Just over a year after the U.S. Securities and Exchange Commission (“SEC”) announced the launch of a Task Force in order to “proactively identify” environmental, social, and governance (“ESG”) related “misconduct” by publicly-listed companies, investment advisers, funds, and other market participants, the Task Force has initiated its first enforcement action in what could signify impending action for companies across industries. In the complaint that it filed late last month, the SEC alleges that Brazilian mining company Vale S.A. is on the hook for making “false and misleading claims about the safety of its dams” prior to the deadly collapse of its Brumadinho dam in 2019 “caused immeasurable environmental and social harm, and led to a loss of more than $4 billion in Vale’s market capitalization.”
According to the SEC’s complaint, which was filed with the U.S. District Court for the Eastern District of New York on April 28, Vale engaged in securities fraud by “improperly obtaining stability declarations for the dam by knowingly using unreliable laboratory data; concealing material information from its dam safety auditors; disregarding accepted best practices and minimum safety standards; removing auditors and firms who threatened [its] ability to obtain dam stability declarations; and making false and misleading statements to investors.”
Vale allegedly “knew that the dam did not meet internationally-recognized safety standards,” the SEC asserts, However, its public-facing sustainability reports and other public filings “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.”
“Rather than confront the high reputational and economic costs arising from the unacceptable safety risks posed by its Brumadinho dam, Vale engaged in a pattern of deceptive acts designed to skirt the applicable regulatory requirements related to dam safety,” the SEC asserts. Specifically, from February 2016 through October 2018, the regulator alleges that Vale “knowingly or recklessly obtained eight fraudulent and deceptive stability declarations in connection with corrupted audits of the Brumadinho dam.” While Vale’s “fraud and deception caused immeasurable human suffering, it also caused significant harm to investors,” the SEC argues, stating that investors relied on Vale’s statements on “several material issues, [namely], the stability of [its] dams; the nature of [its] safety practices in the wake of [a prior] dam disaster; and the actual risk of catastrophic financial consequences should any of its high-risk dams, like the Brumadinho dam, collapse.”
With the foregoing in mind, the SEC contends that by “knowingly or recklessly engag[ing] in deceptive conduct and making materially false and misleading [ESG] statements to investors,” Vale engaged in violations of Section 10(b) of the Exchange Act, Section 17(a) of the Securities Act, and Section 13(a) of the Exchange Act. As such, the regulator is seeking a permanent injunction to bar Vale – and “all persons in active concert or participation with it” – from violating the federal securities laws alleged in the complaint, and is also seeking monetary penalties, as well as a disgorgement of all “ill-gotten gains” in connection such alleged securities fraud.
Certainly not a retail industry case, the newly-initiated ESG enforcement action by the SEC is worthy of attention for companies across industries, including fashion/luxury, which has long been plagued by allegations of unreliable reporting and deceptive audits in connection with brands’ globally-stretching supply chains. In addition to the risks that come with brands making sustainability and climate claims that they potentially cannot backup, the SEC’s case “demonstrates that statements made in ESG reports should now be considered ripe for litigation – whether public enforcement actions or private securities litigation – as classic sources of disclosures,” according to Mintz’s Jacob H. Hupart. “Notably, the SEC’s complaint also features allegations concerning corporate governance failures and problems with the auditing process related to the ESG reports and other disclosures,” he states, asserting that “the presence of these allegations may act to reinforce the SEC’s focus on corporate governance and attestation in its proposed mandatory climate disclosures.”
Jones Day attorneys Marjorie Duffy, Linda Hesse, Henry Klehm III, Samir Kaushik, Sarah Levine, and Joan McKown say that they “expect the SEC to use this approach more regularly in the future,” meaning that companies should consider taking “additional measures to perform an audit of their ESG-related statements and disclosures to ensure the accuracy and verifiability of such statements made in these reports, on their websites, and in connection with their representations regarding products in marketing materials and to regulators.”
The case is SEC v. Vale S.A., 1:22-cv-02405 (E.D.N.Y.).
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