On November 14, 2016, in an interesting lawsuit that brings together a number of recent securities litigation trends, a noteholder of Samarco Mineração, S.A. filed a purported securities class action lawsuit in the Southern District of New York against the company and its CEO on behalf of investors who purchased the company’s debt securities. Samarco, a joint venture of mining giants Vale, S.A., and BHP Billiton, owned and operated the Fundão tailings dam that collapsed on November 5, 2015, in what has been called Brazil’s worst-ever environmental disaster. There are a number of interesting features to this new lawsuit, beyond just its relationship to the dam collapse disaster. A copy of the plaintiff’s November 14, 2016 complaint can be found here.
Samarco is a privately-held Brazilian mining company, owned in equal parts by Vale and BHP Billiton. The company produces iron ore pellets which are sold to steel makers worldwide. The company’s mineral extraction process produces, in addition to the iron ore, a slurry residue that is stored in a large reservoir, known as a tailings pond. The iron ore tailings in the pond are secured by a dam. On November 5, 2016, the dam in the Fundão tailings dam collapsed, causing at least 17 deaths, and allowing more than 60 million cubic meters of iron ore waste to flood into the nearby Doce River and eventually to flood into the Atlantic Ocean about two weeks later.
Between 2012 and 2014 Samarco had conducted three debt offerings in the aggregate principal amount of $2.2 billion dollars. The complaint alleges that following the dam collapse and as a result of various subsequent legal proceedings, the value of the notes “significantly declined, harming investors.”
The plaintiff, Banco Safra’s Cayman Islands Branch, alleges that in the offering memoranda for the Notes and in subsequent annual management reports, the defendants misrepresented material facts about the company and its operations. Specifically, the plaintiff alleges that the defendants failed to disclose that “(i) the Company’s Fundão tailings dam had longstanding systemic and structural defects; (ii) despite representing to invetors that Samarco had mitigated the risk of a catastrophic accident as much as possible through ‘a combination of risk management, careful evaluation, experience and knowledge,’ Samarco had in fact ignored repeated reliable warnings regarding the condition of the Fundão tailings dam; and (iii) as a result of the foregoing, Defendants’ statements about Samarco’s business, operations, and prospects were false and misleading and/or lacked a reasonable basis.”
This lawsuit is merely the latest securities lawsuit to be filed in the U.S. in connection with the Fundão dam collapse disaster. As I have previously noted on this blog, investors had previously filed securities lawsuits in the U.S. against Vale (about which refer here) and BHP Billiton (refer here) related to the disaster.
These securities lawsuit filings come amidst yet another filing trend, which is the rush of securities lawsuits that have been filed in the last two years against Brazilian companies. In addition to the lawsuit filed against Vale identified in the preceding paragraph, there have been a number of U.S. securities lawsuits filed against Brazilian companies relating to the long-running Operação Lava Jato investigation (Operation Car Wash) began as a money-laundering and corruption investigation of the state-controlled oil company Petrobras.
The first of the Brazilian companies to be hit with a securities class action lawsuit related to the corruption investigation was Petrobras itself, which was named as defendant in a securities class action lawsuit filed in the Southern District of New York in December 2014 (refer here). The Petrobras lawsuit was followed within a few months by the filing of securities class action lawsuits against two other companies caught up in the corruption investigation. The first of these two was Braskem, which, as discussed here, was named as a defendant in a securities class action lawsuit filed in the Southern District of New York in July 2015. Eletrobras, which as discussed here (second item) was named in a securities class action lawsuit filed in the Southern District later in July 2015.
In addition to these companies hit with U.S. securities suits related to the Petrobras scandal, yet another Brazilian company was hit with a securities suit earlier this year in connection with unrelated corruption issues. As noted here, in August 2016, aircraft manufacturer Embraer and certain of its directors and officers has been sued in a securities suit following allegations that of the company’s involvement in the payment of bribes to government officials in the Dominican Republic.
In addition to Operation Car Wash, Brazilian officials are also conducting an a separate ongoing criminal investigation (Operação Zelotes) of suspected corruption at Brazil’s Administrative Council of Tax Appeals (CARF), an agency within Brazil’s Finance Ministry. As discussed here, earlier this year, two of the companies caught up in this investigation were hit with U.S. securities class action lawsuits, Gerdau, S.A., which was sued in May 2016, and Banco Bradesco, which was sued in June 2016.
By my tally, counting the latest lawsuit filed against Samarco, that makes eight Brazilian companies hit with securities class action lawsuits in the U.S. since December 2014, of which four have been filed this year alone.
Samarco differs from the other Brazilian companies named in these other U.S. securities lawsuits, in that it is a privately held company. The other Brazilian companies hit with U.S. securities lawsuits were all publicly traded companies, and they all had equity securities or ADRs trading on U.S. securities exchange. The plaintiff apparently intends to argue that the Notes that Samarco issued during in the company’s debt offerings represent publicly traded debt.
