ESG Task Force Brings First Case

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum.

As described in this press release, the SEC has filed a complaint against Vale S.A., a publicly traded (NYSE) Brazilian mining company and one of the world’s largest iron ore producers, charging that it made “false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam. The collapse killed 270 people, caused immeasurable environmental and social harm, and led to a loss of more than $4 billion in Vale’s market capitalization.” The SEC alleged that Vale “fraudulently assured investors that the company adhered to the ‘strictest international practices’ in evaluating dam safety and that 100 percent of its dams were certified to be in stable condition.” Significantly, these statements were contained, not just in Vale’s SEC filings, but also, in large part, in its sustainability reports.  According to Gurbir Grewal, Director of Enforcement, “[m]any investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions….By allegedly manipulating those 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.” The SEC’s charges arising out of this horrific accident are a version of “event-driven” securities litigation—brought this time, not by shareholders, but by the SEC.

As the SEC alleged in the complaint, Vale “committed securities fraud by intentionally concealing the risks that one of its older and more dangerous dams, the Brumadinho dam, might collapse. Specifically, Vale (1) improperly obtained stability declarations for the dam by knowingly using unreliable laboratory data; (2) concealed material information from its dam safety auditors; (3) disregarded accepted best practices and minimum safety standards; (4) removed auditors and firms who threatened Vale’s ability to obtain dam stability declarations; and (5) made false and misleading statements to investors.”  At the same time, Vale’s stock was actively traded on the NYSE, and it raised $1 billion in the U.S. debt markets.

According to the SEC, the Brumadinho dam collapse in January 2019 was “one of the worst mining disasters in history,” releasing nearly 12 million cubic tons of toxic mining waste (called “tailings”) that killed 270 people (burying over 150 people alive) and poisoned the river.  The dam collapse created “immeasurable environmental, social, and economic devastation.” Following the collapse, the company’s market cap fell by over $4 billion, its NYSE-traded ADSs declined in value by over 25% and its corporate credit rating was downgraded to junk status. The SEC alleged that Vale “intentionally concealed alarming signs of the dam’s instability from the investing public and Brazilian authorities. Vale also deliberately manipulated multiple dam safety audits; obtained numerous fraudulent stability declarations; and regularly and intentionally misled local governments, communities, and investors about the dam’s integrity.”

Vale’s experts concluded that the dam failed “due to a geophysical phenomenon known as liquefaction,” triggered by an incremental “accumulation of strain under constant load,” a process known as “creep,” along with heavy rainfall. Just three years earlier, a dam co-owned by Vale, the Mariana dam, had also failed as a result of liquefaction, leading to significant changes to Brazil’s dam safety regulations, which imposed on Vale substantial new reporting, safety audit and disclosure requirements, including dam stability declarations for its tailings dams. Following the Mariana failure, the SEC alleged, Vale “made a renewed public commitment to dam safety,” promising “Mariana Never Again” and publicly declaring its “commitment to sustainability” and goal of “zero harm” to employees and surrounding communities. However, according to the SEC, in “truth, the Brumadinho dam did not meet minimum recommended safety standards that Vale had pledged to implement and claimed to apply.”

The SEC alleged that, in Vale’s public disclosures—including its periodic reports, presentations, sustainability reports and ESG webinars—Vale conveyed assurances about the safety of its dams. In those disclosures, “Vale purportedly honored its commitment,” the SEC charged. “It announced that it was allocating significant capital to dam safety and stability and asserted that each of its more than 100 iron ore tailings dams were safe and operating normally. Vale also repeatedly claimed that it adhered to the ‘strictest’ and best international practices for dam safety and ‘rigorously’ complied with regulatory requirements.”

However, the SEC alleged, Vale had been aware of the dangerous fragility of the Brumadinho dam since at least 2003.  After the Mariana collapse, Vale “identified the Brumadinho dam as one of six critical dams that required attention and presented significant liquefaction failure risk.” Field tests, safety auditors and engineers retained by Vale also indicated high risk associated with this dam.  Nevertheless, the SEC alleged, Vale “knowingly or recklessly suppressed the findings of its own retained experts” and “engaged in a pattern of deceptive acts designed to skirt the applicable regulatory requirements related to dam safety.” According to the SEC, Vale obtained a number of  “fraudulent and deceptive stability declarations in connection with corrupted audits of the Brumadinho dam,” knowing that these declarations “were based on unreliable and flawed laboratory data or a flagrant disregard for minimum standards of safety that Vale purported to follow.” Far from being a stable and safe dam, the SEC alleged, “the Brumadinho dam was at all relevant times an extremely dangerous dam whose stability could not be certified.”

