Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

EIG Energy Fund XIV, L.P. v. Petroleo Brasileiro, S.A.

United States Court of Appeals, District of Columbia Circuit

July 3, 2018

EIG Energy Fund XIV, L.P., ET AL., Appellees
v.
Petroleo Brasileiro, S.A., Appellant

          Argued January 19, 2018

          Appeal from the United States District Court for the District of Columbia (No. l:16-cv-00333)

          Catherine E. Stetson argued the cause for appellant. With her on the briefs were Adam K. Levin and Sean Marotta.

          Daniel B. Goldman argued the cause for appellees. With him on the brief were Barry Coburn and Kerri Ann Law.

          Before: Henderson and Wilkins, Circuit Judges, and Sentelle, Senior Circuit Judge.

          OPINION

          KAREN LECRAFT HENDERSON, CIRCUIT JUDGE

         In 2012 and 2013, an American investment fund sank $221 million into what seemed like a sure bet: buying equipment to extract a massive, newly discovered reserve of undersea crude oil off the coast of Brazil. Brazilian politicians and corporate executives also saw an opportunity and set up a scheme to make illegal use- including payment of bribes and kickbacks-of investors' money. The eventual revelation of the corruption produced the largest political scandal in modern Brazilian history. In light of the scandal, banks were no longer willing to make loans for the oil-extraction project, which collapsed, taking the American fund's money with it.

         Behind the project-and at least some of the corruption- was Petroleo Brasileiro, S.A. (Petrobras), Brazil's state-owned oil company. The jurisdiction of U.S. courts over claims against foreign states and their "instrumentalities," like Petrobras, is limited by the Foreign Sovereign Immunities Act (FSIA), 28 U.S.C. §§ 1330, 1604-1606, so we must determine whether Petrobras's alleged fraud "caused a direct effect in the United States," id. § 1605(a)(2). If it did-as the district court held-then Petrobras is "liable in the same manner and to the same extent as a private individual under like circumstances." Id. § 1606. Otherwise, Petrobras "shall be immune from the jurisdiction of the courts of the United States." Id. § 1604.

         I. Background

         In 2006 Petrobras discovered an estimated 50 billion barrels of undersea oil off the coast of Brazil.[1] Although costly to extract, the sheer size of the deposit was tantalizing not only to the Brazilian state-which had a direct economic interest in the find through Petrobras, the state-owned oil company-but to investors around the world. Petrobras soon formed a foreign-investment venture to build 28 specialized "drill ships" at a cost of more than $700 million apiece. The business plan for the venture, named Sete Brasil Participacoes, S.A. (Sete), called for equity investment of around 7.9 billion Brazilian Reais ($2.19 billion at today's exchange rates), with approximately 4.6 per cent of that coming from Petrobras itself. The remainder of the ships' cost was to be debt-financed through third-party lenders.

         To attract foreign investment, Brazilian law provides tax incentives through special partnerships known as Fundos de Investimento em Participacoes, or FIPs. Petrobras created FIP Sondas to facilitate foreign investment in the Sete project. Petrobras specifically targeted U.S. investors for Sete, Joint Appendix (JA) 25, including EIG Management Company, LLC (EIG), a Washington, D.C.-based private equity fund. Petrobras disseminated in the United States, including to EIG, a presentation called "The Drilling Rigs Project: Petrobras'[s] Strategy for its Successful Implementation." JA26. The presentation contained a "Cautionary Statement for U.S. Investors," referencing U.S. Securities and Exchange Commission rules governing oil and gas investment. JA26-27. Another document disseminated by Petrobras in the United States, titled "Pre-Salt Oil Rigs Project," "discussed the Sete investment premise and touted that Sete would have 'management with extensive experience in the market.'" JA27-28. A third document "promoting investment in Sete" was sent to EIG by a putative Petrobras agent nearly a year after the first two documents circulated. JA28.

         Petrobras and Sete executives also met with EIG executives in the United States at least twice. At one meeting, in Houston, Texas, Sete CEO Joao Carlos de Medeiro Ferraz (Ferraz) "offered rosy descriptions of Sete and its business prospects." JA29. At another, in Washington, D.C., Ferraz addressed a conference of EIG employees and investors and "informed [them] that Sete expected drillship charter revenue 'of almost $90 billion [in] the next 20 years.'" JA30 (second alteration in original). EIG employees twice traveled to Brazil to meet with Petrobras representatives, and Petrobras or Sete corresponded extensively with EIG leading up to EIG's investment, through written memoranda, presentations, telephone calls and emails.

