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"Double Loss"

Juliana Machado - February 23th, 2016

Report published in the newspaper Valor Econômico on 2/23/2016

"In addition to being marked by the strong devaluation of the stock market, the year of 2015 rescued a subject that put the Brazilian shareholders in another alert: the collective actions in the United States, known as class actions. The issue isn’t new, but it has returned to investors radar following the avalanche of cases against Brazilian companies that can bring damage to local shareholders on several fronts.Today, there are four national giants on the US justice radar for claims of losses caused to shareholders: Petrobras, Braskem, Vale and Eletrobras. In the most emblematic case, in addition to a class action lawsuit, the state oil company faces 28 individual lawsuits in the US after bringing to the fore the involvement of former directors in cases of bribery and money laundering that allegedly caused damages to the holders of receipts of action (ADR). The charge is that the company violated laws of the capital market of the country when engaging in acts of corruption. Already the mining company Vale faces in the Court of the South District of New York accusations that also would have caused damages to the holders of ADRs not to provide legitimate information on the environmental disaster with the rupture of a reject dam of Samarco, joint venture that operates Together with Anglo-Australian BHP Billiton, in November last year in Mariana (MG).In the case of Petrobras, if the state company is condemned to pay some type of indemnification to the investors who felt injured, only the holders of ADR can be reimbursed. This is because Judge Jed Rakoff, who handles the trial in the United States, has ruled that only the holders of this type of paper fall within the shareholder class. Thus, in addition to absorbing the damages caused by corruption itself, which has substantially deteriorated Petrobras market value and led to the realization of bill-to-value write-offs, the paper investor in Brazil will not have access to a possible indemnity whose costs must leave the cash of the company itself. However, even in cases of companies not involved in corruption, such as Vale, the losses are also cumulative because, in addition to the cost of indemnity, the investor must absorb the losses already generated by the devaluation of assets as a consequence of the company’s own process and the company’s wear and tear. “In any case with payment of indemnification to investors of ADRs, the loss is double. The Brazilian shareholder loses with the impact that the taxable event itself causes on the company - the corruption in Petrobras and the Samarco accident in Vale's case, for example - and when the indemnity is actually paid, because it arks with that amount and it is not even compensated, "explains Érica Gorga, a doctorate in law from USP and a minority shareholder in the Petrobras lawsuit in the New York Court. She’s the author of the "double circularity" thesis, published on the University of Columbia's website in December 2014, which addresses the double losses that shareholders may have in all cross-border cases involving securities and which run in a jurisdiction more protective of minority rights. In the study, Erica recalls that the history of collective actions in the US courts involving Brazilian companies has already had other players such as Aracruz and Sadia in 2008, when derivative transactions and currency hedging instruments brought billionaires losses to these companies, almost leading them to bankruptcy. After the episode, the two companies were bought: Aracruz by Votorantim Celulose e Papel (VCP), resulting in Fibria, and Sadia by Perdigão, giving rise to BRF. To try to get around the double losses that the lawsuits underway can bring, lawyers heard by Valor follow the same line: the investor in Brazil must seek to recover what he has lost through the public civil action, a close relative of the American lawsuit available in the Brazilian courts. Although accessible, the instrument has its limitations: Laws 7.913 / 89 and 7.347 / 85 determine that among private agents, only associations with at least one year of existence may propose such civil actions. On the public entities side, the Federal Public Prosecutor's Office, the Public Defender's Office, the Union or states and municipalities, autarchys, public companies, foundations or mixed-economy companies are eligible. Outside, collective actions are part of an advanced industry. They consist of filing a lawsuit with a leading claimant, represented by securities litigation offices, financial fraud and infringement of shareholder rights, followed by the adhesion of other groups, individuals or funds that have similar complaints against a company or institution. In most cases, securities lawsuits are filed in district courts and claim that the defendant violated certain US capital market rules, causing loss to shareholders. A typical action has an average duration of two to three years, although the time of the case may vary according to its complexity. In relation to the Brazilian Securities and Exchange Commission (CVM), it is the responsibility of the local authority to charge Public Prosecutor's Office with the protection of investors equity and the interests of the securities market, in the civil, administrative or criminal spheres. It’s in the wake of this commitment that the two entities have maintained, since 2008, an agreement to act jointly in the prevention of illicit acts in the capital market. Under the terms of the agreement, a closer relationship between the two bodies aims to bring more speed to prevention, investigation and repression of practices detrimental to the capital market, as well as the exchange of information, documents, studies and technical work related to regulation and which may contribute to the actions of the two entities."If we look at the case of Petrobras, where there was injury and induction of the shareholder to the mistake, and for the competence of market regulators, the CVM would have the duty to charge the Public Prosecutor's Office more forcefully and act together to recover what was lost. What has been done is still mean, "says Erica. According to the lawyer, the main alternative for Brazilian investors to try to recover eventual losses is public civil action. In this context, according to the lawyer, the best way for Brazilian investors to protect themselves from losses with collective actions is to buy only ADRs, although this will "kill the Brazilian capital market in general", or opt for public civil action in