norms to interpret treaties and contracts that made no mention of anticorruption or transparency. Indeed, although no previous trade or investment treaty has obligated host states or investors to observe anticorruption standards, ISDS panels have increasingly considered corruption relevant, and even dispositive, in determining liability. This process has enabled the development of what is effectively a common law of anticorruption principles. (Although there is no doctrine of stare decisis in investor-state arbitration, arbitral decisions provide persuasive authority in future disputes, and particular decisions may gain influence and recognition comparable to precedent. An arbitral panel has discretion to consider other public international law authorities, including previous investor-state disputes, international commercial arbitration between two private companies, public international courts, and ad hoc bodies such as the Iran-US Claims Tribunal. All of these systems have helped contribute to the emerging anticorruption norms in ISDS.)

Arbitral panels considering corruption have most often treated it as a “shield”—that is, as a defense against liability. But while recent panels and commentators have questioned the merits of a “corruption defense,” recent cases hint at the emergence of a freestanding cause of action for corruption—as a sword rather than a shield. This potential shift suggests that, in addition to the the TPP’s express transparency and anticorruption terms, the ISDS chapter may offer hidden tools for anticorruption enforcement.

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No Longer a Cost of Doing Business: The Yates Memo Signals DOJ Is Serious About Going After Individuals

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As many observers have noted, penalties for Foreign Corrupt Practices Act (FCPA) violations tend to fall on corporations, rather than individual wrongdoers. The individual employees responsible for the unlawful conduct rarely pay fines or go to prison. The FCPA is not unique in this regard; many U.S. Department of Justice (DOJ) settlements with corporate defendants shield executives and employees from personal liability so long as the corporation accepts institutional responsibility. Yet this enforcement posture has been unsatisfying, and critics argue that many corporations simply treat the fines as an accepted cost of doing business. In response to this concern, and after much foreshadowing, the DOJ formally released a new policy on individual liability last week—a policy that applies to all corporate prosecutions and settlements, including those involving the FCPA. Known as the “Yates Memo” (it was announced by Deputy Attorney General Sally Quillian Yates in her remarks at NYU School of Law on September 9th), this new policy statement—the first major policy announcement from the DOJ under Attorney General Loretta Lynch—signals that the “cost of doing business” model of corporate compliance is coming to a definitive end.

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