In one of the SEC’s first ESG-related actions filed since the launch of the its ESG enforcement task force, the commission on April 28 filed a complaint against Vale S.A., a Brazilian mining company that trades on the New York Stock Exchange.
The complaint relates to a catastrophic incident that occurred in 2019, where Vale’s Brumadinho tailings dam failed and released millions of cubic meters of mine tailings into downstream communities, killing 270 people and causing immense environmental and social harm. The incident also caused Vale to lose more than $4 billion in market capitalization.
The government based its allegations on public statements and information in the company’s sustainability reports and shows that SEC ESG enforcement actions are increasingly likely and will examine a broad set of corporate statements.
False and Misleading Statements Alleged
The SEC alleges that Vale made false and misleading statements regarding the safety of its tailings dams in the years leading up to the Brumadinho failure. According to the SEC, by 2016 Vale was aware that the Brumadinho dam did not meet internationally-recognized standards for dam safety, and Vale had been repeatedly warned by experts of the unacceptably high likelihood that the dam could fail.
To conceal this situation, the SEC alleges, Vale falsified dam safety audits, obtained fraudulent stability certificates, and fraudulently assured investors that “100%” of its dams were certified to be in stable condition.
The Reach of SEC’s Investor-Protection Power
This lawsuit illustrates the nexus between the SEC’s mandate for investor protection and enforcement actions relating to statements about safety or environmental compliance, at least in circumstances where major environmental or engineering crises suggest that those statements may have been false or misleading.
While the federal government has taken similar steps in the past—for example, in its unsuccessful prosecution of coal mining executive Don Blankenship for allegedly false public statements regarding mine safety practices after the Upper Big Branch disaster that killed 29 miners—the government’s current focus on ESG suggests that such enforcement actions are increasingly likely and will examine a broad set of corporate statements.
In its lawsuit against Vale, the SEC used statements the company made not just in its periodic reporting, but also in its sustainability reports, a new tactic for the agency.
Gurbir S. Grewal, director of the SEC’s Division of Enforcement, stated in the SEC’s press release that many “investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions.”
Though these reports are not filed with the SEC, the regulator argues that public companies still must report accurately when using them. The SEC complaint also points to misleading statements about the Brumadinho dam made by Vale executives in public presentations.
Lessons for Public Companies
Public companies should take note that the SEC is considering all reporting and public statements, not just required filings, when determining whether a company has misled its investors on ESG matters.
This includes scrutiny of sustainability reports, as illustrated in the SEC’s sample comment letter published in September 2021, which highlighted discrepancies between the level of disclosure provided in the corporate sustainability reports and its SEC filings. Importantly, there may be a tension between aspirational statements made in sustainability reporting and the interpretation of such statements in hindsight after a catastrophic incident, especially where discovery could unearth potentially inconsistent internal statements.
The SEC alleges that senior Vale executives engaged in an intentional cover-up of known safety problems, solicited false certifications from engineering and auditing firms including through financial pressure, and that Vale’s actions led to a disaster that caused hundreds of fatalities and billions of dollars in damages—extreme conduct by any standard.
It is unclear to what extent the SEC’s suit against Vale portends aggressive enforcement actions in less egregious situations. But the theories the SEC will use against Vale could, if successful, be applied in other circumstances where a company’s public statements are inconsistent with environmental or social harm caused by that company’s operations.
Such a prospect should be of most concern to companies that have operations with potentially significant consequences in the event of a catastrophic failure.
Publicly-traded companies should also be aware that the SEC is willing to pursue international operations, particularly if those operations can credibly be alleged to have impacted U.S.-based investors or markets.
The SEC’s lawsuit against Vale shows that the SEC is serious about holding companies accountable for false statements regarding potential environmental and social harms arising from their operations.
Companies should be prepared to report ESG-related matters accurately in their filings with the agency and in public sustainability reports, as well as to vet all public statements touching on such matters to ensure their accuracy and consistency with the company’s internal practices.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Ben Lippard, a partner in Vinson & Elkins’ Washington, D.C., office, is a member of the firm’s Climate Change practice and represents clients in a wide range of environmental matters.
Rebecca Fike, a partner in Vinson & Elkins’ Dallas office, focuses on shareholder enforcement, government and internal investigations and white collar defense. She previously served as senior counsel in the SEC’s Division of Enforcement for nearly 10 years.
Margaret Peloso serves as lead sustainability partner for Vinson & Elkins, based in Washington, D.C. Her practice focuses on climate change risk management and environmental litigation, advising clients such as energy companies, financial institutions, and funds on climate risk analysis and disclosure.
Madelyn Carter is an associate in Vinson & Elkins’ Dallas office and a member of the firm’s Complex Commercial Litigation practice group.