         EIG ultimately invested $221 million in FIP Sondas between August 2012 and May 2013, on behalf of eight funds under its management. Six of the eight EIG funds were based in Delaware but the other two were based in the Cayman Islands, which Brazil has designated as a tax haven. Because investors from designated tax havens are ineligible for the tax incentives provided FIP investments, EIG formed EIG Sete Parent SARL (EIG Sete Parent), a Luxembourg corporation, which in turn formed EIG Sete Holdings SARL (EIG Sete Holdings), also a Luxembourg corporation. EIG's investment in Sete therefore flowed from the eight funds to EIG Sete Parent, to EIG Sete Holdings, to FIP Sondas and, ultimately, to Sete itself.

         Brazilian prosecutors' "Operation Car Wash" became public in 2014. The multi-year investigation uncovered extensive corruption in the Brazilian government, including Petrobras, and in the private-sector oil industry, including Sete. To date, prosecutors have obtained 93 convictions against officials engaged in a bribery and kickback scheme going back to at least 1997. Among the guilty were senior executives at Sete, including Ferraz, EIG's primary contact at Petrobras and Sete. A 30-year employee of Petrobras, Ferraz became the chief executive of Sete sometime before the spring of 2013, when he met with EIG in Houston. Ferraz was EIG's primary contact regarding its Sete investment, first, while he was at Petrobras and, later, when he was Sete CEO. In testimony given to an investigative panel of the Brazilian Congress in 2015, Ferraz explained that "[t]he capital market in the United States, in particular, loves [Sete's] type of business. They very much like the prospects of financing drilling rigs, despite the risks involved." JA233. And so, Ferraz testified, "[t]here was great market interest [in Sete], particularly among U.S. private equity groups" such as EIG. JA218. Another Sete executive, chief operating officer Pedro Jose Barusco, testified to the Brazilian Congress that he and Ferraz had taken "the initiative to create Sete Brasil" and that "the establishment of bribe amounts .. . was a continuity [sic] of what happened in Petrobras." JA23, JA3l (compl.).

         As the scandal of Operation Car Wash enveloped Sete and Petrobras, skittish lenders withdrew their support from the drill ships project. Because the project was highly leveraged by design, the loss of debt financing made it impossible to proceed with construction. Facing insolvency, Sete declared bankruptcy. Investors, including EIG, were left with nothing but worthless shares.

         EIG sued Petrobras and the other defendants in district court, alleging counts of fraud, aiding and abetting fraud and civil conspiracy to commit fraud.[2] Petrobras moved to dismiss for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1).[3] Petrobras asserted that, as an instrumentality of the Brazilian state, it is immune from suit on EIG's claims under the FSIA.

         The district court denied Petrobras's motion to dismiss, concluding that EIG's claims fall within the FSIA's commercial activity exception to foreign-state immunity. EIG Energy Fund XIV, L.P. v. Petrdleo Brasileiro S.A., 246 F.Supp.3d 52, 72 (D.D.C. 2017); see 28 U.S.C. § 1605(a)(2). Although EIG argued that each of the three clauses of the commercial-activity exception applied, the district court relied on the third clause only, which clause grants jurisdiction over claims "based upon ... an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States." 28 U.S.C. § 1605(a)(2).

         The district court reasoned that EIG's injury "occurred at the time Petrobras successfully induced [it] to invest in the Petrobras-Sete project," which injury "occurred, at least in part, in the United States." 246 F.Supp.3d at 72. Because the court concluded that EIG's injury occurred in the United States, it rejected Petrobras's argument that EIG's structuring its investment through its Luxembourg subsidiaries-that is, EIG Sete Parent and EIG Sete Holding-constituted an "intervening event[]" that made EIG's U.S. injuries "indirect." Id.

         Moreover, the district court found that "Petrobras did not merely establish Sete" but '"installed its own former employees'-including the architects of Sete and the bribe scheme, Ferraz and Barusco-for the purpose of continuing the corrupt enterprise." Id. (quoting PL's am. compl. 12). Therefore, it was irrelevant to the court's analysis that Sete, not Petrobras, made the misrepresentations that immediately preceded EIG's decision to invest: "Sete's deceptive conduct, occurring only after it grabbed the baton from Petrobras, is not the kind of ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.