Brazilian and foreign shareholders must be wondering why decisive punitive action in an insider trading scandal involving one of Brazil’s biggest companies has been taken by the US Securities and Exchange Commission (SEC) and not the Brazilian equivalent, known as the CVM.
The SEC announced on February 21 that it had imposed penalties on the former chief financial officer of the meat processing company Sadia, amounting to around US$ 364,400 for illegally buying shares in another meat processing firm, Perdigão, just before Sadia tried to acquire it last July. A former employee of the ABN AMRO bank was also ordered to pay a total of around US$ 135,380 for his involvement.
The CVM issued a statement on February 22 saying that it had cooperated with the SEC investigation yet gave no idea when its own investigation would be completed. In other words, it has taken the US authorities, located almost 5,000 miles away in New York, just over six months to do what the CVM has failed to do on its own doorstep and punish the wrongdoers.
There was something strange about this matter – both in terms of corporate governance and insider trading – right from the day the Sadia bid was announced. The proposal was dubbed Brazil’s first hostile corporate takeover bid but if you had been away for a week you would have missed it.
The initial bid made on Monday July 17 was rejected on Tuesday by Perdigão as being too low. Sadia came back with an improved offer on Thursday, which was rejected by Perdigão on the same day. On Friday, Sadia then said it would not be making any further offer and gave up.
Had the deal gone through, it would have created the world’s fourth-largest food processing, with over 80,000 employees and annual revenues of around US$ 5.5 billion, according to Bloomberg.
Yet these decisions were taken at breakneck speed by a handful of people – the managers of some pension funds with stakes of around 55% in Perdigão and some Sadia executives.
Around 45% of shareholders in Perdigão had no say despite the fact that Perdigão shares are traded on the Novo Mercado of the São Paulo stock exchange which requires high levels of corporate governance and transparency and only lists companies with widely held shares, all with voting rights. Sadia’s shareholders were not consulted at all.
Those shareholders who may have wanted to hold on and await developments were not allowed to do so, due to the precipitous rejection by the Perdigão board of directors, which refused to even consider calling a shareholders’ meeting. Sadia’s hasty retreat also raises questions since it had originally given Perdigão shareholders until as far ahead as October 24 to make a decision.
When one thinks of the long drawn-out takeover battles in other countries, such as RJR Nabisco, so memorably described in the book "Barbarians at the Gate", Vodafone and Mannesman, Mittal and Arcelor, Oracle and People Soft one can only wonder why this affair was so short and sharp.
As to the insider trading, it was obvious to anyone that news of Sadia’s approach had leaked or had been leaked. On Thursday, July 13, when the market index, known as the Ibovespa, fell by around 2.4%, shares in Perdigão rose by 1.9% and Sadia shares rose by 1.1%.
On Friday, July 14, when the Ibovespa remained virtually flat, falling by 0.01%, Perdigão shares jumped by 5% and Sadia shares by 2.6%. On Monday, July 17, when the offer was made public, Perdigão shares soared by 17.6% and Sadia shares by 1.9%.
Anyone who chose to sell shares in either company, but particularly Perdigão, on that particular day would have made a nice profit indeed. Shares generally rise in the target company but it is not so common for them to rise in the bidder. This is another odd feature of this affair.
Considering these factors, it seems strange that the CVM has not acted sooner or even issued an interim report. A senior official at the CVM’s headquarters in Rio de Janeiro told me on February 26 that its own investigation was continuing and he had "no idea" when an announcement would be made. Nor would he give a rough estimation in terms of weeks or months.
The official also seemed unconcerned that there was no English version of its statement, issued on February 22, on its site and was unsure if an English version would be posted. Considering that both Sadia and Perdigão are traded on the NYSE, one would expect an English version of such an important announcement to be available.
Brazilian companies have made great progress in terms of corporate governance in recent years and the Novo Mercado has been a great success in attracting new and existing companies. Foreign investors own the majority of shares in many of these companies. There are now 35 Brazilian companies listed on the NYSE where their shares are traded as ADRs.
However, this episode shows that the capital markets in Brazil still have a long way to go before they match standards in more mature markets.
Investing in shares is a risky business anywhere but investors are unlikely to be prepared to take on additional risk due to poor oversight by the board of directors of companies and a dilatory approach by the regulatory body.
1) Under the SEC agreement, the two men "Without admitting or denying the allegations… have each consented to the entry of a final judgment imposing injunctive and monetary relief." The SEC also stressed that it was still investigating the affair and referred to a former senior member of the Sadia board of directors who had resigned over his involvement in the scandal.
The deal means that presumably no criminal charges will be taken against the men in the US. The CVM pointed out that although it could also reach a similar agreement it could also hand over the results of the investigation to the public prosecutor’s office.
2) For more on this subject my article "Brazil’s Stock Market – the Path to Riches or Rags" Brazil Political Comment, November 7, 2006.
John Fitzpatrick is a Scottish writer and consultant with long experience of Brazil. He is based in São Paulo and runs his own company Celtic Comunicações. This article originally appeared on his site www.brazilpoliticalcomment.com.br. He can be contacted at email@example.com.
© John Fitzpatrick 2007