DoubleLine Capital LP v. Odebrecht Finance, Ltd

Background

DoubleLine Capital LP, DoubleLine Income Solutions Fund, and DoubleLine Funds Trust sued Odebrecht, S.A.; Construtora Norberto Odebrecht, S.A. (CNO); and Odebrecht Engenharia e Construção, S.A. (OEC). The plaintiffs had purchased debt securities issued by Odebrecht Finance, Ltd., a company that was no longer a party to the case. The securities included 7.125% notes maturing in 2042 and 7.50% perpetual notes.

The plaintiffs alleged that the defendants concealed a bribery and kickback scheme exceeding $3 billion and made false or misleading statements in offering memoranda, financial reports, press releases, and communications with the plaintiffs. The claims remaining relevant to this motion were claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, a controlling-person claim under Section 20(a), and New York common-law fraud. The case also includes a negligent-misrepresentation claim, which the plaintiffs did not address in this motion.

Effect of the Discovery Sanctions

In a prior Rule 37 sanctions order, the court established that the defendants made the alleged misrepresentations and omissions, that those statements were material, that the defendants acted with scienter, meaning knowledge of wrongdoing or an intent to deceive, and that OEC was CNO’s successor. The sanctions order also barred the defendants from presenting evidence or argument contesting those established facts. The defendants did not dispute the finding that their failure to comply with the discovery order was willful.

Judge Ho ruled that Rule 56 permits a court to rely on facts established through a discovery-sanctions order when deciding summary judgment. He rejected the defendants’ arguments that doing so would merely duplicate the sanctions relief or violate due process. The court explained that sanctions established facts for the case, while summary judgment resolves a claim or part of a claim as a matter of law when no genuine factual dispute remains.

Section 10(b) Claim

The plaintiffs sought summary judgment against CNO and OEC on four of the six elements of their Section 10(b) claim: a material misrepresentation or omission, scienter, a connection with the purchase or sale of a security, and reliance. They did not seek summary judgment on economic loss or loss causation.

The facts established in the sanctions order resolved the first three elements. As to reliance, the plaintiffs relied primarily on a declaration from Mark Christensen, DoubleLine Capital’s Emerging Markets Portfolio Manager and Co-Director of Corporate Research. The court found the declaration sufficiently based on personal knowledge. It stated that DoubleLine reviewed CNO’s offering memoranda and quarterly financial results and relied on that information when purchasing the notes. The court also considered the plaintiffs’ additional purchase of $5.25 million in notes after asking the defendants about the Brazilian investigation and receiving a misleading response.

The court held that the defendants failed to identify evidence creating a genuine dispute about reliance. It therefore granted partial summary judgment on the first four elements of the Section 10(b) claim. At trial, the plaintiffs must still prove economic loss and loss causation.

Section 20(a) Claim

The plaintiffs also sought partial summary judgment against Odebrecht under Section 20(a), which can impose liability on a person who controls someone responsible for a primary securities-law violation. A Section 20(a) claim requires a primary violation by the controlled person, control by the defendant, and meaningful participation in the alleged fraud.

Judge Ho denied summary judgment on this claim. The plaintiffs had established only four of the six elements of the underlying Section 10(b) claim and did not show that this partial ruling established the required primary violation for Section 20(a) purposes. The court noted that the plaintiffs cited no authority supporting that position.

New York Common-Law Fraud Claim

The plaintiffs sought summary judgment on the first four elements of their New York fraud claim, leaving resulting damages for trial. Those elements were a material misrepresentation or omission, knowledge of falsity, intent to defraud, and reasonable reliance.

The court held that the sanctions order established the first three elements because its finding of scienter established knowledge of falsity and intent to defraud. The court also found that the plaintiffs actually relied on the defendants’ statements and that their reliance was reasonable or justifiable. The plaintiffs had reviewed the defendants’ financial reports and conducted the level of diligence required under the circumstances; the court found no basis to require them to investigate the possibility of a global bribery scheme.

Disposition

The court granted in part and denied in part the plaintiffs’ Motion for Partial Summary Judgment. Summary judgment was granted as to elements one through four of the Section 10(b) claim and elements one through four of the New York common-law fraud claim. Summary judgment was denied as to the Section 20(a) claim. Trial remains necessary on the unaddressed damages-related elements, the Section 20(a) claim, and the negligent-misrepresentation claim. The court ordered the parties to submit a joint letter concerning trial availability and directed the clerk to terminate the motion.