Staying true to the SEC's 360 degree approach for advancing the Biden Administration's ESG agenda, on April 29, 2022, the Securities and Exchange Commission ("SEC") sued a publicly traded Brazilian company. The SEC filed a securities fraud lawsuit against Vale S.A. ("Vale") for, among other conduct, making misleading environmental, social, and governance ("ESG") disclosures. By suing Vale, Melissa Hodgman, Associate Director of the Commission's Division of Enforcement, explained that the SEC seeks to demonstrate that it "will aggressively protect our markets from wrongdoers, no matter where they are in the world."
In the world of ESG and stakeholder capitalism, the pressure for organizations to make commitments and be transparent on their progress is high. And, balancing potentially competing stakeholder interests to drive long-term value is a challenge. It requires a delicate balance to say the least. It also requires an all hands approach and commitment to creating an internal structure that supports an alignment between commitments and actions by having checks and balances horizontally across functions and vertically into the boardroom. As the SEC shows in the Complaint against Vale, the stakes for misalignment are high.
The Complaint
According to the Complaint filed by the SEC, Vale deceived investors about the safety and stability of the dams it built to hold waste from its mining operations. The SEC alleges that Vale was aware of and concealed the risk that its Brumadinho dam could collapse. When the dam ultimately collapsed in January 2019, it resulted in 12 million cubic tons of mining waste (a.k.a. "tailings") and 270 deaths, along with significant environment, social and economic damage. As characterized by Gurbir Grewal, Director of the SEC's Division of Enforcement, "[b]y allegedly manipulating [its] disclosures, Vale compounded the social and environmental harm caused by the Brumadinho dam's tragic collapse and undermined investors' ability to evaluate the risks posed by Vale's securities."
If proven true, Vale's failure to address the dam before the disaster starkly contrasts its purported commitments and public disclosures. The cause of the Brumadinho dam collapse was a geo-phenomenon called "liquefaction," which also caused the collapse in 2015 of another dam co-owned by Vale. Following that disaster, Vale became subject to new safety regulations and audits. In addition, Vale pledged to commit to sustainability and "zero harm" to its employees and surrounding communities.
Vale made these ESG assurances in its public disclosures, including in sustainability reports, SEC periodic filings, presentations, and ESG webinars. Yet, notwithstanding such assurances, according to the SEC's findings, as early as 2003, Vale allegedly did not meet recommended safety standards even though it knew that the Brumadinho dam's fragile state posed significant risk. The SEC further alleges that Vale knowingly or recklessly obtained fraudulent stability declarations in connection with audits to shape its false narrative about the dam.
The SEC looked beyond the formal SEC filings and concluded that Vale's President and CEO falsely touted the condition of the dams in a public article, Vale produced a sustainability report that included false statements, and Vale conducted webinars that contained false proclamations about compliant measures and the general condition of the dam. Moreover, the SEC claims that Vale perpetuated the false statements even after the collapse.
The causes of action brought by the SEC include violations of Section 10(b) and Rule 10b-5, which require companies, directors and officers to make accurate and not misleading statements to investors. The SEC also brought a claim under Section 17(a), which bars companies and individuals from engaging in fraudulent conduct that could negatively impact investors. Unlike Section 10(b) and Rule 10b-5, Section 17(a) does not require a showing of scienter in civil matters. Last, the Commission brought a claim under Section 13(a), which imposes reporting obligations. The SEC seeks an injunction against Vale for future violations of securities laws, as well as a disgorgement of ill-gotten gains and civil monetary penalties.
Notable Takeaways
Accountability and Transparency - Without a doubt, the Complaint alleges some fairly egregious behavior on the part of Vale. However, the allegations and the causes of action lodged against Vale crystalize that the SEC will rely on disclosures outside SEC filings to illustrate fraud. In this new era of stakeholder capitalism, the Complaint also highlights how the alignment of commitment and action will be scrutinized.
Stakeholder Capitalism - ESG is an enterprise-wide financial value proposition that signals balancing all stakeholders to drive that value. In the Complaint, the Commission also underscored that the misrepresentations not only misled investors but government regulators and communities given the loss of life along with the pure environmental damage to those affected communities. In this way, the allegations against Vale reinforce the SEC's recent commitment to aggressively regulate, monitor and litigate environmental and social harms affecting all stakeholders, not just corporate investors.
Director Oversight and Management Execution - Notably, the SEC did not name any individual defendants. But, it did highlight the actions and statements made by Vale's CEO, corporate geotechnical risk management group, and other executives. It also focused on the chain of command and reports made to directors and senior management as to the safety of the dam. While a limited number of ESG related-claims have been pursued to date, this new enforcement action demonstrates the broad scope of risk to directors and officers with respect to their ESG related statements, activities and oversight, even when such statements and conduct are not in connection with SEC required filings.
As organizations continue to build the infrastructure for oversight and execution of their ESG programs, directors and senior management should closely review their ESG goals, achievements, and representations on a regular basis with a focus on transparency and accuracy, as well as impact to all relevant stakeholders. This enforcement action is certainly a harbinger of more regulatory and private actions.
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