On April 28, the Securities and Exchange Commission (SEC) filed a complaint against the Brazilian mining company Vale S.A., alleging that the company made false and misleading statements to investors about the company’s “commitment to sustainability” and other material matters.[1] In a press release announcing the action, the SEC framed this complaint as an exemplary effort of the Division of Enforcement’s new Climate and ESG Task Force.[2] This task force was convened in March 2021, with the “initial focus” of identifying “any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.”[3] Since March 2021, the SEC’s Division of Corporation Finance has issued a Sample Comment Letter that offers details on the kinds of climate-related risks that should be disclosed under current rules.[4] The Vale complaint, however, is the first enforcement action falling squarely within the purview of the Climate and ESG Task Force, offering new insight into the task force’s approach to ESG-related misstatements.

The SEC’s Complaint Against Vale S.A.

Vale is a Brazilian corporation whose notes and American depositary shares (ADS) are registered with the SEC and traded on the New York Stock Exchange. The SEC’s complaint against Vale concerns allegedly false and misleading statements made prior to and immediately after the collapse of Vale’s Brumadinho dam. The dam was in the state of Minas Gerais, Brazil, and was used to collect toxic sludge produced in the mining process. The dam’s collapse on Jan. 25, 2019, released 12 million tons of toxic sludge that killed a total of 270 people and entered the Paraopeba River 5 miles away, leaving it a “dead river.” These events led to a market reaction that, according to the SEC, caused harm to investors. The complaint alleges that “in the days after the Brumadinho dam collapse … Vale’s ADS fell by nearly 25%, wiping out approximately $4.4 billion in market capitalization.” Vale’s corporate credit was also downgraded to “junk” status by Fitch and Moody’s.

According to the SEC’s complaint, these events followed several years of company statements designed to convince investors that Vale’s dams were thoroughly inspected for stability risks. In November 2015, three years prior to the Brumadinho dam collapse, a dam co-owned by Vale in the city of Mariana also collapsed, resulting in 19 deaths and harm to the surrounding environment. Following that dam’s collapse, Vale’s regular communications with investors signaled that the company would prevent this sort of accident in the future. A key element of the company’s subsequent safety protocol was reliance on external auditors. In an October 2016 presentation, Vale claimed to investors that its dams had been audited that year to assess the risk of collapse. In 2017, Vale’s Form 20-F and Form 6-K again referenced these audits and stated that “no anomalies were identified.” In Vale’s 2016 Sustainability Report, posted on the company’s website in 2017, Vale discussed its “environmental responsibility” and again touted the external audits. The 2017 Sustainability Report went further, stating that “the audited structures were certified to be in stable condition” and that Vale “maintains the management of its dams in permanent alignment and updating with the good and strictest international practices, standards of which exceed the legal requirements.” In December 2018, less than a month before the Brumadinho dam’s collapse, Vale presented an ESG webinar claiming that “all of Vale’s iron ore dams are safe and operating within normal limits,” and “100% of Vale’s iron dams have their Stability Dam Declaration issued by the External Auditors.” Even after the Brumadinho dam’s collapse, Vale continued to represent that it had properly monitored the risk of the dam’s collapse, stating in a Form 6-K from Jan. 28, 2019, that “the dam had a Safety Factor in accordance with the world’s best practices and above the reference of the Brazilian Standard.”

The SEC’s complaint alleges not only that these assertions about Vale’s safety precautions were material misrepresentations but also that Vale’s leadership knew the statements were misleading. According to the SEC, at the same time Vale was assuring investors that external auditors certified the safety of its dams, external auditors hired by Vale had alerted the company that the Brumadinho dam did not meet safety standards. The company was aware of these safety concerns as early as 2016. Vale, however, accepted a safety audit from one auditing firm that included certain “laboratory data” that various experts had characterized as unreliable. Vale did not disclose information about this unreliable data to a second auditing firm that relied on the data for the stability declarations it signed. When that firm developed concerns about Vale’s dams, Vale allegedly replaced the firm with a third auditing firm, and pressured this firm to revise reported concerns about the unreliable “laboratory data” by leveraging an offer to execute a $2.1 million contract with the firm. Audits completed during this period served as support for eight stability declarations. The SEC’s complaint argues that because executives at Vale were allegedly aware of weaknesses in the data underlying the company’s stability declarations but nonetheless touted the safety of its dams, and even pressured auditors to attest to their safety, Vale’s assurances to investors constituted reckless, if not knowing, securities fraud. The complaint purports to state claims under Section 10(b) and Section 13(a) of the Exchange Act, as well as Section 17(a) of the Securities Act.

Takeaways From the Vale Complaint

This enforcement action highlights the SEC’s increasing scrutiny of alleged misstatements about issuers’ ESG credentials. In the press release announcing the action, the director of the SEC’s Division of Enforcement, Gurbir S. Grewal, emphasized that ESG disclosures in filings, as well as voluntarily disclosed materials like Vale’s Sustainability Reports and ESG webinar, are sources of information that the SEC is reviewing carefully. “Many investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions.”[5] Grewal’s further statements, describing the alleged harm to investors in the same breath as “social and environmental harm,” reaffirm the SEC’s increasingly aggressive approach to ESG matters since the inception of the ESG Task Force.[6] The press release quotes Grewal: “By allegedly manipulating those disclosures, Vale compounded the social and environmental harm caused by the Brumadinho dam’s tragic collapse and undermined investors’ ability to evaluate the risks posed by Vale’s securities.” Issuers should keep watch for further action by the ESG Task Force, especially as new rules on climate-related disclosures are considered.[7] A final draft of these rules should arrive by the end of the year.