Cooley Discusses the Risk of Liability from Sustainability Reports

In April of last year, as described in this press release, the SEC 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. In discussing the charges, the press release made reference to the SEC’s Climate and ESG Task Force formed in 2021 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.”  On Tuesday, the SEC announced that Vale had agreed to pay $55.9 million to settle the SEC charges.   According to the Associate Director of Enforcement, the SEC’s “action against Vale illustrates the interplay between the company’s sustainability reports and its obligations under the federal securities law….The terms of today’s settlement, if approved by the court, will levy a significant financial penalty against Vale and 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.”

In April of last year, as described in this press release, the SEC 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. In discussing the charges, the press release made reference to the SEC’s Climate and ESG Task Force formed in 2021 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.”  On Tuesday, the SEC announced that Vale had agreed to pay $55.9 million to settle the SEC charges.   According to the Associate Director of Enforcement, the SEC’s “action against Vale illustrates the interplay between the company’s sustainability reports and its obligations under the federal securities law….The terms of today’s settlement, if approved by the court, will levy a significant financial penalty against Vale and 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.”

In the complaint, 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.  However, the SEC alleged, Vale had been aware of the dangerous fragility of the Brumadinho dam since at least 2003.  After the collapse of another Vale dam, 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.” (See this PubCo post.)

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 emphasizing that the complaint frequently looked to Vale’s sustainability reports (to which Vale’s SEC filings sometimes made reference) for many of the alleged deceitful statements. In addition, a number of Vale executives reviewed, approved and certified statements, which the SEC contended were false, in Vale’s 2016 and 2017 Sustainability Reports.

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.

The settlement, which remains subject to court approval, requires Vale to pay a civil penalty of $25 million and disgorgement and pre-judgment interest of $30.9 million and would permanently restrain and enjoin Vale from violations of the Securities Act and the Exchange Act.

This post comes to us from Cooley LLP. It is based on the firm’s blogpost, “Sustainability reports—not a liability-free zone,” dated March 30, 2023, and available here.