As a follow-up to our October 15 discussion about challenges to the standing of certain opt-out plaintiffs in the In re Petrobras Securities Litigation, No. 14-cv-9662 (S.D.N.Y.) consolidated litigation, Judge Rakoff has resolved those issues in two decisions. In a brief October 19, 2015 decision announcing the Court’s opinion (and dismissing certain opt-out claims) and a more fulsome January 5, 2016 decision explaining his reasoning, Judge Rakoff denied the Petrobras defendants’ motion to dismiss on each of the standing arguments. Although the two opinions address a variety of arguments beyond the standing issues, including dismissal of various claims on limitations grounds, the Court’s opinion allows those opt-out plaintiffs whose standing was challenged to proceed with certain claims in their cases.

As background, Petróleo Brasileiro S.A. (“Petrobras”), a Brazil-based energy multinational, is a target of a Brazilian police investigation of alleged rampant corruption involving construction contracts. Allegedly, several large construction companies colluded to avoid Petrobras’s competitive bidding process, giving kickbacks to Petrobras executives to allow the collusion. As a result, Petrobras allegedly significantly overpaid for the construction of certain refineries.

In December 2014, investors who had purchased American Depository Shares of Petrobras on the New York Stock Exchange, as well as other securities, filed a securities class action in the Southern District of New York, alleging violations of the Securities Act of 1933, the Securities Exchange Act of 1934, and (in an amended complaint) Brazilian securities laws. Plaintiffs allege that in regulatory filings and public statements, Petrobras misrepresented its financial condition, financial controls, and ethical practices. A motion to dismiss the class action allegations was substantially denied, but on August 21, 2015, Defendants, i.e., Petrobras, affiliated entities, and their underwriters, filed a Motion to Dismiss Certain Individual Opt-Out Complaints.

Judge Rakoff’s opinion (“Op.”) denies Defendants’ motion as to the standing issues, though the reasoning differs for various categories of opt-out plaintiffs. First, the Court rejected Defendants’ argument that certain opt-out plaintiffs should be dismissed because “[t]he plaintiffs in those cases are suing on behalf of others and have not personally suffered injuries.” (Op. at 3.) Instead, the Court observed that “the Supreme Court has held that an assignee of a claim has standing to pursue that claim.” (Op. at 3 (citing Sprint Communications Co., L.P. v. APCC Services, Inc., 554 U.S. 269, 271 (2008).) In regard to one opt-out plaintiff, Aura Capital Limited, the Court held that the plaintiff “alleged that it brought claims through a valid legal assignment of the claims of two investors who purchased Petrobras American Depositary Shares” and “submitted copies of the alleged assignments,” which is sufficient to survive a motion to dismiss because “the assignments do refer to Petrobras securities and are facially valid.” (Op. at 3-4.)

Next, the opinion turns to two plaintiffs who “do not allege assignments of claims” but instead “invoke a prudential exception to the standing requirement,” which “permit[s] third-party standing where the plaintiff can demonstrate (1) a close relationship to the injured party and (2) a barrier to the injured party’s ability to assert its own interests.” (Op. at 4 (citing W.R. Huff Management Co., LLC v. Deloitte & Touche LLP, 549 F.3d 100, 109-10 (2d Cir. 2008).) Here, the Court held that the complaint of opt-out plaintiff NN Investment Partners B.V. contains sufficient allegations to invoke the prudential exception to the standing requirement since it “details the relationships between the named plaintiffs and their funds, sub-funds, and series, which allegedly purchased Petrobras securities.” (Op. at 4-5.) “In particular, the Amended Complaint states for each fund or sub-fund that the relationship between a named plaintiff and the fund or sub-fund and is ‘similar to that of a trustee to a beneficiary’ and that the funds or sub-funds have no legal personality and cannot sue on their own.” (Op. at 5.) Similarly, the complaint of opt-out plaintiff Dimensional Emerging Markets Value Fund, et al., with some minor exceptions, “alleges that the funds or series that purchased Petrobras securities lack separate legal personality, have no employees or officers, and cannot take action, except by and through the named plaintiffs.” (Op. at 5.)

Although “Defendants argue that these allegations are insufficient because they are legal conclusions that need not be accepted as true at the motion to dismiss stage,” the Court disagreed, noting that the prudential exception does not require that the plaintiff “plead any specific legal relationship.” (Op. at 6.) “Instead, the question for the Court at this stage is whether plaintiffs’ allegations, taken as true, support the legal conclusions that (1) the named plaintiffs had ‘a close relationship to the injured party and (2) a barrier [existed] to the injured party’s ability to assert its own interests.’” (Op. at 6.) As a result, the court denied Defendants’ motion to dismiss regarding those opt-out plaintiffs relying on the prudential exception to the standing requirement.