Is the U.S. Law Enforcement Stronger than

that of a Developing Country?

The Case of Securities Fraud by Brazilian

Corporations and Lessons for the Private

and Public Enforcement Debate

Érica GorgaFundacao Getulio Vargas Law School at São Paulo

5th International Conference on Corporate Governance

in Emerging Markets

Sept. 25th, 2015

The Petrobrás Scandal

The biggest corruption scandal in Brazilian

history

Auditors (Pricewaterhouse Coopers)

refused to sign off on Petrobras’ quarterly

financial statements.

Petrobrás has lost $80 billion or about 65%

of its market value over the past 5 months.

Effects on Brazilian

Currency and Economy

The Brazilian Real has lost a tenth of its

value against the dollar in the last 10 days.

Potential impact in 13% of Brazilian

GDP.

Brazilian Companies Already

Sued in the U.S.

Aracruz Celulose S.A.–

Level III ADR Program na NYSE (1992)

Nível 1 na BM&FBovespa (2002)

Sadia S.A.–

Level 1 na BM&FBovespa (2001)

Level II ADR Program na NYSE (2001)

More than Billion Dollar

Losses - Examples

Aracruz – major forest products manufacturer and the

largest wood pulp producer in the world.

Level III ADR program on the NYSE (1992)

Level 1 on the BM&FBovespa (2002)

Sadia – major food and beverages company in Brazil.

The largest exporter of meat-based products. Level 1

on the BM&FBovespa (2001)

Level II ADR program on the NYSE (2001)

“Hedging” with Derivatives

Aracruz and Sadia: billion-dollar losses in

STF when the Brazilian real plummeted in

relation to the dollar.

Companies previously disclosed conservative

financial policies, relying on currency derivate

futures markets to hedge the risk exposure to

exchange rate fluctuations.

Private Enforcement: Class

Action Lawsuits in the U.S.

Filed against the companies and some

managers/ board members.

Focus on securities regulation failures:

Section 10(b) and 20(a) of the Securities

Exchange Act of 1934, Rule 10b-5,

Fraud on the market doctrine

Rule 10b-5

"Rule 10b-5: Employment of Manipulative and Deceptive Practices":

It shall be unlawful for any person, directly or indirectly, by the use

of any means or instrumentality of interstate commerce, or of

the mails or of any facility of any national securities

exchange,(a) To employ any device, scheme, or artifice to

defraud,(b) To make any untrue statement of a material fact

or to omit to state a material fact necessary in order to

make the statements made, in the light of the

circumstances under which they were made, not

misleading, or(c) To engage in any act, practice, or course of

business which operates or would operate as a fraud or deceit

upon any person, in connection with the purchase or sale of

any security."

Private Enforcement

Class actions are initiated and funded

by lawyers.

The result of the suit benefits all

investors who acquired shares during

the class period.

Civil indemnification.

U.S. Sadia Class Action /Outcome

Filed by “The Sadia Investor Group” on Nov. 5,

2008 in New York.

Defendants: Sadia S.A., Tomazoni (CEO), Ferreira (CFO),

Fontana Filho (Chairman), d’Avila (Vice Chairman), Furlan

(later Chairman), Teixeira Jr. (later CFO).

Settled for US$ 27 million. Attorney fees

30%,$723,228.36 expenses.

Net settlement fund US$18,012,711.96

U.S. Aracruz Class Action/ Outcome

Filed by private attorneys on Nov. 26, 2008 on

behalf of City Pension Fund for Firefighters and

Police Officers in the City of Miami in Florida.

Against Fibria Celulose S.A., Carlos Vieira (former

Chairman), Carlos Aguiar (former CEO, Isac

Zagury (former CFO).

Settled for US$ 37.5 million. Attorney fees 33.33%.

Expected net settlement fund ≅ US$ 23,760,000.00

Private Enforcement:

“Derivative” Lawsuits in Brazil

Art. 159. "By a resolution passed in a general meeting, the

corporation may bring an action for civil liability against any

officer for the losses caused to the corporation's property.”

