IN RE: Petrobras Securities Litigation

RESPONSE in Support of Motion re: 791 MOTION for Attorney Fees Notice of Class Counsel's Motion for an Award of Attorneys' Fees and Reimbursement of Litigation Expenses. Document filed by Employees' Retirement System of the State of Hawaii, North Carolina Department of State Treasurer, Universities Superannuation Scheme Limited.

Southern District of New York, nysd-1:2014-cv-09662

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8 POMERANTZL Jeremy A. Lieberman Managing Partner May 18,2018 VIA ECF & HAND DELIVERY Hon. Jed S. Rakoff, U.S.D.J. United States District Court for the Southern District of N ew York 500 Pearl Street, Courtroom 14B New York, New York 10007 Re: In re Petro bras Sec. Litig., No. 14-cv-9662 (JSR) Dear Judge Rakoff: This letter, on behalf of Class Representatives in the above-captioned action, responds to Cleary Gottlieb Steen & HaUlilton LLP's May 7, 2018 letter (the "Letter") regarding Class Counsel's lodestar and issues they believe the Court may wish to inquire further upon. I Class Counsel appreciates the thorough work Cleary Gottlieb performed to review time sheets dating back to March 2015 documenting the time that was necessary to achieve the historic $3 billion settlement. Broadly speaking, Cleary Gottlieb's issues concerning Class Counsel's work are limited to three areas, namely: (1) use of staff attorneys and project associates and reasonableness of their billing rates; (2) use of staff attorneys and project associates to translate key documents in a timely and cost-efficient manner, rather than relying upon outside vendors; and (3) instances where C1eary Gottlieb questions the amount of time expended or time sheet detail provided. What follows are Class Counsel's responses. For clarity and efficiency, the responses appear in the order in which Cleary Gottlieb's questions are raised. A. Pomerantz Time Sheets 1. Total Staff Attorney and Project Associate Time a. Lodestar Prior to September 30, 2015 I See ECF No. 793. Unless otherwise noted, capitalized terms have the same meanings assigned to them in the StipUlation of Settlement and Release. ECF No. 767-1. "'Class Counsel" refers to Pomerantz LLP, Labaton Sucharow LLP and Motley Rice LLC, the three law firms requesting attorneys' fees pursuant to the motion originally tiled on April 20, 2018. ECF Nos. 789-91. 600 Third Avenue, New York, New York 10016 tel: 212.661.1100 8 Hon. Jed S. Rakoff, U.S.D.J. May 18,2018 Page 2 ..... Pomerantz's lodestar figure [J includes approximately 32,305 hours ($15,257,314) billed by staff and project attorneys before September 30, 2015, prior to significant document production in this case. Although we understand that some of this pre-production time pertains to reviewing documents for production pursuant to the Petrobras Defendants' requests for production, fact investigation, and/or briefing the Petrobras Defendants' motion to dismiss, we observed several entries in which staffand project attorneys charged for general tasks during this time period such as reading news articles and summarizing and translating publicly available information." Letter at 5. (i) Litigation Context Petrobras has strongly and consistently asserted that it was a victim of the fraud, not the perpetrator. 2 According to Petrobras, bad acts of a few corrupt former employees who left years earlier could not be attributed to Petrobras under the adverse interest doctrine, and those who issued allegedly false statements had no knowledge of the fraud. 3 Petrobras even became an assistant prosecutor in actions against corrupt cartel companies, recovering hundreds of millions of dollars, an achievement Petrobras would likely try to place before a jury. PwC Brazil jumped on the bandwagon and argued that the scheme involved few former employees who had no financial reporting responsibilities and who concealed the scheme from those who did. Id. ~ 85. While Petro bras, adverse interest argument failed at the motion to dismiss, it has become wildly successful in Brazil, with both regulators and a federal judge agreeing that Petrobras was a victim of the cartel. By way of example, a congressional inquiry in Brazil concluded that Petro bras was a victim, Judge Sergio Fernando Moro, overseeing the Lava Jato prosecutions, referred to Petro bras as a victim in several opinions, and Petro bras has trumpeted these findings in public statements. Specifically: It is important to highlight that the public authorities in charge of the "Lava Jato" investigation and the Brazilian Supreme Court have acknowledged that Petrobras is a victim of the facts reveled by this investigation. As a result, the Company has 2 See, e.g., ECF No. 789, Declaration of Jeremey A. Lieberman in Support of (A) Class Representatives' Motion for Final Approval of Class Action Settlement and Plan of Allocation; (B) Class Counsel's Motion for an Award of Attorneys' Fees and Reimbursement of Litigation Expenses; and (C) Class Representatives' Motion for Reimbursement of Costs ("Lieberman Decl.") ~ 48. 3 See ECF No. 156 at n.13 ("There are no facts alleged showing that Foster knew at the time of any evidence of irregularities ..."); p.24 ("None of those statements show that Foster knew anything about the Payment Scheme, or the basis of the CAC's claims."); n.22 ("If anything, other allegations in the CAC actually support the opposite inference regarding Gabrielli's scienter ... Gabrielli was instrumental in acting on Fonseca's complaints of misappropriation of funds in the Communications Department of the Supply Division in 2008-2009 []; it was Gabrielli who launched a formal inquiry, and he spearheaded the effort to dismiss the employee responsible."). See also ECF Nos. 618 and 620 (Foster and Gabrielli summary judgment motions strongly asserting the absence of facts supporting scienter). 8 Hon. Jed S. Rakoff, U.S.D.J. May 18,2018 Page 3 already received, to date, R$ 716 million recovered by the Brazilian authorities from the companies and individuals involved in the illegal acts that harmed Petrobras. 