The Easter Rebellion and Petrobras’ $17 Billion Write Down

On this day, 99 years ago the Easter Rebellion began. If there is one event that is seared into history as a turning point for Irish independence from Britain, it was the Easter Rebellion. England had finally granted Home Rule to Ireland in 1914 but suspended implementation due to World War I. This did not appease the Irish nationals in the Irish Republican Brotherhood, who led the Easter Rebellion. On this day in 1916, on Easter Monday in Dublin, the Irish Republican Brotherhood, led by Patrick Pearse, launched their armed uprising against British rule. Assisted by militant Irish socialists under James Connolly, Pearse and his fellow Republicans rioted and attacked British provincial government headquarters across Dublin and seized the Irish capital’s General Post Office. Following these successes, they proclaimed the independence of Ireland, which had been under the repressive thumb of the United Kingdom for centuries, and by the next morning were in control of much of the city. Later that day, however, British authorities launched a counteroffensive, and by April 29 the uprising had been crushed. After the Rebellion, the English commander decreed the execution of its leaders creating martyrs in Ireland who are honored to this day.

In what may turn out to be a date almost as significant for the Brazilian energy giant Petrobras, yesterday the company announced the results of its audit to determine how much money it lost through the systemic bribery and corruption which is alleged to have pervaded the company. In an article in the Wall Street Journal (WSJ), entitled “Brazil’s Petrobras Reports Nearly $17 Billion in Asset and Corruption Charges”, Paul Kiernan reported that the State-run oil company wrote off “$2.1 billion of alleged bribe payments”. The remaining losses came from “graft and overvalued assets”.

Unfortunately for the company, “Petrobras Chief Executive Aldemir Bendine said in a news conference that additional revisions to the corruption-related write-downs are possible if prosecutors uncover more wrongdoing. But he also said an outside auditor approved Petrobras’s earnings “without any reservations.” That could ease investor concerns about the likelihood of major impairment charges in the future. “We were conservative with this number. We might not reach it, but it was a way to give credibility,” Mr. Bendine said. “We have made our best efforts to turn the page on this sad chapter that the company has passed through.””

Further, and perhaps more ominous for the country as a whole, “The events surrounding Petrobras have slowed both the construction sector and the oil industry, leading to reduced spending, thousands of layoffs and several bankruptcies.” However the article quoted the UK-based economic research group, Oxford Economics, as saying “Petrobras’s need to slash investments could “tip the Brazilian economy into a deeper-than-expected recession.””

Petrobras is the world’s most indebted major energy company. This audited statement was made due to “an April 30 deadline in Petrobras’s bond covenants that could have allowed the holders of billions of dollars of Petrobras debt to demand early repayment, a possibility that prompted Moody’s to yank the company’s investment-grade rating in February. Petrobras has been locked out of capital markets since late 2014 due to repeated delays in its financial statements.”

Petrobras of course claims that it is the victim here. While it cannot claim the tired and tested rogue employee defense, it can draw some support from another source. As reported in another WSJ article, entitled “Brazil’s Alleged Petrobras Corruption Not Widespread, Witness Testifies”, reporters Rogerio Jelmayer and Jeffrey T. Lewis wrote that in testimony before Brazil’s Congress, Augusto Mendonça Neto, president of Setal Engenharia, an engineering company that is a supplier to Petrobras, said that “The alleged corruption scheme at Brazil’s Petroleo Brasileiro SA grew out of an agreement among some of the country’s biggest construction companies to divvy up contracts from the state-owned oil company.”

They reported that “Mr. Mendonça Neto has acknowledged being part of the alleged scheme, and is cooperating with investigators. Mr. Mendonça Neto outlined the history of the conspiracy, saying it started in 1997 when a group of Brazilian construction companies got together informally to try to increase their bargaining power against Petrobras. Mr. Mendonça didn’t name the other companies involved. “The objective of these companies was to have a way to protect themselves, and they arranged things among themselves, so they would each have an opportunity” to win contracts from the oil company, he said. “They competed with the rest of the market. What they wanted was to not compete among themselves, because they were the most important [companies].” The group of companies initially had no control over who was able to bid on Petrobras contracts, but that changed after Petrobras executives joined the scheme in 2003 or 2004, Mr. Mendonça Neto alleged. Once they were on board, the group of suppliers grew to include more companies and together they were able to control which businesses got invited to bid on contracts, he said.”

He went on to testify that “The corruption at Petrobras was limited to three top executives and not spread throughout the company” naming three former Petrobras executives, Paulo Roberto Costa, Renato Duque and Pedro Barusco, as also being involved, and said that the rest of the company isn’t corrupt. “The only contact I had with corruption was with those three people I named, apart from that there was never anything,” Mr. Mendonça Neto told the committee. Petrobras “is a highly competent company, composed of people who are extremely prepared and competent.””

Whether the case is as Mr. Mendonça Neto has alleged, three people trying to extort the entire universe of Petrobras contractors or a broader scheme within the company to shake down those doing business with it or companies paying to play with Petrobras, it hardly matters for investors. Petrobras has already announced that it will not pay dividends for 2015. However that may not be enough for investors, as Keirnan reported, “More broadly, investors say the company needs to improve its governance. The Brazilian government, which is Petrobras’s largest shareholder, now nominates most of the company’s board, including its chairman. Brasília has ordered Petrobras to subsidize fuel prices in recent years while the company was simultaneously executing a massive investment plan, leading it to burn billions of dollars in cash.”

As important as the Easter Rebellion was for Irish independence, it was but one step which led to the creation of the Irish Free State in 1922. While this release of information regarding the cost of bribery to Petrobras and its shareholders will be but one in a long number of steps down (hopefully) the path of doing business legally and not corruptly.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2015