In addition to “immeasurable human suffering,” the SEC charged, Vale also harmed investors.  By hiding the serious problems with Brumadinho and other tailings dams, the SEC alleged, Vale caused its “sustainability reports, periodic filings, and other Environmental, Social, and Governance (“ESG”) disclosures to be materially false and misleading. Vale’s deceit misled investors regarding several material issues: the stability of Vale’s dams; the nature of Vale’s safety practices in the wake of the Mariana dam disaster; and the actual risk of catastrophic financial consequences should any of its high-risk dams, like the Brumadinho dam, collapse. Through its myriad of false statements, material omissions, and other deceptive acts or practices, Vale violated the antifraud provisions of the federal securities laws.”

It’s worth noting that the complaint frequently looks to Vale’s sustainability reports (to which Vale’s SEC filings sometimes made reference) for many of the alleged deceitful statements. For example, the complaint charges, Vale made public statements in its periodic filings on Forms 20-F and 6-K in 2017 and 2019, its sustainability reports issued in 2017 and 2018 and in a December 2018 ESG webinar, all of which touted its

“stability declarations and reassured investors that its dams were stable and safe. In its 2017 Sustainability Report issued in 2018, for example, Vale affirmed that ‘100% of the audited structures were certified to be in stable condition’ with stability declarations issued ‘by the responsible auditors,’ and that all of their dams ‘are completely normal.’ Vale’s 2017 Sustainability Report further represented to investors that ‘[i]n addition to applying best practices pertaining to dam safety management, Vale submits its structures to audits conducted by specialized external consultants, and rigorously complies strictly with applicable legislation.’ [However,] because Vale secured each of the stability declarations for the Brumadinho dam through fraud and deceptive acts, these statements were materially false and misleading.”

The complaint later alleges that “Vale’s misstatements in the 2017 Sustainability Report were knowing or reckless.”

In addition, a number of Vale executives reviewed, approved and certified the statements in Vale’s 2016 and 2017 Sustainability Reports. One executive, for example, signed a certification regarding the 2017 Sustainability Report “representing that he had read the report, his business area had procedures and internal controls to ensure all relevant information was communicated to him, all relevant information had been provided by his area, and that he did not have any knowledge of any incorrect information about a material fact or the omission of a material fact necessary to make the statements in the report not misleading.”  However, the SEC alleged, these representations were false because the executive “knew or was reckless in not knowing that the declarations of stability Vale had obtained for its upstream tailings dams, including the Brumadinho dam, could not be relied upon and did not properly reflect safety conditions.”

During this period, the company, through its wholly owned subsidiary, issued $1 billion in 6.25% notes due 2026, guaranteed by Vale, which were listed on the NYSE. At the time of issuance, the SEC alleged, “Vale had falsely reassured its investors that all of its dams in the Iron Ore Business were subject to rigorous safety review and that they were safe. Following the dam collapse, Fitch downgraded Vale’s corporate credit rating to BBB- and placed the company on a negative watch. Moody’s downgraded Vale’s corporate credit rating to Ba with a negative outlook.”  In addition, Vale issued more than 170 million common American Depositary Securities in connection with a corporate restructuring during the period when, the SEC alleged, “the price of its common stock was materially inflated as a result of undisclosed safety issues with the Brumadinho dam. Following the collapse of the Brumadinho dam, Vale incurred more than $7 billion of provisions and expenses related to the dam’s rupture.”

The SEC charged that the company violated Exchange Action section 10(b) and Rule 10b-5, Securities Act Section 17(a),  and Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-16 (in connection with its Forms 20-F and 6-K).  The SEC requested a permanent injunction, disgorgement and civil monetary penalties. Notably, the press release refers to the SEC’s Climate and ESG Task Force formed last year in the Division of Enforcement “with a mandate to identify material gaps or misstatements in issuers’ ESG disclosures, like the false and misleading claims made by Vale.”

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One Comment

  1. NAND L. DHAMEJA
    Posted Friday, May 20, 2022 at 3:07 am | Permalink

    It is an interesting and revealing case of not following Environmental Safety norms. We come across companies not observing such norms, this case refers to a company involved in mining and such public utilities

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