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Short Seller Alert : Braskem S.A. (BAK)

|Includes: Braskem S.A. (BAK)

How Braskem's name has come up in the corruption probe surrounding Petrobras ?

Braskem is accused of bribing Petrobras officials to secure construction contracts between 2006 to 2012. An investigation has been commenced into Braskem S.A. (NYSE:BAK) ("Braskem") related to potential violations of federal securities laws. Braskem is a Brazilian petrochemical company and is the largest petrochemicals producer in Latin America. Braskem is also the largest producer of thermoplastic resins in the Americas.

Braskem SA (ADR) has become the latest victim of the Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) corruption scandal. Braskem is the largest provider of petrochemicals in terms of revenue.

On March 11, 2015, Braskem's shares plummeted after a report from a local newspaper, Folha de S. Paolo, implicated Braskem in the corruption scandal surrounding state-owned oil producer Petroleo Brasileiro SA ("Petrobras"). On this news, shares of Braskem fell over 20%, or $1.80 per share, on March 11, 2015.

On March 17, 2015, according to an online article discussing Braskem, "ex-Petrobras executive Paulo Roberto Costa and admitted money launderer Alberto Youssef said in testimony" that "Braskem paid annual bribes, initially set at $5 million, to buy crude derivatives such as naphtha and propylene at low prices from 2006 to 2012."Braskem has gotten involved in the corruption scandal following a testimony claiming that it made under-the-table payments to the Rio de Janeiro-based energy company in favor of receiving contracts.

According to testimony made by former Petrobras executive Paulo Roberto Costa, and self-confessed money launderer Alberto Youssef, Braskem paid at least $5 million annually between 2006 and 2012. The payments were made to acquire crude derivative contracts like propylene and naphtha at cheaper prices. The testimony was made available to the general public on the Brazilian Supreme Court website on March 6.

Despite the petrochemical company opposing the claims, its $750 million bonds with a coupon rate of 7%, maturing in 2020, fell 9.6% last week to trade at 97 cents on the dollar.

The company revealed that its top line is closely tied to the US dollar, which has shown strength against the Brazilian real.

The claim against the petrochemical company shows the level of penetration caused by the Petrobras scandal. The investigation carried on by federal authorities has entangled the most prominent Brazilian builders, rig makers, and government officials. Furthermore, this has resulted in more than one million people to come out on the streets to protest against President Dilma Rousseff's handling this situation.

These developments can seriously dent the stock performance of Brasken SA, as investors would prefer to sell the stocks instead of waiting upon the results of the investigations. In such scenarios, investors also tend to ignore the fundamental financial standing of the company.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.