Brazilian companies push for deal to minimize Petrobras scandal

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Some of the companies caught up in a massive corruption scandal at state-run oil firm Petrobras are quietly pressing Brazil's government and judiciary to strike a "grand bargain" to minimize the legal fallout, five sources with knowledge of the talks say.

The companies, which prosecutors suspect of paying out billions of dollars in bribes through service contracts they had with Petrobras, are worried the investigation is too far-reaching and could drag on for years, heavily damaging their bottom lines and Brazil's fragile economy.

They are not trying to escape punishment altogether but are pressing judges and officials in President Dilma Rousseff's government, sometimes through intermediaries or at informal meetings, to find a way for any penalties to be definitive and applied quickly, the sources told Reuters.

"There has to be a way to say 'We screwed up' without ... it destroying us and others," a source from one of the companies said.

The sources spoke with Reuters on the condition that neither they nor the companies involved in the talks be named, so they could describe their strategies for dealing with and getting past Brazil's biggest-ever corruption scandal.

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While questions abound over the legality and political viability of some ideas, and there is some disagreement among the companies and even their shareholders about what path to take, the sources said several proposals on accelerating a solution have been put forth to officials. They include:

-- A more active government role in coordinating a settlement among the nearly two dozen companies implicated in the scheme.

-- Enforcement of more restrictive guidelines on how police and prosecutors detain and question suspects in the case.

-- Rousseff making major changes in how Petrobras is run in order to regain confidence in Brazil's economy and ease the considerable public anger over misappropriated money.

The companies have so far not discussed in detail what punishments would be appropriate for those guilty of corruption, the sources said.

Federal prosecutors say as many as 23 companies regularly overpaid Petrobras for service contracts from roughly 2004 to 2014. The excess funds were then funneled to corrupt Petrobras executives as well as politicians, including members of Rousseff's Workers' Party, the prosecutors allege.

Some of Brazil's biggest construction and engineering conglomerates are under investigation, including OAS SA, Odebrecht SA and Andrade Gutierrez, all privately held. They have publicly denied wrongdoing.

Questions over legality

The leftist Rousseff has acknowledged graft existed at Petrobras, but denied she knew about it at the time. She has so far shown little willingness to intervene in the investigation, saying that courts' independence must be respected.

However, she warned last month that guilty individuals must be punished without causing the "destruction" of the companies they work for.

Her government's top lawyer, Luis Inácio Adams, told Reuters on Jan. 8 that settlement deals would be "more efficient than closing a business" and that his office would be willing to participate in any such talks.

A spokesman for Rousseff's office declined to comment on questions about whether companies had requested government intervention in the case.

Federal prosecutors and government lawyers including Adams have said that, to reach a settlement, companies must first acknowledge they committed a crime, return misappropriated money and cooperate with investigators, among other conditions.

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However, none of the companies wants to be the first to take such steps because they worry it would single them out and the political and financial fallout could bankrupt their businesses, said a political source who has had direct contact with several of them in recent months.

Some companies also have legal language in their bonds that allows creditors to demand immediate repayment if the company admits to a crime.

Therefore, some of the sources say the only viable solution is for Rousseff's government to organize a "massive" deal in concert with all involved companies, plus courts and regulators.

One government minister, speaking on condition of anonymity, confirmed that some companies have sought out the administration to explore such an accommodation but said no formal negotiations were taking place.

The legality of such a deal is questionable. A leading prosecutor in the case, Carlos Fernando dos Santos Lima, said last month that companies could propose settlements together, although he cautioned they would be treated individually.

Downgrades, layoffs

The scandal has deeply shaken Latin America's largest economy since details began to filter out last year.

Rousseff's popularity has fallen to an all-time low, and some leading opposition politicians have even begun floating the possibility of impeaching her.

Petrobras shares have tumbled 55 percent since September, as the scope of the scandal broadened, shaving nearly $50 billion off the company's market value.

The economic fallout, including postponed investments in highways and other infrastructure as the companies under investigation hoard cash, may push Brazil into its second recession in as many years, economists say.

Twenty-three executives from six of the Petrobras contractors being probed have been detained and charged with money laundering and corruption.

None of the companies themselves have been charged with any crimes to date but investors worry they might face large fines or be banned from all future government contracts, as Brazilian law stipulates in some corruption cases.

Those concerns are behind the push for an "acordão" - a broad deal, in Portuguese.

Ratings agency Fitch cut credit ratings last month for Construtora Queiroz Galvão and Mendes Junior Trading e Engenharia, both among the 23 companies being probed, citing the Petrobras scandal.

OAS missed debt payments last month, citing difficulties in accessing credit markets. Combined, the contractors have laid off as many as 20,000 workers in recent months, according to media reports.

Most of the publicly known evidence against the companies comes from witness plea bargain testimony that has been leaked to the media. Many of the companies complain they are enduring severe damage without having the opportunity to defend themselves in court.

They say their firms, and Brazil's economy as a whole, cannot afford to wait while prosecutors decide whether to press charges.

Brazil's complex legal system, with its overlapping jurisdictions and numerous avenues for appeal, is one of Latin America's slowest. A similar, though smaller corruption case known as the "mensalão" dragged on for seven years before the guilty parties were sentenced in 2012.

"Only the government has the powers to rapidly solve a problem this big," another of the sources said.

Political costs

An episode this week laid bare the potential political costs if Rousseff tried to forge such a deal.

Brazilian media reported that Justice Minister Jose Eduardo Cardozo met this month with lawyers representing Odebrecht. The news sparked an uproar on social media as many speculated that Odebrecht, the largest of the contractors being probed, was seeking the government's help in reaching a broad settlement.

Joaquim Barbosa, a former Supreme Court chief justice, called on Cardozo to resign. Sergio Moro, the federal judge overseeing the Petrobras investigation, said the meeting was "intolerable."

Cardozo denied any wrongdoing. One of the lawyers, Dora Cavalcanti, said she used the meeting to protest against "criminal" leaks of witness testimony in the case, which she said in other countries would lead to "severe penalties or the invalidation of the proceedings."

Cavalcanti's argument reveals how the companies plan to push back against the investigation.

Moro's tactic of jailing witnesses and suspects without charges and pressuring them into giving plea bargain testimony has come under increasing attack.

The lawyer for OAS' chief executive, who is one of the jailed executives, publicly asked last month that Moro be removed from the case on the grounds he is not impartial. Other companies have made the same request in private, sources said.

Moro says his investigation has followed Brazilian law.

Some companies are pressing for more overtly political steps they believe could ease public anger, and create better conditions for a settlement.

One idea recently floated to senior government officials, the sources said, would be for Rousseff to make sweeping changes at Petrobras, such as the appointment of more board members from the private sector, to show that lessons have been learned and management of the company will improve.

Rousseff's recent appointment of a trusted confidant as Petrobras' new CEO would seem to rule out such a move - but the companies haven't given up.

"We still hope she'll listen to us," one of the sources said.