Securities litigation victory for Eletrobras
On February 3, 2021, Davis Polk secured a complete dismissal with prejudice of a federal securities action against Centrais Elétricas Brasileiras S/A – Eletrobras (“Eletrobras” or the “Company”), a Brazilian state-owned electric utilities company, as well as two senior executives. The case is captioned Eagle Equity Funds LLC v. Centrais Elétricas Brasileiras S/A – Eletrobras, 19-CV-09344-JMF (S.D.N.Y.).
Between 1962 and 1993, Brazilian law imposed a tax on end users of electricity to help generate funds for the expansion of the country’s electricity sector. During the first phase of this so-called “Compulsory Loan Program” (approximately 1962 to 1976), Eletrobras distributed instruments governed by Brazilian law and commonly referred to as “Bearer Bonds” in recognition of consumers’ tax payments. During the second phase (approximately 1976 to 1993), the Company recorded tax payments in book entry form as “Compulsory Loan Credits” (together with Bearer Bonds, the “Compulsory Loan Obligations”). Widespread litigation regarding the continuing enforceability and payment terms of the Compulsory Loan Obligations has been ongoing in the Brazilian courts for many years.
Plaintiffs Eagle Equity Funds LLC (“Eagle”), AHG Vermogensverwaltungsgesellschaft MB (“AHG”) and AAE Management for Energy Equipment LLC are investors purporting to hold hundreds of Bearer Bonds acquired in private, aftermarket transactions between 2008 and 2013 along with Eletrobras American depositary receipts (“ADRs”) purchased on the New York Stock Exchange in 2019. Eagle and ADR have been prosecuting lawsuits in Brazil to enforce their Bearer Bonds since approximately 2013 and 2014, respectively.
On October 9, 2019, Plaintiffs filed suit in the SDNY, asserting securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) as well as claims for negligent misrepresentation, breach of contract, and declaratory judgment. Principally, Plaintiffs alleged that SEC filings made in connection with the Company’s U.S. ADR program included statements or omissions (i) misrepresenting the status and scope of ongoing Brazilian litigation on the validity and enforceability of Compulsory Loan Obligations, (ii) improperly minimizing the import and likely impact of recent appellate decisions by the Brazilian Superior Court of Justice in favor of Compulsory Loan Credit holders and (iii) minimizing the extent of Eletrobras’ financial exposure to outstanding Compulsory Loan Obligations. Notably, Plaintiffs maintained that their Exchange Act claims sought “only” injunctive relief – specifically, orders precluding the Company from filing any documents with the SEC, including in connection with a potential capital-raising privatization transaction then under consideration in the Brazilian Congress, until it publicly “corrected” its previous alleged misstatements. Plaintiffs’ remaining claims, however, sought a declaration that Plaintiffs’ Brazilian Bonds were valid and enforceable and more than $5 billion in contract damages under Brazilian law.
Davis Polk filed a motion to dismiss, advancing a number of arguments including: that Plaintiffs’ Exchange Act claims were time-barred; that they failed to adequately allege actionable misrepresentations/omissions, reasonable reliance and cognizable injury; that they were impermissibly extraterritorial and precluded by the “purchaser/seller rule” established in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975); and that the entire action should be dismissed under the doctrine of forum non conveniens. Plaintiffs took a number of unusual positions in opposition, including notably that they were not required to plead multiple elements of ordinary Exchange Act claims because they sought injunctive relief rather than damages and that they could satisfy other elements of their Exchange Act claims in piecemeal fashion by virtue of holding both Bearer Bonds and ADRs.
On February 3, 2021, Judge Jesse M. Furman dismissed Plaintiffs’ action in its entirety and with prejudice. The Court agreed with Davis Polk’s position that Plaintiffs could not “mix and match” aspects of multiple different financial instruments to plead Exchange Act claims. It then held, as Davis Polk had argued, that any claims premised on Plaintiffs’ Bearer Bond holdings were either precluded by the purchaser/seller rule (which prohibits claims by “mere holders” of securities) or failed for want of reasonable reliance because the Company’s public statements would have dissuaded any rational investor from acquiring Bearer Bonds. It further adopted Davis Polk’s position that Plaintiffs’ ADRs also could not support a claim because Plaintiffs had suffered no cognizable injury to those assets and, again, could not plead reasonable reliance because they purchased ADRs while concededly disbelieving the Company’s representations on the magnitude of its Compulsory Loan Credit exposure. In reaching these conclusions, the Court rejected Plaintiffs’ contentions that private injunction claims under the Exchange Act are exempt from pleading requirements concerning injury, reliance, and the purchaser-seller rule, determining that a 1967 Second Circuit decision arguably supporting such propositions was no longer good law in light of the Supreme Court’s intervening Blue Chip decision.
The Davis Polk team included partner Antonio J. Perez-Marques, counsel Craig J. Bergman and James H.R. Windels and associates Matthew R. Brock, Michael V. Pucci, Keith Dore, Molly L. Stein and Alexa Jacobson. All members of the Davis Polk team are based in the New York office.