United States: Standing of Petrobras Opt-Out Plaintiffs Challenged

A recent motion to dismiss filed by the defendants in the In re Petrobras Securities Litigation, No. 14-cv-9662 (S.D.N.Y.) consolidated litigation challenges the standing of several institutional opt-out plaintiffs. Defendants' arguments on standing, if accepted, could have a far reaching impact on an investment advisor's standing to sue on behalf of funds it advises.

As background, Petróleo Brasileiro S.A. ("Petrobras"), a Brazil-based energy multinational, is a target of a Brazilian police investigation of alleged rampant corruption involving construction contracts. Allegedly, several large construction companies colluded to avoid Petrobras's competitive bidding process, giving kickbacks to Petrobras executives to allow the collusion. As a result, Petrobras allegedly significantly overpaid for the construction of certain refineries.

In December 2014, investors who had purchased American Depository Shares (ADSs) of Petrobras on the New York Stock Exchange filed a securities class action in the Southern District of New York, alleging violations of the Securities Act of 1933, the Securities Exchange Act of 1934, and (in an amended complaint) Brazilian securities laws. Plaintiffs allege that in regulatory filings and public statements, Petrobras misrepresented its financial condition, financial controls, and ethical practices. A motion to dismiss the class action was substantially denied.

However, on August 21, 2015, Defendants, i.e., Petrobras, affiliated entities, and their underwriters, filed a Motion to Dismiss certain Individual Opt-Out Complaints (the "Opt-Out Def. Mem."). Defendants' supporting memorandum makes a variety of arguments in favor of dismissal against a variety of plaintiffs, including arguments on standing.

As to standing, Defendants argue that certain plaintiffs "must be dismissed" where those plaintiffs "are investment advisors who have not adequately pleaded that they have standing to sue." Opt-Out Def. Mem. at 2. Instead of "alleg[ing] that they have suffered a personal injury in their own right," these plaintiffs "assert claims on behalf of others without ... plausibly alleging that they have received a valid assignment of those claims." Id. According to Defendants, investment advisors who purchased the relevant securities on behalf of others cannot "demonstrate[] that they have suffered an injury-in-fact, as required to establish standing." Id. at 6. For example, Defendants argue that one such plaintiff only makes "the conclusory assertion that it has standing and authority to sue Defendants through a valid legal assignment," which is "a factually bare legal conclusion." Id. Defendants argue that said plaintiff should be dismissed for lack of standing because it "failed to plead facts plausibly alleging that it has received a valid legal assignment." Id. at 8. Defendants make similar arguments about the standing of several other plaintiffs as well. See id.

On September 18, 2015, the individual plaintiffs ("Plaintiffs") filed a Joint Memorandum of Law in Opposition to the Motion to Dismiss ("Pl. Mem."), responding to the standing issues. First, Plaintiffs call Defendants' argument that investment advisors lack standing a "false premise." Pl. Mem. at 1. Plaintiffs argue instead that "none of the challenged Individual Plaintiffs purports to sue in its capacity as an investment advisor," and instead each such plaintiff "either received a valid assignment of the underlying investors' claims" or "is suing in its capacity as the legal entity with authority to sue on behalf of Petrobras investors who cannot bring claims except through the challenged plaintiff." Id. Plaintiffs rely on the "prudential exception" described in W.R. Huff Asset Mgmt. Co., LLC v. Deloitte & Touche LLP, 549 F.3d 100 (2d Cir. 2008), which applies where "where the plaintiff can demonstrate (1) a close relationship to the injured party and (2) a barrier to the injured party's ability to assert its own interests." Id. at 4-5 (quoting Huff, 549 F.3d at 107-109). According to Plaintiffs, each plaintiff challenged on these grounds "brings suit as a trustee or other responsible entity under law on behalf of one or more injured investors in Petrobras securities who cannot bring suit themselves—not as an investment advisor on behalf of unaffiliated clients like the plaintiff in Huff." Id. at 9. Further, Plaintiffs argue that Defendants misread Cortlandt St. Recovery Corp. v. Hellas Telecomms., S.a.r.l., 790 F.3d 411, 418 (2d Cir. 2015), as requiring that a plaintiff "must submit evidence of the assignment at the time of pleading to prove Article III standing or face dismissal." Id. at 5. Plaintiffs argue that, instead, "the district court in Cortlandt analyzed the assignment at issue, which was submitted after the filing of the complaint," and none of the issues with the assignment in Cortlandt apply to the Aura Capital assignment in the instant dispute. Id. at 5-6.

On October 5, 2015, Defendants filed their Joint Reply Memorandum of Law in Further Support of Their Motion to Dismiss the Individual Action Complaints (the "Opt-Out Def. Reply"), which further addresses the standing issues. Defendants do not reiterate or expand upon their arguments that certain plaintiffs were investment advisors and thus lacked standing to sue. Instead, Defendants challenge the standing of specific plaintiffs or groups of plaintiffs. For one plaintiff who argued that it had received an assignment of the Petrobras securities, Defendants reply that the purported assignment documents do not identify "any securities that are purportedly being assigned" or "list any specific securities," with "no explanation for the purported assignments," and bear the signature of only the assignor, not the assignee. Opt-Out Def. Reply at 1. In regard to the "prudential exception" referenced in Plaintiffs' opposition, Defendants argue that a group of plaintiffs trying to assert the prudential exception do so only by amending their complaint to include "bare legal assertions that the entities that actually made the investments do not have legal personality separate from the named plaintiffs or that the named plaintiffs have the exclusive authority to act on behalf of the actual investors." Id. at 2 (internal citations omitted). Defendants also ask why a third group of plaintiffs, who expressed their intention to amend their complaint, have not yet done so. Id.

While some might argue that Defendants' arguments are technical, the reality is that given the limitations and repose issues in the litigation, amendments at this stage may not cure these issues. Regardless of how the court rules on the motion to dismiss here, this argument over standing reinforces the need to anticipate and remediate potential standing issues early enough to avoid dismissal risks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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