SEC’s ESG Task Force Racks Up Another Win — Dam Collapse Becomes $55 Million Securities Fraud

The Securities and Exchange Commission’s (SEC) Climate and ESG Task Force has scored another victory quickly on the heels of its recent settlement with Activision. On March 28, the SEC announced a settlement with the publicly traded Brazilian mining company, Vale S.A. (Vale), related to charges arising from allegedly misleading disclosures about the safety of its dams.

In its April 2022 complaint, the SEC alleged that Vale violated the antifraud provisions of the Securities Act of 1933 (Securities Act) and the Securities and Exchange Act of 1934 (Exchange Act) by intentionally concealing the risk that its Brumadinho dam might collapse. The dam’s January 2019 collapse killed 270 people, poisoned the Paraopeba River and its tributaries with 12 million cubic tons of mining waste, and damaged local communities and economies. See SEC v. Vale S.A., No. 1:22-cv-02405 (E.D.N.Y. Apr. 28, 2022). Under the settlement, which the Eastern District of New York just approved on April 11, Vale agreed to a $25 million civil penalty, $30.9 million in disgorgement and prejudgment interest, and injunctive relief preventing it from violating Section 17(a)(2) or (3) of the Securities Act or Section 13(a) of the Exchange Act. See id. at Dkt. No. 51.

Seeking relief under Section 10(b) and 13(a) of the Exchange Act and Section 17(a) of the Securities Act (and related rules), the SEC alleged that Vale knowingly or recklessly engaged in deceptive conduct and made materially false and misleading statements to investors about the safety and stability of its dams.  According to the SEC, beginning in 2016, Vale obtained stability declarations for the dam by using unreliable and flawed laboratory data. The SEC also alleged that Vale concealed material facts and information from its auditors and removed auditors and firms who threatened Vale’s ability to obtain stability declarations.  The complaint further alleged Vale disregarded best practices and minimum safety standards and fraudulently stated that the dam was safe in multiple public disclosures.

Vale’s concealment of the true condition of the dam in its annual sustainability reports and other public filings caused those reports to be materially false and misleading. Vale’s false disclosures harmed investors, according to the SEC, because, after the dam collapsed, Vale’s market capitalization declined by over $4 billion, its American Depository Shares (which are registered with the SEC and publicly traded on the NYSE) lost more than 25% of their value, and its corporate credit rating was downgraded to junk status.

In a press release, SEC Associate Director of the Division of Enforcement Mark Cave announced: “Our action against Vale illustrates the interplay between the company’s sustainability reports and its obligations under the federal securities laws.” Cave further stated the settlement would “demonstrate that public companies can and should be held accountable for material misrepresentations in their ESG-related disclosures, just as they would for any other material misrepresentations.”

The Vale action signals the extension of the SEC’s scrutiny beyond SEC filings to sustainability reports, presentations, ESG webinars, and other ESG-related analyses. Although Vale was able to negotiate a resolution with the SEC that avoided admitting wrongdoing and agreeing to scienter-based charges, this fraud-based resolution signifies an expansion of the SEC’s ESG scope. Vale also stands as a reminder that foreign issuers that access U.S. capital markets are subject to scrutiny from the SEC’s ESG task force and should take care that their governance and sustainability-related statements are accurate and verifiable.