4 Unlike other mega securities class actions that followed criminal convictions of the CEOs and CFOs, such as WorldCom, Enron, and Tyco, here CEO Maria das Graca Silva Foster ("Foster"), former CEO Jose Sergio Gabrielli ("Gabrielli"), and former CFO Almir Barbassa ("Barbassa") (i.e., those who issued the allegedly false statements), have not been charged with any crime despite the comprehensive and sweeping investigation. Indeed, the Individual Defendants' summary jUdgment motions emphasize the strength of their scienter arguments. See ECF Nos. 617-18, 619. Instead of following a trail blazed by enforcement authorities as those from afar may suppose, Class Counsel sought to stitch together a mosaic of evidence to demonstrate that senior executives who issued the false statements did so deliberately or, at a minimum, with reckless disregard for the truth. In addition to opposing scienter at every tum, Petro bras fervently argued that overcharges by the cartel companies had at best an immaterial impact on its balan<;e sheet. Strongly supporting this argument, Petrobras reported in a March 22,2015, filing with the U.S. Securities and Exchange Commission that the actual overcharge was just 3% of a contract's value. It then attributed just $2.5 billion, or a very small fraction of the $218.7 billion reported property, plant & equipment ("PP&E") as of December 31, 2014, to an asset write-down resulting from the cartel. Lieberman Decl. ~ 73. In other words, the PP&E inflation was barely more than 1% and therefore was immaterial. This materiality argument was more than window dressing. Petrobras determined that only 52 individual assets, representing just 32% of its total PP&E as of December 31,2014, included amounts paid to contractors implicated by Lava Jato. s Although Petrobras admits that the overpayments were incurred for contracts entered between 2004 and April 2012, it concluded that it was impracticable to identify exact amounts and time periods in which the overpayments were capitalized thereby enabling it to avoid a critical restatement. Specifically: Since the company cannot identify the amount of overpayments for specific contractual payments or in specific accounting periods, it cannot determine the periods in which to adjust property, plant and equipment. 6 4 See 5 Petrobras and its consultants evaluated 52 assets valued at R$188.4 billion as of September 30,2014. Applying an exchange rate of2.65 as of December 31,2014, these assets would have been valued at approximately $70.9 billion in Petrobras' 2014 Form 20-F, amounting to 32% of the total $218.73 billion reported PP&E as of December 31,2014. 6 See 2014 Form 20-F at F-14. 8 Hon. Jed S. Rakoff, U.S.D.J. May 18,2018 Page 4 Assigning fractions of the $2.5 billion write-down to specific periods proved a difficult and time-consuming exercise that Class Counsel had to undertake to demonstrate that earlier statements concerning PP&E were materially misleading. Like scienter, Petrobras' materiality argument could have torpedoed the litigation at the motion to dismiss, in summary judgement, or at trial. Indeed, whether the fraud had a material impact on Petrobras' balance sheet was a hotly contested issue and presented a real risk that Class Counsel faced throughout the pleadings, motions to dismiss, summary judgment, and anticipated facing at trial. To rebut this argument, Class Counsel needed to "recreate" the cost attributable to several multibillion dollar refinery construction projects and then demonstrate through TCU or other analyses the amount of inflation ofPP&E for each project. This was a daunting and extensive task involving scores of documents in Portuguese. Ultimately, using an army of Portuguese speaking reviewers, Class Counsel was able to "crack the code" with respect to these projects, culminating in Dr. Henning's expert report regarding materiality. (ii) Initial Staffing In this context, Pomerantz began assigning staff attorneys and project associates to the matter in June 2015. Initially, Pomerantz hired four staff attorneys. 7 Two had extensive experience practicing law in Brazil, were admitted in both Brazil and New York, and one previously managed a law practice in Brazil after clerking for the Court of Justice in Sao Paulo. Another is a highly skilled attorney with supervisory experience who is admitted to practice in New York and Massachusetts and who graduated from Harvard Law School in 1990. All four are fluent in Portuguese. All the staff attorneys and project associates not previously with the Firm and working on other matters were interviewed by Pomerantz associates, counsel, or partners with the Firm and tested on their Portuguese language skills, particularly with respect to analyzing legal documents. 8 In addition to background screening, language skills testing, and education and applicable bar admission verification, candidates also completed a document review skills screening and were subjected to conflicts checks. Reflecting the demanding hiring process, significantly more applicants were not offered employment for any number of reasons than those hired as fulltime Pomerantz employees. 7 One of those staff attorneys has since become a Pomerantz associate, another left the Firm just months ago for ajob with a Wall Street bank. 8 The language test was administered by ALTA Language Services and is designed to verify whether a candidate can read and comprehend legal documentation written in Portuguese at a pre-determined level of skill based on ALTA's protocol. Each test consisted of a variety of sample documentation written in Portuguese, with each passage being followed by a series of multiple-choice questions about the information contained within. Scoring is done on a percentage basis, making it easy to determine which candidate was able to read and comprehend legal documentation in Portuguese. 8 Hon. Jed S. Rakoff, U.S.D.J. May 18,2018 Page 5 Project associates were closely monitored and supervised throughout their involvement in the litigation. 9 Working in Pomerantz offices in New York, Chicago and Florida, project associates were supervised by Pomerantz partners, counsel, and senior associates who delegated responsibilities to ensure non-duplication of eff