Friday, July 29, 2016

There have been several recent and interesting updates to the In re Petrobras Securities Litigation, 14-cv-9662 (S.D.N.Y.) that we have discussed several times on this blog. First, the Second Circuit has decided to accept review of the class certification question. Second, Judge Jed Rakoff denied a motion to stay the underlying proceedings (including the impending trial) pending the Second Circuit appeal in a decision that called the class action “arguably secondary” to the numerous opt-out proceedings. Finally, several plaintiffs have voluntarily dismissed their claims with prejudice—but without explanation.

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 of Petrobras on the New York Stock Exchange, as well as other securities, 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. Although District Court Judge Jed Rakoff, overseeing the case, has certified the class of plaintiffs, several large institutional investors have opted out of the class. The trial date for the Petrobras actions is set for September 19, 2016, which Judge Rakoff has said is “set in stone.” (S.D.N.Y. Docket No. 623 at 7.)

However, several recent events have conspired to upend these proceedings. First, on June 15, 2016, a three-judge panel on the Second Circuit decided to allow an interlocutory appeal on the issue of class certification in the Petrobras class action. (2nd Cir. Docket No. 122.) Although Fed. R. Civ. P. 23(f) permits an interlocutory appeal on the issue of class certification, interlocutory appeals are still rare in the federal courts. So the appeal is a noteworthy development by itself. Moreover, the Second Circuit has directed that this appeal will be “expedited.” The Second Circuit appeal is expected to turn on Morrison issues, so named after the Supreme Court’s holding in Morrison v. National Australia Bank, Ltd., 561 U.S. 247 (2010). In other words, the Second Circuit will decide whether certain of the underlying transactions giving rise to these proceedings are “domestic” to the United States and thus amenable to class-action securities claims. Although there will likely still be a sizable class regardless of the Second Circuit’s decision, the question of who will even be in the class in the Petrobras proceedings remains unresolved, a mere two months before trial is “set in stone” to begin.

Next, Judge Rakoff has denied the Petrobras defendants’ request to stay the underlying proceedings in this action—for both the class action and individual plaintiffs—until the Second Circuit resolves the class certification issue. (S.D.N.Y. Docket No. 623.) Judge Rakoff’s decision (“Op.”) included language critical of defendants’ request. As Judge Rakoff points out, none of the issues involving the appeal of the class certification are “directly related … to the 27 parallel individual actions,” raising the question of why defendants sought a stay of all proceedings. (Op. at 2.) Judge Rakoff noted that FRCP 23(f), the rule which allows interlocutory appeals from orders granting class certification, expressly does not stay district court proceedings unless either the underlying or appellate court orders otherwise. Judge Rakoff made clear that even a stay of only the class action would not meet the standard for granting a stay, but pointedly added that “when the stay request is coupled to a request to derail the entire litigation while the Second Circuit considers an issue that only relates to the class action, the arguments for a stay here become even less persuasive.” (Op. at 3-4.)

To determine whether to grant a stay, Judge Rakoff applied the “traditional” test, which also resembles the standards in most jurisdictions for whether to grant a preliminary injunction: “(1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies.” (Op. at 3 (citing Nken v. Holder, 556 U.S. 418, 426 (2009)).)

Viewing the first Nken factor to be indeterminate without knowing the Second Circuit’s rationale for allowing the appeal, Judge Rakoff held that defendants would not be irreparably injured if a stay did not issue, largely because “the scope of the trial will not be altered significantly by the Second Circuit’s decision.” (Op. at 5-6.) Conversely, Judge Rakoff held that the plaintiffs would be substantially injured by a stay, expressly mentioning the plaintiffs in the “27 parallel individual actions that will go to trial with the class action, regardless of whether it remains a class action,” all of whom “have worked diligently to abide by this Court’s scheduling and case management orders.” (Op. at 7.) Because it is not clear when the Second Circuit would hear and decide the appeal, Judge Rakoff elected not to add to this case’s “expensive, dispiriting, undue delay,” which he called “the bane of the American legal process.” (Op. at 8.)

Finally, Judge Rakoff held that the fourth Nken factor also favored denying the request for a stay, calling defendants’ arguments that “considerations of judicial economy favor a stay” “blatantly incorrect.” (Op. at 8.) In a strongly worded point, Judge Rakoff pointed out that “[t]he Court has set aside a full two months to try this consolidated group of 28 complicated cases. It was not an easy matter for this judge, who, though on senior status, continues to take a full load of cases, to free up that amount of time.” (Op. at 8-9.) “More broadly, the public interest is served by the speedy and effective administration of justice, not least in cases of such obvious public interest as this one.” (Op. at 9.) Consequently, Judge Rakoff held that since three of the four Nken factors militated towards denial (and the fourth did not tilt either way), and some class will remain regardless, the request to stay the proceedings was denied.

The major takeaway from Judge Rakoff’s opinion in the legal press seems to have been the Court’s reference to the class action here as “arguably secondary” to the opt-out claims. For example, in a Financial Times piece about the decision, one commentator called the decision a “paradigm shift” due to its groundbreaking “acknowledgement that not only are the opt-outs important, but they have become potentially more important.” However, as surprising as the language in the Court’s opinion may be to some observers, it appears to be specific to the nature of this case, in which several large institutional investors with significant alleged losses have opted out. Specifically, Judge Rakoff states that the litigation “has evolved into one that is primarily a non-class action.” (Op. at 7.) This suggests that the Court’s ruling (and tone) may not apply in cases where the class still predominates over the opt-outs.

As an interesting coda, the Petrobras defendants have asked the Second Circuit to essentially reverse Judge Rakoff’s decision regarding the stay request, and the Second Circuit has decided to consider it. In a July 12, 2016 order from Second Circuit Judge Peter W. Hall, the Second Circuit referred the motion for a stay of the district court proceedings to the three-judge panel sitting on July 26, 2016. (S.D.N.Y. Docket No. 689.) In addition, the Second Circuit decision granted a temporary stay of the district court proceedings pending determination of the broader motion for a stay while the appeal is pending. Since the proceedings are now stayed, the September 19 trial date may have to be pushed back, adversely affecting Judge Rakoff’s schedule—exactly what the Court had hoped to avoid.

Finally, in an apparently unrelated development in the Petrobras proceedings, on July 13, 2016, Judge Rakoff so-ordered stipulations of dismissal for opt-out plaintiffs MII Life, Cathay Multi-Strategy High-Yield Bond Fund, Wafic Rida Said, and Legg Mason Western Asset Euro High Yield Fund. (S.D.N.Y. Docket Nos. 693, , 695, 696.) Curiously, all four dismissals are with prejudice, barring those plaintiffs from re-asserting their claims if they so desire in the future. It is unclear why they have all decided to drop their claims, especially so close to trial.