For example, the plaintiff alleges (in paragraphs 35 and 40) that after news of the dam disaster and subsequent legal proceedings the value of the Notes fell over the course of “the next two trading days.” The plaintiff also apparently intends to argue that the Notes trade in an efficient market and therefore that the plaintiff class is entitled to rely on the fraud on the market theory in order to establish a presumption of reliance; for example, in paragraph 51 and 52, the plaintiff argues that the members of the class are “entitled to a presumption of reliance upon the integrity of the market.” The plaintiff also alleges, in paragraph 61, that the Notes “were traded on an active and efficient market.”
The plaintiff does not, however, identify the “market” on which the Notes trade. My diligent internet research has not identified any public trading information for the Notes. However, my research also suggests that the company’s initial Notes offering in 2012 was a Rule 144a private placement, rather than a public offering. The plaintiff itself alleges that it purchased the Notes “pursuant to domestic transactions, including but not limited to, the use of U.S. broker/dealers, as well as from counterparties located in the United States.” (See Paragraph 16 of the Complaint). The complaint also alleges that the Notes “were traded by multiple U.S. broker-dealers and/or counterparties and were covered by multiple rating agencies.” (Paragraph 51).
It may be that the company’s debt is not, in fact, publicly traded. That is of course no barrier to the plaintiff pursuing a securities fraud lawsuit; the securities laws apply to private transactions as well as to public transactions. However, if the company’s debt securities do not trade on a domestic securities exchange, the U.S. securities laws will apply, if at all, if the transactions meet the test under the second prong of Morrison’s two-prong analysis, specifying that the U.S. securities laws apply to “domestic transactions in other securities.” Whether or not Morrison’s second prong is satisfied and the U.S. securities laws apply to transactions in Samarco’s debt securities will depend on the circumstances surrounding the transactions.
Obviously, the nature of the transactions will also have a great deal to say about whether or not the debt securities trade in an efficient market and therefore whether or not the plaintiff class can rely on the fraud on the market theory in order to be able to depend on the presumption of reliance.
Because Samarco is a privately-held company, I do wonder what kind of D&O insurance program it might have in place. It would not surprise me to learn that its insurance program did not anticipate the possibility of a U.S. securities class action lawsuit; like many private company D&O policies, even for those in place for very large companies, its D&O insurance may well include a Securities Claim exclusion. On the other hand, given the existence of the company’s substantial debt securities, many of which apparently were traded in the U.S., it is also possible that its D&O policy was modified in some fashion to provide a measure of protection for U.S.-style investor claims.
In any event, there is one last securities litigation trend that this new lawsuit represents. In addition to being a part of the wave of U.S. securities lawsuits that have hit Brazilian companies, this lawsuit is also part of the larger trend of U.S. securities litigation against non-U.S. companies. As I noted in my year-end review of 2015 securities class action lawsuit filings (here), the number of lawsuits filed against non-U.S. companies was a significant factor in the uptick of new securities suit filings in 2015. This trend has continued again this year. Of the approximately 234 securities lawsuit that have been filed so far this year, according to my unofficial and unaudited running tally, approximately 41 have been filed against non-U.S. companies, representing nearly 18% of the securities class action lawsuit filings so far this year. The percentage of lawsuits against non-U.S. companies is about event with last year’s rate, but the number of lawsuits against non-U.S. companies so far this year (41) is beyond last year’s year-end total (34).
More About Securities Litigation Involving Publicly Traded Debt: As our nation’s President-elect is well aware, there is a long tradition of U.S. securities class action litigation involving publicly traded debt. Mr. Trump was one of the many people named as a defendant in the In re Donald J. Trump Casinos Securities Litigation, which eventually made its way to the Third Circuit (here).
The case arose out of the default of the bonds issued to finance the acquisition, construction, and completion of the Taj Mahal casino in Atlantic City, N.J. The Taj Mahal was by far the largest casino in Atlantic City. It flopped. The bondholders filed their lawsuit after the various related entities filed for Chapter 11 bankruptcy, alleging that there had been misrepresentations in bond prospectus. The district court dismissed the case on the grounds that the prospectus “bespoke caution,” rendering the alleged misrepresentations inactionable as a matter of law. The Third Circuit affirmed.
In affirming the district court’s “bespeaks caution” analysis, the Third Circuit said “no reasonable investor could believe anything but that the Taj Mahal bonds represented a rather risky, speculative investment which might yield a high rate of return, but which alternatively might result in no return or even a loss.”
In other words, all of the danger signs were there and obvious, but people bought in despite the obvious dangers, and they wound up getting screwed — but no sympathy for them, because the danger was obvious, right?
How could this happen? In the words of Paul Simon, “Such are promises/ All lies and jest/Still, a man hears what he wants to hear/ And disregards the rest.”