The judge presiding over a proposed securities fraud class action suit against Brazilian petroleum giant Petrobras should have taken a closer look at the types of stock purchases the plaintiffs made before class certification, a federal appeals court has ruled.
Petrobras, in which the Brazilian government holds a majority stake, was once among the largest companies in the world. But its value plunged in the wake of a sprawling money laundering and bribery scheme involving Brazilian politicians and captains of industry, including the CEO of Odebrecht, the construction conglomerate that pleaded guilty last year in the Eastern District to running a vast bribery operation.
Petrobras investors filed a class action against company officials, arguing they took part in hiding the scheme.
Southern District Judge Jed Rakoff certified two classes of plaintiffs for money damages: those with claims under the Securities Act of 1933 and those with claims under the Securities Exchange Act of 1934.
But in an order reversing Rakoff's certification, a panel of the U.S. Court of Appeals for the Second Circuit said that, under the U.S. Supreme Court's 2010 holding in Morrison v. National Australia Bank, 561 U.S. 247, parties bringing claims under the Securities Act and the Securities Exchange Act must show they acquired their shares through domestic transactions, since Petrobras shares aren't traded on an U.S.-based exchanges.
Writing for the panel, Eastern District Judge Nicholas Garaufis, sitting by designation, said Rakoff committed "legal error" by not conducting Morrison inquiries to show the domesticity of the plaintiffs' transactions.
Circuit Judges Peter Hall and Debra Ann Livingston joined in the decision.
Lewis Liman, Jared Gerber and Mitchell Lowenthal of Cleary Gottlieb Steen & Hamilton represented Petrobras. Jeremy Lieberman, Marc Gross, Emma Gilmore, John Kehoe and Brenda Szydlo of Pomerantz represented investors.