SEC Sues Vale Over Dam Disclosures Before 2019 Disaster

The Securities and Exchange Commission’s lawsuit shows how the regulator is using investor-protection powers to go after public companies that suffered costly environmental or engineering crises. The January 2019 dam collapse near the town of Brumadinho in southeastern Brazil cost Vale at least $7 billion in legal payments and significant additional future costs to take down other structures that have the same upstream construction design as the Brumadinho dam.

A Vale executive,

Gustavo Pimenta,

said on an earnings call Thursday that the company strongly disagrees “with the claim and the suit, and we’ll certainly contest all the allegations.”

Securities laws require public companies to disclose facts and risks that are important to investment decisions. The SEC said Vale misled investors for several years about the risks posed by its dam, which contained rock and waste from iron-ore mining operations. The company manipulated multiple dam-safety audits and issued sustainability reports aimed at investors and other stakeholders that said Vale followed the “strictest international practices” for dam safety, the SEC said.

Vale had denied owning the sort of mine-waste dam near Brumadinho, underscoring the industry’s reluctance to disclose information about such structures. Vale’s denials to investors and the media came after another so-called upstream tailings dam, known as Fundão, failed in 2015, killing 19 people in what was then considered Brazil’s worst-ever environmental disaster. That dam was co-owned by Vale and Australia’s

BHP Group Ltd.

The SEC’s focus on what Vale wrote in sustainability reports is a new tactic for the agency, which says investors increasingly factor environmental issues such as climate change into their decisions. Companies use sustainability reports to explain their record and commitments for addressing environmental, social and governance (ESG) issues.

Sustainability reports aren’t filed with the SEC, unlike annual and quarterly financial reports, but the regulator argues that public companies still must communicate accurately when they use them.

“Many investors rely on ESG disclosures like those contained in Vale’s annual sustainability reports and other public filings to make informed investment decisions,” SEC Enforcement Director Gurbir S. Grewal said. “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.”

Miners have struggled over the past decade to attract investors to the sector, which faces concerns about pollution and other risks for people who live near dig sites. Miners have tried, often through sustainability reports, to persuade investors that their track record is better than what has been portrayed.

Vale said this month in a securities filing that it is committed to paying “fair, swift and equitable reparation” to parties affected by the disaster and would “vigorously contest proceedings we believe are without merit.”

The SEC filed its civil fraud lawsuit in Brooklyn federal court, seeking remedies such as fines and repayment of what the agency terms ill-gotten gains. Shares of Vale trade on the New York Stock Exchange and, according to the SEC, the company has raised over $1 billion by issuing debt in the U.S. The SEC said the Brumadinho dam collapse in early 2019 wiped out more than $4 billion of Vale’s market value, although its American depositary shares now trade higher than they did before the catastrophe.

Last year, at the beginning of the Biden administration, the SEC said a new task force would hunt for cases focusing on misleading climate-change disclosures, which was seen as an escalation of regulators’ interest in the issue.

The SEC had previously signaled companies should disclose climate-related risks if they were material to investors. During the Trump administration, it probed

Exxon

Mobil Corp. for whether the oil and gas giant played down business risks related to greenhouse-gas regulations. The SEC ended the investigation without making allegations of wrongdoing against Exxon.

Thursday’s case wasn’t brought by the task force, whose leader, Kelly Gibson, left the SEC in February to become a partner at law firm Morgan, Lewis & Bockius LLP.

The case against Vale resembles earlier lawsuits and enforcement actions the SEC has brought against companies accused of misleading investors about problems that later mushroomed into a full-blown crisis.

The SEC in 2019 sued

Volkswagen AG

, accusing the company of defrauding U.S. investors by not disclosing its awareness about a device that allowed its cars to cheat American emissions tests. The diesel-cheating scandal was a huge blow to VW, which paid more than $25 billion in fines, penalties and compensation to settle criminal and civil lawsuits. VW contests the SEC’s allegations and is litigating with the regulator in San Francisco federal court.

Write to Dave Michaels at [email protected]