Less than three years after Eike Batistawas dubbed by President Dilma Rousseff“the pride of Brazil,” prosecutors will try to send the former billionaire to prison for alleged insider trading in a trial set for later this month.
He’d be the first.
In a nation where most big deals leak, no one has ever been imprisoned for using insider information in the 13 years since such activity was made illegal. And fines are small: Of the 57 cases of insider trading ruled on by securities regulator CVM between 2006 to 2013, all but seven involved fines of less than $160,000.
The auto-regulation board of BM&FBovespa SA, the operator of Brazil’s stocks and derivatives exchange, said last year it detected 91,000 transactions that showed irregular volumes or stock-price moves. The CVM ruled on just 10 cases in 2013 and three cases this year.
“Insider trading is clearly widespread in Brazil, and we as investors would be naive if we didn’t believe that,” said David Riedel, president of Riedel Equity Research in Greenbrae, California. “There is a consistent pattern of leaking. But the problem is not the laws -- it’s that they aren’t enforced.”
Brookfield, Brasil Brokers
The benchmark Ibovespa stock index surged Sept. 16 by the most in two years before a presidential poll was made public as speculation spread that the survey would show market-friendly presidential candidate Aecio Neves gaining voter support. The poll released two hours after the market closed confirmed just that.
Brookfield Incorporacoes SA skyrocketed 21 percent on Jan. 23 on rumors its parent company would take the unit private. That deal was announced four days later.
And the CVM said in a statement this week it fined three controlling shareholders of real-estate brokerage Brasil Brokers Participacoes SA 300,000 reais ($120,000) apiece for trading stocks before the publication of results in 2011.
Brasil Brokers said in an e-mail that the company itself wasn’t investigated by the CVM for any matter related to capital markets. Brookfield referred Bloomberg to a Jan. 23 regulatory filing after it was questioned by the BMF&Bovespa and CVM about the share surge. The company “doesn’t know of any fact that could justify that,” it said in the filing.
The CVM said it doesn’t comment on specific cases after being asked if it’s investigating the leaked poll or Brookfield’s share surge. The regulator also said in an e-mail that it’s “doing everything that its legal mandate requires.”
Case Against Batista
Prosecutors in Rio de Janeiro have filed charges for alleged insider trading against Batista, who lost most of his $34.5 billion fortune when his energy and commodities empire collapsed, for illegally dumping shares of his oil company using privileged information. The company, at the time known as OGX, tumbled 95 percent in 2013 as it filed for bankruptcy protection after cutting output targets and halting most operations. The case against Batista is scheduled to start in a Rio court on Nov. 18.
Prosecutors in Sao Paulo also filed charges yesterday against three former OGX executives after filing charges against Batista in September. OGX said it couldn’t comment and didn’t have contact details for the executives.
Batista’s lawyer, Sergio Bermudes, didn’t respond to phone call and e-mail requests for comment. He has said previously that the allegations against Batista were groundless.
While laws governing financial markets are strict in Brazil, the CVM doesn’t have the technology, people or funding to fully enforce the rules, said Eduardo Salomao Neto, a partner at the law firm Levy & Salomao Advogados in Sao Paulo.
‘Big Crimes’
“It’s a matter of money, but it’s also a matter of creativity,” he said, adding that Brazil’s legal framework hinders enforcement of all criminal laws, not just white-collar crime. “The regulators could do partnerships with the police and prosecutors to conduct more sophisticated investigations that would uncover the big crimes and criminals. The crimes that are detected and punished now are very small -- there has to be bigger ones nobody ever hears about.”
The CVM said in its e-mail response that budget constraints don’t affect the work it does.
While not illegal, leaks also regularly appear in newspapers before official announcements. Of the 11 biggest mergers and acquisitions announced in Brazil in the past two years, newspapers and news agencies reported on at least seven of them before the official announcement was made, according to data compiled by Bloomberg News.
Credit Suisse
Medical Diagnostics company Fleury (FLRY3) SA plunged 9 percent on July 31 after Exame magazine reported that talks to sell the company to private-equity firm Gavea Investimentos Ltda. had stalled. Gavea announced last month that discussions had ended.
Credit Suisse Group AG paid the largest fine in Brazil’s history in an agreement with the CVM that included no acknowledgment of wrongdoing. The Zurich-based bank agreed to pay 19.3 million reais to end a CVM probe into the alleged use of insider information. The investment bank bought Embraer SA’s stock in 2006 before the planemaker announced changes to its capital and corporate governance structure that would allow it to trade on the Novo Mercado, a section of the BM&FBovespa with higher standards of corporate governance.
Fleury said in an e-mail that it questioned its controlling shareholder about the Exame report at the time and was told there wasn’t any information it needed to report. The regulatory filing about the end of talks was sent on Oct. 20, immediately after the company was notified, Fleury said. Arminio Fraga Neto, the chief investment officer of Gavea, declined to comment in an e-mailed response to an interview request. Credit Suisse didn’t respond to a request for comment.
‘Sad and Discouraging’
As the Ibovespa posted the world’s biggest plunge among major indexes since the start of September, cases of alleged insider trading hurt the credibility of Brazilian markets, according to Maria Helena Santana, a former president of the CVM. Only a fraction of suspicious trades are ever investigated and punished because the CVM lacks the employees and technology to better enforce insider trading laws, she said.
“In short, it’s very sad and discouraging,” Santana said.
And that’s what makes Batista’s case so unusual, said Riedel from the equity research company in California.
“Punishing a very high-profile person, like the U.S. did with Martha Stewart, sends a message,” he said, referring to the Martha Stewart Living Omnimedia Inc. founder jailed for lying about a stock sale. She was released in March 2005 after serving almost five months in jail and returned to the company in 2012. “Batista may become the example of what not to do.”
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