Washington State Investment Board v. Odebrecht S.A.

Background

Washington State Investment Board (the “Board”) alleges that Odebrecht S.A. (”Odebrecht”), Construtora Norberto Odebrecht S.A. (“Norberto”), and Odebrecht Engenharia e Construção S.A. (“Engenharia”) participated in and concealed an international bribery scheme. The Board asserts claims under Section 10(b) of the Securities Exchange Act, Rule 10b-5, Section 20(a), the Washington State Securities Act, and common-law fraud.

The Board alleges that the defendants operated a structured-operations division used to conceal communications and payments. According to the Second Amended Complaint, the division paid about $3.3 billion in bribes from 2006 through 2014 and maintained a shadow budget. The defendants marketed notes to investors, and the Board purchased more than $100 million of those notes between June 21, 2012, and February 4, 2015. After the bribery scheme became public, the notes’ value declined.

The Board alleged that offering memoranda, financial statements, and other disclosures falsely stated or implied that the companies obtained contracts primarily through competitive bidding and prepared their financial statements according to Brazilian accounting standards. In an earlier round of this case, the court allowed claims based on competitive-bidding statements and successor liability for Engenharia to proceed, but dismissed claims based on alleged Brazilian accounting violations. After the defendants consented to the filing of the Second Amended Complaint, they moved under Federal Rules of Civil Procedure 9(b) and 12(b)(6) to dismiss portions of it.

Ruling on Brazilian accounting allegations

The court first held that the defendants had waived their argument that the previously dismissed accounting claims were dismissed with prejudice. The defendants had consented to the filing of the Second Amended Complaint, which included those claims.

The court then considered several alleged violations of Brazilian accounting standards:

- Provision accrual: The Board alleged that the defendants should have recorded a provision for expected penalties, fines, legal costs, and other obligations arising from the bribery scheme. The court held that the new allegations about the size and growth of the bribes, warnings to Marcelo Odebrecht, and the relocation of the structured-operations division did not show that a loss was probable when the challenged statements were made. The allegations therefore did not state an actionable misstatement. - Contingent-liability disclosure: The Board also alleged that the defendants should have disclosed the expected costs of a contingent liability. The court held that the allegations did not show that a law-enforcement investigation had begun when the statements were made or that the statement-makers believed a loss was more likely than not. This theory did not state an actionable misstatement. - Contract revenue: The Board alleged that the defendants improperly failed to separately identify revenue from contracts obtained through bribery. The court held that the cited accounting provision described a common practice rather than a mandatory requirement, so the allegations did not establish a Brazilian accounting violation. - Contract expenses: The Board alleged that the defendants failed to record bribes and kickbacks associated with specifically identified contracts as expenses. The court held that the Second Amended Complaint identified particular contracts and bribe amounts and adequately alleged that the unrecorded expenses were material. This theory stated an actionable misstatement.

Accordingly, Norberto’s statement that it prepared its consolidated financial statements under Brazilian generally accepted accounting principles could support a Section 10(b) claim only insofar as Norberto failed to disclose the cost of bribes as contract expenses. The motion to dismiss was denied as to that theory and granted as to the other alleged Brazilian accounting violations.

Claims against Odebrecht

The court held that the Board adequately alleged direct Section 10(b) and Rule 10b-5 claims against Odebrecht based on Odebrecht’s own statements that its financial information complied with Brazilian accounting standards, to the extent those statements failed to disclose bribe-related contract expenses. The court granted the motion as to Odebrecht’s other alleged misstatements, including public denials on which the Board did not allege reliance.

The court denied the motion to dismiss Odebrecht’s control-person claim under Section 20(a). A control-person claim alleges that a defendant controlled the primary violator and culpably participated in the violation. The court found that the Board plausibly alleged that Odebrecht controlled Norberto and participated in the fraudulent conduct through the structured-operations division, personnel overlap, payment activity, and separate tracking of bribery transactions.

State-law claims and Engenharia

Because the court found that the Brazilian accounting allegations concerning undisclosed bribe expenses were sufficient under Section 10(b), it allowed the corresponding Washington State Securities Act and common-law fraud claims to proceed against Norberto and Odebrecht. The court also denied the motion to dismiss Odebrecht’s control-person claims under the Washington statute.

The court limited Engenharia’s liability under the Washington State Securities Act and common-law fraud claims to successor-liability theories. The Board did not dispute that limitation. The opinion also notes that the Section 10(b) and Rule 10b-5 claim against Engenharia was premised only on successor liability and was not challenged in this motion.

Leave to amend and case status

The court denied further leave to amend because it had twice found the allegations concerning provision accrual, contingent-liability disclosure, and separate reporting of bribery-related contract revenue insufficient, and the Board identified no facts suggesting that another amendment would cure those defects.

The court concluded that the defendants’ partial motion to dismiss was granted in part and denied in part. It lifted the discovery stay and terminated as moot the Board’s motion to partially lift that stay. The case was set for an initial pretrial conference.