Is the U.S. Law Enforcement Stronger than that of a Developing Country? The Case of Securities Fraud by Brazilian Corporations and Lessons for the Private and Public Enforcement Debate
68 Pages Posted: 6 Feb 2015 Last revised: 12 Feb 2015
Date Written: October 1, 2014
The corporate governance literature usually refers to the U.S. enforcement superiority to explain the premium that foreign firms experience when cross-listing in U.S. stock exchanges. This paper casts doubt on this hypothesis by analyzing two comparative case-studies of private and public enforcement actions taken against securities fraud in the United States and in an emerging market during the 2008 financial crisis.
Two leading non-financial Brazilian corporations cross-listed in the United States – Aracruz Celulose S.A. and Sadia S.A. – suffered billion-dollar losses when the Brazilian real unexpectedly plummeted in relation to the dollar. Despite previous disclosure that they engaged in pure hedging activity to manage risk, their great losses were considered to be the result of highly speculative trading in currency derivatives. Consequently, U.S. lawyers filed securities class actions in New York and Florida on behalf of ADR holders. Both corporations sued their Chief Financial Officers in derivative suits in Sao Paulo and Rio de Janeiro. The Brazilian Securities and Exchange Commission (CVM) started administrative proceedings against the companies, their officers, board members, and auditors; yet the SEC did not take any action.
Because the alleged wrongdoing was the same in the U.S. and the Brazilian actions, the parallel U.S. and Brazilian enforcement developments provide the opportunity for concrete qualitative assessments of the corporate governance issues, legal consequences and different outcomes in these two jurisdictions. The paper shows that U.S. enforcement is superior in terms of private shareholder financial recovery, but inferior when it comes to public discipline and out-of-pocket liability for corporate actors. The paper then advances normative conclusions for improving private and public enforcement, and for the comparative corporate governance debate.
Keywords: private enforcement, public enforcement, securities fraud, securities litigation, cross-listing, cross-listed firms, foreign firms, comparative securities law, comparative corporate law, corporate governance, international corporate governance, shareholder recovery, financial crisis, Brazil
JEL Classification: K22, K41, K42
Suggested Citation: Suggested Citation