A big factor in the heightened levels of securities litigation filings in 2018 and one of the most important recent litigation trends has been the rise of event-driven securities litigation. These are securities lawsuits based not – as was the case in the past – on accounting misstatements or financial misrepresentations, but on setbacks in a company’s operations that affect a company’s share price. In recent months, securities suits have been filed following wildfires, plane crashes and data breaches. Given this trend and in light of the significance of the event, it arguably should be no surprise that plaintiff lawyers have now filed a U.S. securities class action lawsuit after the most recent Brazilian dam collapse, the January 25, 2019 disaster at Brumadinho, in Minas Gerais, Brazil.
As discussed here, last Friday, a 28-story tall tailings dam at the Córrego do Feijão iron ore mine collapsed, unleashing a wall of mining debris, water, and mud that swept through the surrounding area, carrying some survivors as far as a mile away. As of January 28, 2019, at least 65 people were confirmed dead, and at least 292 were considered missing. Searches for the missing and for bodies continued on Tuesday, January 29, 2019.
The dam was owned by Vale, S.A., the same company as was involved in the 2015 Samarco dam collapse which took place in Mariana, about 80 miles away. That earlier dam disaster, which at the time was called Brazil’s worst environmental disaster, killed 19 people.
On Monday, January 28, 2018, Vale’s shares plunged nearly 25%, and the company said it would suspend its dividend and share buybacks. The company also immediately said it would donate $27,000 to each family affected. On January 29, 2019, the Wall Street Journal reported that Brazil’s Prosecutor General, Raquel Dodge, said she would pursue criminal charges against Vale, Brazil’s largest iron ore miner. Among other things, the Journal article notes that the cause of the collapse was still not known.
The U.S. Securities Class Action Lawsuit
On Monday January 28, 2019, the first full day of business after the dam collapse around Noon local time in Brazil on Friday, January 25, 2019, plaintiffs’ securities lawyers filed a securities class action lawsuit in the Eastern District of New York on behalf of an individual Vale shareholder against the company, its CEO, and its CFO.
The complaint, a copy of which can be found here, purports to be filed on behalf of persons who purchased Vale’s publicly traded securities between April 13, 2018 and January 28, 2019. The complaint alleges that the company’s securities trade on the New York Stock Exchange.
The complaint quotes several different news reports about the Corrego de Feijão dam collapse. Among other things, the complaint quotes a BBC news report stating that the dam’s alarm system failed at the time of the accident. The complaint also cites a Sao Paulo newspaper as stating that “the risk of collapse of the dam had been mentioned in a ‘tense meeting’ that approved its license last month.”
The securities complaint alleges that after the 2015 dam collapse, involving a dam jointly controlled by Vale and a unit of BHP Billiton, Vale “purportedly took steps to provide relief to those affected and prevent such a catastrophe in the future.” The complaint quotes several of Vale’s filings with the SEC, including filings in which the company steps the company said it had taken to inspect dams used in its operations, including safety audits and monitoring.
The complaint alleges that the company’ statements in its filings about its dam safety and inspection efforts were false or misleading, because the defendants failed to disclose that “(1) Vale had failed to adequately assess the risk and damage potential of a dam breach at its Feijão iron ore mine; (2) Vale’s programs to mitigate health and safety incidents were inadequate; (3) consequently, several people were killed and hundreds more were missing after Vale’s dam at its Feijão iron ore mine was breached; and (4) as a result, Defendants’ statements about its business, operations, and prospects, were materially false and misleading and/or lacked a reasonable basis.
The complaint seeks damages on behalf the purported plaintiff class under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as under Section 20(a) of the Exchange Act.
Given the established pattern of event-driven securities litigation, we probably shouldn’t be surprised plaintiffs’ lawyers have filed this lawsuit, in light of the magnitude of the disaster. Indeed, the same plaintiffs’ lawyers that filed this complaint also filed a complaint against Vale after the earlier Samarco mining dam collapse. (That earlier suit remains pending after surviving at least in part the defendants’ motion to dismiss, although the lead plaintiff in that earlier case is represented by the Bernstein Litowitz law firm).
But while there is no surprise in the lawsuits’ filing, there is something about the hasty filing of this lawsuit that is unseemly. The rescuers are still searching for bodies. The cause of the dam collapse is still unknown. That the victims and their families might be aggrieved and seek redress might be understood. That an investor who investments lost value is already pushing to the front of the queue as if demanding what about my losses really is, in my view, unfortunate.
Like many of these event driven securities lawsuit filings, the complaint in this case is not the strongest. It frankly reads like a mismanagement claim rather than a misrepresentation claim. At a minimum, the scienter allegations are thin, at best.
That said, the plaintiff in the new lawsuit does have at least one material factor weighing in his favor, and that is the fact of the earlier dam collapse. The fact of the earlier collapse unquestionably puts the defendants in an unsympathetic light and definitely raises questions about what the company was saying about its efforts after the earlier collapse concerning the safety of its mines. There probably will be some good questions to ask down the road about the company’s disclosures. Just not now, while the rescuers are still trying to recover the victims’ bodies.
Be that as it may, I suspect we will see a plethora of event-driven lawsuits filed in the months ahead, many filed by the same law firm as this one, as well as others of the so-called “emerging” law firms. As the dialog about possible securities litigation reform gains steam in the months ahead, we are going to be hearing a lot more about the phenomenon of event-driven litigation.