Former Billionaire and Chief Executive Officer of EBX Group Co. Eike
Batista... Read More
Less than three years after Eike Batista was 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.”
To contact the reporter on this story: Denyse Godoy in Sao Paulo at dgodoy2@bloomberg.net
To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net;
Jessica Brice at jbrice1@bloomberg.net
Jessica Brice, Bradley Keoun
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