Article 159, § 3. "Any shareholder may bring the action if

proceedings are not instituted within three months from the

date of the resolution of the general meeting.”

Article 159, § 4. "Should the general meeting decide not to

institute proceedings, they may be instituted by

shareholders representing at least five per cent of the

capital.”

Aracruz “Derivative” Suit

Suit approved by Aracruz shareholder meeting

(majority voting, 96.5% shareholders).

Aracruz brought suit against former CFO Zagury

in Rio de Janeiro.

Settled for R$ 1.5 million (US$ 710,900).

Company received R$ 1.5 million, shareholders

nothing.

Sadia “Derivative” Suit

Suit approved in Sadia shareholder meeting

(unanimously voting, 63% shareholders).

Sadia brought suit against former CFO Ferreira in

Sao Paulo.

Suit dismissed by the Sao Paulo State Appeal Court.

“Art. 134 § 3. The approval, without reservations, of the financial

statements and accounts shall exempt the officers and members of the

statutory audit committee from liability except as regards error, bad faith,

fraud or misrepresentations (article 286).”

Comparative Analysis

Class Actions vs. Derivative Suits: Who can

recover damages

Ineffective structure of Brazilian class actions

(initiation and procedural problems)

Public Civil Suit ("Ação civil pública - 1989)

Settlement Characteristics

Public Enforcement: Brazilian CVM

The CVM initiated administrative proceedings

against managers and directors of both companies.

Sadia - Board members d’Ávila, Furlan, Rodrigues, Fatio

and Campos - fines of R$ 200,000 each.

Board members Fontana Filho, Morales, Santos, and

Comparato, also members of the Finance and Audit

committees - fines of R$ 400,000 each.

Former CFO Ferreira was forbidden to hold a managerial

position in a publicly-held company for 3 years.

Aracruz : Aguiar (CEO); Soares, Roque and

Tourinho (financial committee); Agonilha, Pinheiro

and Sutton (audit committee); Lago and Calfat

(board members) and Zagury (CFO).

Settlement: R$ 800,000 each, exceptions:

R$ 1,200,000 for Aguiar (CEO) and R$ 1,500,000

for Zagury (CFO).

Public Enforcement: Brazilian CVM

Public Enforcement:

Lack of Action of the SEC

No U.S. public enforcement for foreign

corporations.

Increased investigation costs did not hinder

U.S. private enforcement.

Petrobras Stock Ownership

Structure (CVM)

Why will Petrobras pay much

higher settlements/ fines?

The Petrobrás case in the U.S. is not

only a civil case.

U.S. Department of Justice (DOJ)

Securities and Exchange Commission

(SEC)

Foreign Corrupt Practices Act

Payments (criminal, administrative and

civil settlements/ fines).

Siemens AG Example

“Siemens paid kickbacks to win contracts for transportation in

Venezuela, mobile-telephone networks in Bangladesh, power plants

in Israel and traffic-control systems in Russia, according to

prosecutors. The company allegedly paid $1.36 billion in bribes to

government officials worldwide and concealed them using off-book

accounts . . . .” Sheenagh Matthews, Siemens Rises as Size of

Bribery Fine Brings Relief, BLOOMBERG.COM, Dec. 15, 2008.

DOJ - criminal fines/settlement - US$ 450 million

SEC - administrative settlement - US$ 350 million

Why will Petrobras pay much

higher settlements/ fines?

Aracruz and Sadia – 1 class action suit

each

Petrobrás group – several class-actions

(several securities / titles)

Aracruz and Sadia – class period of 5/6

months

Petrobrás – class period of 4 ½ years,

from May of 2010 to Nov. of 2014.

Why will Petrobras pay much

higher settlements/ fines?

Petrobrás losses are higher

80 billion drop in market value

Conclusion

In Brazil, private enforcement is weak.

Class actions need special attention.

Brazilian public enforcement was more

effective (in the Aracruz and Sadia

cases). But not likely to be in the

Petrobras case.