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IPE Views: Pension funds hit by Petrobras losses must weigh legal options carefully

Rachel Fixsen looks at the steps institutions can take to reclaim losses after investing in Petrobas

Pension funds exposed to troubled Brazilian oil giant Petróleo Brasileiro (Petrobras), who have lost money on their investments as a result of alleged wide-scale corruption at the company, will have to weigh their options carefully before deciding which legal route to take, experts say.

A class action has already been launched in the US against Petrobras and related parties, with UK pension fund Universities Superannuation Scheme (USS) acting as the lead plaintiff.

While other investors who believe they have suffered losses from Petrobras’ misdeeds can join the class action, they also have the option of taking separate legal action against the semi-state owned enterprise.

Swedish pensions buffer fund AP1 has already chosen to do this, and was part of a 23 March filing in the US District Court Southern District of New York.

The pension fund is listed as a plaintiff alongside six public-sector New York pension funds.

A spokesman for AP1 said: “We have decided to take this route since we expect to get more money back that way.”

The fund had listened to counsel from its legal advisors, he said.

Taking advice on any potential legal case is essential before opting for a particular course of action, says David Seidel, chief executive and chief general counsel of the Institutional Investors Tort Recovery Association (iiTRA) in the UK, which manages the interests of pension funds and other big investors in securities class action cases.

“Like any case, the issues are complex and you have to know what you’re getting into before you make a decision on how to proceed,” he says.

“It doesn’t matter if it’s Petrobras or another case in US or UK — they all require advice,” Seidel says.

Key factors for a pension fund to consider before deciding whether to run its own legal action of join the class action include assessing how big their individual claim is, says Robin Ellison, consultant at law firm Pinsent Masons and professor of pensions law and economics at Cass Business School.

Other issues are what the strength of the fund’s legal advice is, whether they have the internal management resources to manage the case, and whether the trustees are prepared to lose money on the case, he says.

“Wherever you are running an action is hard work, even if the lawyers are doing it for you,” says Ellison.

In the US, he says, investors have little to lose by joining or following a class action suit.

“It’s a no-brainer because the law firm in the US runs a no-win, no-fee case,” he says, adding that the only downside is the 30 cents in the dollar the investor might lose on any damages they receive.

“If you think you’ve got a good case and you are owed a gigantic sum of money, you might think it’s worth running a separate action in which you pay fees of 10 cents in the dollar,” he says.

When a class action such as the suit against Petrobras is launched in the US, it is not even necessary for aggrieved investors to actively join the class action — they can simply sit on the sidelines and wait for the outcome.

Because if successful, the court or its administrator then sends out the message to other investors, who are then free to put in their claims as well as those involved directly in the class action, says Seidel.

Even running a separate case is much lower risk in the US than it would be in the UK, for example, Ellison says.

“The big thing in America is that if you lose, you don’t pay the other side’s costs,” he says.

Seidel says pension funds need to assess not only their exposure to the company they are considering suing, but the extent to which that relates to the legal issue at hand.

“It depends how many shares they own that are relevant, and the estimated recognised loss, before they can decide whether to join the class action,” says Seidel.

He also notes that, even though the US has been curbing the rights of non-Americans to sue through US courts, in the Petrobras case, European pension funds are able to use US courts to sue the Brazilian company — in the class action or separately — only because some of its shares trade as American Depository Receipts (ADRs) on the New York Stock Exchange.

In general, non-American plaintiffs cannot now sue non-American companies in the US, he says.

Seidel says the Petrobras case is likely to take years to reach a conclusion.

“The allegations are quite significant, and even if it were to go to settlement on average it’s going to take around four years,” he says.

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