Brazil. "I would say that it’s the only alternative, though not appropriate, for the investor to try to recover the losses," she says. The shareholder could still file individual lawsuits against the company, but this option, for being the most expensive, becomes less viable, especially in the case of people who are just looking for a way to get back what was lost. "Usually, collective actions filed in the United States end in agreement, but the financial impact on the company is very relevant. In that case, the shareholder may file a class action against the company in Brazil. It doesn’t have the same strenght, bur is the best route. It may take a little longer, but it creates a complex, cascading discussion", says Fernanda Farina, a Ph.D. from the University of Oxford in the United Kingdom and a representative of L. Farina Attorneys in the country. For her, the way is for the investor to be proactive and seek compensation for losses through public actions "private", that’s, open via the associations. In the evaluation of the lawyer, besides being the strongest instrument available to the jurisdiction in Brazil, the damage was caused in the sphere of private investment; therefore, the Public Prosecutor's Office isn’t the best representative because it isn’t within that scope that the collection needs to be done."I defend an increase in public civil actions with this 'private' character, through association, because it’s the victim who has to move to repair the damages in a process that places the company as a defendant and the directors as a highway. We need to get out of the culture of the individualized process.The collectivization movement is worldwide.In a world of masses like ours today, resolutions must be mass", she says. Already in the view of the lawyer and former president of the CVM, Luiz Leonardo Cantidiano, double losses may also happen in Brazil, as the investor doesn’t claim their rights and stay out of the payment of damages that may happen here. Moreover, on the domestic side, the shareholder will have costs in any case, unlike the legal structure of the American collective actions, in which it’s the offices specializing in this type of process that seek investors to participate in the action and that defray the expenses involved. In general, he argues that it’s the role of the trader of a company to assess the risk factors involved in the operation and, if it has been harmed by misconduct or mismanagement, to seek out the available ways to recoup the lost investment. The ideal, according to Cantidiano, would be to create a mechanism of collective action that would approximate more than the American collective action because, in addition to being limited, collective action in Brazil isn’t worth any loss and may be barred by certain clauses of the statute of the company, such as arbitration. On the Prosecutor’s side, the lawyer points out that the organ isn’t always up to date with the matter and acts with other priorities. Thus, in relation to companies, the lawyer argues that the exit is to have more attention and caution in the decision to access the international market because all corporations are vulnerable to collective actions, while, on the side of the investor, the stimulus is that it's worth fighting for rights. "The public civil action is a shameful thing and could be improved from a legal point of view. I believe that, in Brazil, there could be a relaxation of the law so that people could file lawsuits more easily, as happens in the United States. Now, if the investor considers themselves prejudiced, it is worth seeking ways to try to be reimbursed using the available legal elements or working to improve them. This is what improves the functioning of the market, "he says. The Public Prosecutor's Office argues that in the capital market and securities, punishments need to be allocated to those identified as liable for the loss. That’s, the judicial perception is that it’s incumbent upon the Prosecutor’s to direct the accusations to the controlling shareholder or individuals identified as the perpetrators of the damage, but not necessarily to the legal entity. "If you take cases of insider trading as an example, where shareholders negotiate assets with inside information and profit improperly, you can clearly identify who is the author of the act," says the master of economic law and attorney general Fernando Antonio Alves De Oliveira, who coordinates the Capital Markets Working Group linked to the Public Prosecutor Office’s 3rd Chamber, responsible for issues of consumer protection and economic order. "However, investors can form an association and solve a macro problem in a single action and this is positive for the Justice and the shareholders," says the prosecutor.For investors, it’s the task of rethinking strategies to prevent further losses from external exposure, as well as using the public civil action not only to recover damages, but also as a means of recovering the credibility of the Brazilian market. "It’s the beginning of a resumption, and I fully agree that the Brazilian stockholder has to have the same guarantee that the investor outside has. If this is not there, it can’t save the market," says Aurélio Valporto, economist and vice president of the Minority Investors Association. Valporto confirmed to Valor that the association is still negotiating to file a civil lawsuit against Petrobras and argues that this type of instrument, through association, "is a good way" to hold companies accountable. If they do consider themselves to be equally harmed by some kind of negligence or criminal act, the responsibility to defend themselves, create controls, and seek redress is for the company itself."In the eyes of the investor, it’s fundamental that the responsibility of the company is also aimed at creating legal certainty, because, after all, the shares of the company were the assets traded, not the individuals who caused the damage. In our view, a myth has been created that the company is a victim. There are few prosecutors that move, but Law 7.913 gives us this support, "he says. The lawyer Erica agrees that it’s still lacking in Brazil, in the collective actions aspect, to understand that the company is responsible for the illegal acts in addition to criminalizing and identifying the responsible directors and financial officers. "Whoever is going to the market is the company, the asset is in the name of the company, then it’s they who must respond. If it can receive money and investments from people, it also has to indemnify people. All are holders of rights and obligations”, she argues "

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