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Update) Vantage Drilling: New Development In Petrobras Corruption Case
Aug. 7, 2015 10:36 AM ET | 6 comments | About: Vantage Drilling Company (VTG), Includes: ESV
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary

Formal charges against M. Zelada, the former head of state-run oil firm Petrobras' international division, and five others, saying they favored Vantage Drilling in a rig contract.
One of the six charged by the prosecutor was Hsin Chi Su, chief executive of Taiwanese shipping firm TMT.
One comment is that this development is serious enough to put a stop on trading VTG until this affair has been clearly resolved.
This article is an update of my preceding article on Vantage Drilling (NYSEMKT:VTG), published on July 6, related to Jorge Zelada's arrest on suspicion of receiving bribes on the Titanium Explorer, which is operated by VTG, and another rig operated by Ensco (NYSE:ESV).

Image: Titanium Explorer

July 31, VTG announced the following:

Last night, Brazilian media reported that Vantage Drilling Company's agent utilized during the contracting of the Titanium Explorer drillship with Petrobras, Mr. Hamylton Padilha, has made statements in cooperation with Brazilian authorities conducting investigations of corruption with former Petrobras executives and Brazilian politicians. The media reports state that Mr. Padilha made admissions of wrongdoing. We have not been able to confirm these statements. Mr. Padilha has acted as an agent representing numerous international companies in connection with their drilling contracts in Brazil over a period of many years. Furthermore, if Mr. Padilha committed any illegal acts, he was not acting on our behalf or upon any instructions from the Company.

History of the "case":

In early July, we learned the following:

Brazilian police arrested Jorge Zelada, former director of Petrobras' international division, as part of an ongoing investigation into bribery and corruption at the state-run oil producer, prosecutors said on Thursday.

Zelada is suspected of money-laundering, appropriating public funds, corruption, tax evasion and contract fraud. He was taken into custody early Thursday as part of the graft probe that has already ensnared dozens of Brazil's top executives.
Brazilian Federal prosecutor Carlos Fernando dos Santos Lima said:

This step concludes the analysis of Petrobras' principal directorships. there is still much to be investigated (at the company).

Jorge Zelada was the director of the international division at Petrobras (NYSE:PBR) from 2008 to 2012.

He is suspected of receiving bribes on the Titanium Explorer drillship operated by Vantage Drilling, and another rig operated by Pride International, a company acquired by Ensco in 2011. The investigation was quick, and Carlos Fernando dos Santos Lima indicated earlier this week that it had revealed evidence of corruption by nearly 15 foreign firms.

However, VTG is the first known U.S. firm mentioned in the case. Other former Petrobras executives were found guilty of embezzling huge amounts of money.

One former Petrobras executive who cooperated with the police has already returned to the company a $97 million fortune he amassed in Swiss bank accounts.

Today, Reuters released an article regarding both M. Jorge Zelada and M. Hamylton Padilha:

Brazilian prosecutors on Thursday presented formal charges against Jorge Zelada, the former head of state-run oil firm Petrobras' international division, and five others, saying they favored U.S. company Vantage Drilling in a rig contract.
The most recent charges presented in Brazil's largest-ever corruption scandal included money laundering and corruption, and Zelada will stand trial with dozens of other engineering tycoons and former Petrobras executives if a judge accepts them. One of the six charged by the prosecutor was Hsin Chi Su, chief executive of Taiwanese shipping firm TMT.
The federal prosecutor's office in the southern city of Curitiba said in a statement that Su and the others paid bribes of $31 million to Zelada, other ex-Petrobras officials, and Brazil's PMBD political party. The PMDB, or Brazil Democratic Movement Party, is part of President Dilma Rousseff's governing coalition. The prosecutor's office said that in exchange, Petrobras officials improperly favored Vantage Drilling for a contract with the oil company for the use of its Titanium Explorer rig. The award of the contract was rife with irregularities, prosecutors said.

M. Zelada has been found guilty:

Prosecutors also said international cooperation from authorities in Monaco had helped to uncover accounts held by Zelada amounting to 11.58 million euros ($12.7 million). Zelada's accounts were still moving funds after he became ensnared in the corruption scandal, known popularly in Brazil as Operation Car Wash, prosecutors said. They said evidence of irregularities in the Titanium Explorer contract included meeting records, e-mail exchanges and foreign bank transfers into and out of Zelada's accounts.

Commentary:

This is another development that worries me, because M. Hsin Chi Su has been charged in this affair. Obviously, M. Hsin Chi Su is a crook and the problem is if really he acted on behalf of Vantage Drilling when he acted illegally?

As you all know, Vantage Drilling is suing Nobu SU (M. Hsin Chi Su) for fraud, breach of fiduciary duty, and unjust enrichment.

On July 14, 2015, the 14th Court of Appeals in the Texas decided to deny the motion filed by SU and affirm the temporary injunction against SU, with respect to 72,238,972 shares of Vantage stock [Su] holds through F3 Capital.

In August 2012, Vantage sued Su in state court for fraud, breach of fiduciary duty, and unjust enrichment. Vantage claims that Su wrongfully induced Vantage to issue approximately 100 million shares of its stock to Su through F3 Capital. Vantage seeks damages, plus a constructive trust over, and disgorgement of, all profits realized by Su from the transactions, including the Vantage shares.

On June 11, 2014, the trial court signed a temporary injunction, ruling as follows with respect to 72,238,972 shares of Vantage stock "[Su] holds through F3 Capital.

I do not think Vantage Drilling was really aware of what was going on at the time, between MM. Zelada, Padhila and Hsin Chi Su. However, the fact and the matter is that the prosecutor is claiming "irregularities in the Titanium Explorer contract, included meeting records, e-mail exchanges and foreign bank transfers into and out of Zelada's accounts." and this is quite damaging for Vantage Drilling, at first glance.

The question now will be whether or not the contract is still considered valid?

As I said, recently in my preceding article on Vantage Drilling, this situation may push Petrobras to renegotiate the Titanium explorer contract, and obviously get a lower day rate or even, worse, an early termination. I will not speculate further about this situation because it would be pure speculation on my part.

M. Paul Bragg seems adamant to show that the contract has been signed in good faith and fair price, and if wrongdoing committed, it is limited between Mr. Padhila and certain Petrobras officers, who acted without the consent and the knowledge of the company. Furthermore, M. Bragg said in the conference call:

We have previously provided to the CEO of Petrobras, in July 2015, a lengthy report that substantiates that the contract was negotiated fairly and well within prevailing market terms. The terms of the contract where approved by action of the Petrobras parent company board prior to execution.

Currently our audit committee is independently investigating the published claims. And as of now, our internal and independent investigations have no evidence of wrong doing by our employees, our participation in any manner with the inappropriate acts alleged to have been conducted by Mr. Padilha, who was also agent for several other international drilling companies.

Ultra-Deepwater
1 Titanium Explorer Built and delivered 3/2012 DSME-UDW
1/20
end of contract
585
[Petrobras]
Equatorial Guinea
One comment is that this development is serious enough to put a stop on trading VTG, until this affair has been clearly resolved.