Doubleline Capital LP v. Odebrecht Fin., Ltd.

323 F.Supp.3d 393

DOUBLELINE CAPITAL LP, DoubleLine Income Solutions Fund, and DoubleLine Funds Trust (on behalf of its: 1) DoubleLine Core fixed Income Fund Series; 2) DoubleLine Emerging Markets Fixed Income Fund Series; and 3) DoubleLine Shiller Enhanced Cape® Series), Plaintiffs,

v.ODEBRECHT FINANCE, LTD., Construtora Norberto Odebrecht, S.A., Odebrecht Engenharia E Construção S.A., and Odebrecht, S.A. Defendants.

1:17-cv-4576-GHW

United States District Court, S.D. New York.

Filed August 8, 2018

Karl P. Barth, Steve W. Berman, Hagens Berman Sobol Shapiro LLP, Seattle, WA, Jason Allen Zweig, Hagens Berman Sobol Shapiro LLP, New York, NY, for Plaintiffs.

Michael Barry Carlinsky, Jacob J. Waldman, Quinn Emanuel Urquhart & Sullivan, New York, NY, Eric C. Lyttle, Michael Ethan Liftik, Quinn Emanuel Urquhart & Sullivan, LLP, Washington, DC, for Defendants.

MEMORANDUM OPINION AND ORDER

GREGORY H. WOODS, United States District Judge

In 2014, Brazil found itself embroiled in what has become a widely publicized scandal. Brazilian authorities launched an investigation (Operation "Lava Jato" or "Car Wash") into a sprawling bribery and kickback scheme. Construction and engineering conglomerates were accused of bribing government officials in order to secure lucrative contracts. Not initially implicated in the scandal, Defendant Odebrecht, S.A. and several of its subsidiaries later joined the ranks of those targeted by Brazilian prosecutors and police investigators. Odebrecht's CEO was arrested, indicted, and sentenced to prison in connection with his participation in the scheme. Odebrecht itself pleaded guilty to charges brought against it in the Eastern District of New York. Plaintiffs, who purchased substantial quantities of Notes issued by Defendant Odebrecht Finance, Ltd. and guaranteed by Defendant Construtora Norberto Odebrecht ("CNO"), saw the value of their holdings drop precipitously after news of Defendants' participation in the bribery scheme. Plaintiffs filed suit, asserting claims against Defendants under Section 10(b) and 20(a) of the Exchange Act, as well as various state law claims. Defendants Odebrecht Finance, CNO, and Odebrecht Engenharia E Construção S.A. ("OEC") have moved to dismiss Plaintiffs' claims. Because Plaintiffs adequately plead that CNO's failure to disclose its participation in the bribery scheme rendered its explanation for its success materially misleading, Plaintiffs' Section 10(b) claim with respect to that statement survives. And because Plaintiffs sufficiently plead their intentional fraudulent conveyance claim, that claim also survives dismissal. Defendants' motion is granted with respect to Plaintiffs' remaining claims against the moving Defendants.

I. BACKGROUND¹

A. The Parties

Plaintiff DoubleLine Capital LP is a Delaware limited liability company. Second Amended Complaint (ECF No. 41) ("SAC") ¶ 11. It brings claims on behalf of its advisory client. Id. Plaintiff DoubleLine Income Solutions Fund is a Massachusetts business trust. Id. ¶ 12. Plaintiff DoubleLine Funds Trust is a Delaware statutory trust. Id. ¶ 13. It brings claims on behalf of DoubleLine Core Fixed Income Fund Series, DoubleLine Emerging Markets Fixed Income Fund Series, and DoubleLine Shiller Enhanced Cape® Series. Id.

Defendant Odebrecht, S.A. ("Odebrecht") is a Brazil-based corporation. Id. ¶ 14. Through its subsidiaries, Odebrecht operates in the construction, engineering, infrastructure, chemical, utilities, and real estate businesses. Id. ¶ 29. Odebrecht and its subsidiaries conduct business in Brazil and twenty-seven other countries, including the United States. Id. Marcelo Odebrecht has served as the company's president and Chief Executive Officer ("CEO") since 2009. Id. ¶¶ 30, 43. Hilberto Silva is the head of Odebrecht's Division of Structured Operations. Id. ¶ 30.

Defendant Construtora Norberto Odebrecht, S.A. ("CNO") is a subsidiary of Odebrecht. Id. ¶ 15. Prior to and during 2009, Marcelo Odebrecht served as CNO's CEO. Id. ¶ 43. CNO primarily handles large-scale infrastructure construction projects, including highways, railways, bridges, tunnels, airports, and power plants. Id. ¶¶ 1, 15. It is the largest engineering and construction firm in Latin America, and among the largest globally. Id. ¶ 31. CNO is Brazil's largest exporter of services and the world's fifteenth largest "international contractor." Id. ¶ 32. With its roots in Brazil, CNO has branched out into other countries. Id. Its international revenues increased from 30% in 1992 to 54.3% in 2012. Id.

Defendant Odebrecht Engenharia e Construção S.A. ("OEC") is also a subsidiary of Odebrecht and the parent company of CNO. Id. ¶ 16.

