The Impact of the Financial Crisis on Nonfinancial Firms: The Case of Brazilian Corporations and the 'Double Circularity' Problem in Transnational Securities Litigation

Theoretical Inquiries in Law, vol. 16.1, pp. 131-181, 2015

Yale Law & Economics Research Paper No. 518

52 Pages Posted: 12 Nov 2014 Last revised: 5 Feb 2015

Érica Gorga

Yale University - Center for the Study of Corporate Law; São Paulo Law School of Fundação Getulio Vargas FGV DIREITO SP

Date Written: November 10, 2014

Abstract

This Article discusses the impact of the international financial crisis on Brazilian capital markets. While the banking industry was not severely affected, leading nonfinancial corporations experienced severe financial turmoil. Two Brazilian corporations cross-listed in the United States — Sadia S.A. and Aracruz Celulose S.A. — suffered billion-dollar losses when the Brazilian real unexpectedly plummeted in relation to the dollar. Despite earlier disclosure that these companies had engaged only in pure hedging activity, these great losses were found to be the result of their highly speculative trading in currency derivatives. Consequently, several private lawsuits were filed both in the United States and in Brazil.

This Article takes a novel approach to the transnational securities litigation debate by examining the particular consequences of private litigation in a developed and in an emerging country. It compares the types of lawsuits filed and their final outcomes. Despite substantially similar alleged wrongdoing, the outcomes for securities holders in each jurisdiction contrast strikingly. Only U.S. investors of both companies were able to obtain substantial financial recoveries; Brazilian investors obtained none. This Article examines the reasons behind these discrepant results and the consequent economic distributional effects on global securities markets after the U.S. Supreme Court decision in Morrison.

The Article argues that Morrison aggravates such (i) shareholder cross-border non pro rata compensation and (ii) transfers of company value from foreign to U.S. investors. It identifies a set of costs borne by foreign investors, and so far neglected by scholars, as a consequence of the current status of U.S. and international securities law regimes. These costs are the result not only of the typical “circularity problem” in securities litigation, but also of a “double circularity problem” as they fall on foreign shareholders who also suffered equivalent damages to those experienced by the U.S. class being compensated. The Article then discusses potential policy reforms for fixing transnational securities litigation.

Keywords: transnational securities litigation, securities fraud, cross-listing, cross-listed companies, financial crisis, securities regulation, comparative securities law, private enforcement, international capital markets, internacional corporate governance, Brazil, Brazilian capital markets

JEL Classification: K22, K41, K42

Suggested Citation

Gorga, Érica, The Impact of the Financial Crisis on Nonfinancial Firms: The Case of Brazilian Corporations and the 'Double Circularity' Problem in Transnational Securities Litigation (November 10, 2014). Theoretical Inquiries in Law, vol. 16.1, pp. 131-181, 2015; Yale Law & Economics Research Paper No. 518. Available at SSRN: https://ssrn.com/abstract=2522580 or http://dx.doi.org/10.2139/ssrn.2522580

Érica Gorga (Contact Author)

São Paulo Law School of Fundação Getulio Vargas FGV DIREITO SP ( email )

R. Rocha, 233, Bela Vista
São Paulo, 01330-000
Brazil

Yale University - Center for the Study of Corporate Law ( email )

127 Wall Street
New Haven, CT 06511
United States
203-988-6500 (Phone)

HOME PAGE: http://www.law.yale.edu/faculty/EGorga.htm

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