Investors Who Live Outside the U.S. and Who Purchase the Stocks or Bonds of a Company Listed and Traded in the U.S. Can Recover Money Lost Due to Fraud by that Company From a U.S. Court

A version of this article was published in Spanish in the November 2018 edition of Techo Financiero. 

By:      Chet B. Waldman and Joshua W. Ruthizer

The value of a stock, bond, or other security typically increases and decreases due to market or economic factors.  If Apple announces that it had net income in a quarter that was better than analysts anticipated, the company’s stock price may increase in value.  On the other hand, if a company’s main product becomes obsolete (e.g., typewriters) and revenues substantially decline, the company’s stock price may drop. 


However, sometimes, the value of a company’s securities decreases because corporate misconduct or fraud is revealed.  For example, news may come out that a company lied in its financial statements about its revenue or profits, or a company hid significant negative events impacting its manufacturing facilities.  If that company’s stock or bonds are listed or traded on a U.S. stock exchange (i.e., NASDAQ or the New York Stock Exchange (“NYSE”)), then the misconduct or fraud can be a criminal or civil violation of U.S. securities laws.  Whether the U.S. securities laws apply depends on whether the stock or bond was purchased on a U.S. exchange, not the residency or location of the investor or the company at issue.  Therefore, investors who live outside the U.S., such as in Panama, may be able to recover damages under the U.S. securities laws.  The recent scandal at Petrobras Brasileiro S.A. (“Petrobras”) provides a perfect example of this.    


Petrobras is one of the world’s largest energy companies, with a market cap, as of August 8, 2018, of over $80 billion.  It is approximately 64% owned by the Brazilian government and 36% owned by public investors.  Petrobras common stock and preferred stock trade on the Brazilian stock exchange (the Bovespa).  Petrobras also has common and preferred American Depository Receipts (“ADRs”) that trade on the NYSE, each of which corresponds to a Brazilian share.

Petrobras planned to expand its refining capacity by building or purchasing new refining facilities, mostly in Brazil.  To complete these large scale projects, Petrobras contracted with Brazilian construction and engineering companies through a bidding process.  Only some of the construction and engineering companies in Brazil had the capability to complete these projects.  According to published reports, over a dozen of these companies formed a “cartel” to rig the competitive bidding process.

Petrobras insiders and executives told cartel members the highest amount Petrobras was willing to spend on a particular contract.  Petrobras executives also limited the bidding on the contracts to cartel members.  Cartel members then decided what contract would go to which cartel member, and the “winning” cartel member would make the “lowest” bid at or near the maximum amount Petrobras was willing to spend.  Cartel members kicked back 3% of an inflated contract’s total value as bribes to Petrobras division heads, known as “directors.”  Those directors were appointed by the Brazilian government, and a portion of the kickbacks found its way to Brazilian political parties and politicians.

As a result, the contracts Petrobras entered into were inflated by as much as 20%. For example, Petrobras originally budgeted $2.3 billion for the Abreu E Lima oil refinery.  Inflated bids and cost overruns pushed costs for the refinery to $18.5 billion.  Total kickbacks and bribes for the refinery have been estimated at $550 million (3% of $18.5 billion)!  Brazilian authorities estimate that Petrobras wrongfully paid out up to $28 billion through the bid rigging scheme. 

Petrobras and its executives seemingly violated U.S. securities laws by reporting false financial statements. The inflated prices of projects meant that Petrobras reported inflated amounts for its property, plants and equipment (“PP&E”) on its financial statements since the assets were reported at the inflated cost paid to the cartel members, not at fair value.  Indeed, after the scheme was revealed, Petrobras announced an asset impairment and write-down of $16.8 billion to its financial statements, meaning its assets had been publicly overstated by, at least, that amount.  Petrobras also arguably made false statements about the integrity of its management and the effectiveness of its financial controls. 

When the truth about Petrobras’s false statements was revealed to the public, the price of Petrobras securities declined dramatically.  For instance, the price of Petrobras ADRs declined from a high of $47.39 per ADR on March 17, 2010, to a price of $5.26 per ADR on March 19, 2015 (a decline of $42.13 or 88.9% per ADR).

Consequently, a securities fraud class action litigation was started in Federal Court in New York on behalf of purchasers of Petrobras ADRs and Bonds against Petrobras and its outside accounting firm.  That litigation recently settled for $3 billion.

Options Available to Non-U.S. Investors

As mentioned earlier, investors that live outside the U.S. can recover damages under the U.S. securities laws for investments made in stocks and bonds listed on U.S. exchanges.  There are several ways that an investor can seek to recover damages.           

Active Litigation.  Investors can bring a lawsuit on their own behalf in a U.S. court alleging violations of the U.S. securities laws.  However, securities litigation can be expensive.  Attorneys’ fees, court costs, and expert fees can run into the hundreds of thousands, if not millions of dollars, depending on the size of the case and the length of the litigation.  For most investors, it is not economically feasible to bring their own case because the cost of the case will far outweigh the potential recovery.  

Class Action Litigation. If a large group of investors were harmed by the same conduct, then an investor can bring a securities lawsuit as a “class action.”  In a class action, one or a few investors (the class representatives) act on behalf of all investors in a company who were similarly damaged as a result of the same fraud or other misconduct (the class members).  When a settlement or a judgment is reached, all class members can share in the recovery, on a pro rata basis.  If an investor believes he/she/it can do better than the recovery they will receive as a member of the class, the investor can choose not to participate in the class recovery and “opt-out” to pursue their own individual cases, as long as the investor’s claims have not expired.

Class actions provide a valuable tool to investors.  By combining all investors’ losses, the total amount of damages increases significantly.  With such large damages, it becomes economically viable to pursue the claims.  Further, the U.S. allows for contingency fee arrangements, under which the attorneys representing a class only get paid if they recover money for the class and, if so, they get paid a percentage of the recovery at the end of the case.  The attorneys are also reimbursed their out-of-pocket costs (e.g., court filing fees, expert fees, travel expenses) from the recovery.  Importantly, if there is no recovery in favor of the class, then the class members do not have to pay any attorneys’ fees or costs.    

Class Action Settlements. Any investor who fits within the definition of the class can share in a class action recovery.For example, anyone who purchased shares of Petrobras on the NYSE between March 2010 and March 2015 and lost money should be able to share in the $3 billion settlement fund obtained for class members in that litigation. However, payment of a class member’s share of the recovery is usually not automatic.Investors typically have to complete and send back a “Proof of Claim” form, where they provide information and documentation evidencing that they purchased and held the security at the relevant time(s) (showing that they are a member of the class).Failure to fill out and return a claim form may prevent a class member from obtaining a share of the recovery.Surprisingly, many class members do not complete the forms.Studies have shown that approximately 70% of class members in securities class action settlements do not submit the necessary paperwork and do not collect money to which they are entitled.