Defendant Odebrecht Finance, Ltd. ("Odebrecht Finance") is a wholly owned subsidiary of Odebrecht and incorporated under the laws of the Cayman Islands. Id. ¶ 17. As of March 31, 2012, the corporation had a net capital deficit of $386,659. Id. ¶ 34. Odebrecht Finance has no "legitimate assets." Id. ¶ 35. Rather, its only listed assets are long-term receivables from Odebrecht and other "Odebrecht-related entities of questionable solvency." Id. According to Plaintiffs, Odebrecht and CNO have treated Odebrecht Finance as "their own piggy-bank, sweeping every dime out of the company in exchange for only a small number of utterly worthless ‘receivables.’ " Id. ¶ 36. Plaintiffs allege on information and belief that Odebrecht Finance has been insolvent since its incorporation. Id. ¶ 34.

Odebrecht Finance is a shell company and was organized for the "sole purpose" of raising investment funds for CNO through the issuance of bonds. Id. ¶¶ 17, 33. From 2010 through 2014, the company issued billions of dollars in notes, all of which were guaranteed by CNO. Id. ¶ 37. Between May 6, 2013 and March 31, 2015, Plaintiffs purchased significant quantities of two bonds issued by Odebrecht Finance: (1) 7.125% Notes due on June 26, 2042 (the "7.125% Notes"), and (2) 7.50% Perpetual Notes (the "7.50% Notes"). Id. ¶¶ 24-26. Each of the Notes was "unconditionally and irrevocably guaranteed" by CNO. Id. ¶ 24. Odebrecht Finance immediately conveyed all of the proceeds from sales of the notes to CNO and Odebrecht without receiving anything of equivalent value in return. Id. ¶ 39. Those proceeds were used for CNO's "general corporate purposes" and as additional equity investments in other Odebrecht subsidiaries. Id. ¶ 36.

B. Defendants' Alleged Bribery and Kickback Scheme

Between 2001 and 2016, CNO and Odebrecht paid at least $800 million in bribes to government officials in Brazil and at least a dozen other countries. Id. ¶ 40. These bribes were paid "in order to influence the award of more than 100 large construction contracts to CNO." Id. In furtherance of this scheme, Defendants established the Division of Structured Operations (the "Division") as a "standalone division" of Odebrecht in 2006. Id. ¶ 41. The Division had one purpose: to act as a "bribe department," making "illicit payments" to government officials in exchange for public contracts for CNO. Id. ¶ 42. From 2006 to 2009, Marcelo Odebrecht approved the Division's payments. Id. ¶ 43. After Marcelo became the CEO of Odebrecht in 2009, Hilberto Silva became the head of the Division. Id. Silva reported directly to Marcelo, providing Marcelo with periodic updates of the bribes paid by the Division. Id.

Of the $788 million that was paid by the Division in bribes from 2001 through 2016, $349 million was paid to Brazilian officials and political parties. Id. ¶¶ 49-50. The Division paid, for example, $20 million to Guido Mantega, Brazil's former Finance Minister, and other officials to secure a $184 million transportation project for CNO. Id. ¶ 51. The Division also paid $9.7 million to Paulo Roberto Costa, a Brazilian legislator, in exchange for a $142 million public construction contract for CNO. Id. ¶ 52. In all, Defendants received over $1.9 billion in benefits from the contracts secured by the bribes to Brazilian officials. Id. ¶ 50. The Division also paid approximately $439 million to officials and political parties outside of Brazil. Id. ¶ 53. Defendants obtained contracts valued in excess of $1.4 billion as a result. Id. Overall, Defendants benefited in excess of $3.3 billion from contracts secured by bribes between 2001 and 2016. Id. ¶ 49.

The money used to make the bribes was obtained through various "off the books" means, including: (1) collection of standing overhead charges from clients; (2) attributing overcharges and fees to service providers and subcontractors as legitimate without including them in project budgets; (3) undeclared retainers and success fees for the purchase of company assets; and (4) self-insurance and self-guarantee transactions. Id. ¶ 46. After the funds were generated, they were not recorded. Id. Rather, the funds were sent by the Division to a series of offshore entities that were not identified as related entities in CNO or Odebrecht's financial statements. Id.

The Division laundered the bribe payments through a network of banks located in countries with "strict bank-secrecy laws." Id. ¶ 48. The Division also funneled the money through various "dummy corporations" that transacted with "friendly" banks. Id. ¶ 54. By 2010, one of the banks used by the Division located in Antigua collapsed. Id. ¶ 55. Division executives Fernando Migliaccio and Luiz Eduardo Soares then purchased the majority interest in another Antigua bank, and that bank began to charge Odebrecht a 2% "commission" to launder the bribe payments. Id. ¶¶ 43, 55.

The Division did not record the bribe payments in CNO and Odebrecht's accounting records. Id. ¶ 44. Rather, the Division used two "shadow" systems to track the payments. Id. The "MyWebDay" system was used to generate payment requests, process payments, and create spreadsheets documenting the payments. Id. The "Drousys" system was used by Division employees to communicate with each other and "other co-conspirators" using secure email and instant...