In a landmark ruling, the D.C. Circuit Court of Appeals on Tuesday allowed investor EIG Global Energy Partners to hold Brazilian oil major Petrobras accountable in the US courts. This ruling may result in Petrobras having to pay over $221 million in compensatory damages to the investment fund.
EIG Global Energy Partners, a U.S. based investment firm, had invested $221 million in a project to exploit newly discovered oil reserves off the coast of Brazil. The project was launched in 2010 when Petrobras established Sete Brasil, a company intended to attract funding and forge relationships with shipyards.
Petrobras held a minor 10% of Sete Brasil shares, with the remaining 90% held by equity investors. EIG decided to invest in Sete Brasil in 2011 and implemented its initial capital infusion the following year.
The court found that during this period, Petrobras and Sete executives were engaging in extensive corruption which resulted in the eventual collapse of Sete Brasil. A criminal investigation disclosed that Petrobras executives were receiving kickbacks from contractors, splitting the ill-gotten gains among themselves and political figures. As these corruption allegations became public, lenders withdrew from the project resulting in its collapse and rendering EIG’s investment worthless.
Petrobras attempted to claim it was shielded from liability through the 1976 Foreign Sovereign Immunities Act (FSIA). The FSIA stipulates that foreign states and their sister agencies are largely immune from U.S. legal jurisdiction. Petrobras, a mixed-economy company, has 28% of its stock owned directly by the Brazilian federal government with the federal bank BNDES owning an added 8%.
However, the Court of Appeals rejected this argument, maintaining that Petrobras had a direct effect on the United States through its relationships and dealings that led to EIG’s substantial investment.
The court’s ruling is interesting in light of Petrobras’s historical run-ins with the law. In 2018, Petrobras agreed to pay a total penalty of $853 million to the US and Brazilian authorities. This fine arose from Petrobras’s violation of the Foreign Corrupt Practices Act, in its role of enabling payments to politicians and political parties in Brazil.
