Is 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
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Corporate governance literature usually refers to enforcement superiority to explain the premium that foreign firms enjoy when cross-listing in U.S. stock exchanges. This Article 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-Sadia S.A. and Aracruz Celulose 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 action complaints in New York and Florida on behalf of American Depositary Receipt holders. Both corporations sued their Chief Financial Officers in derivative suits in Sao Paulo and Rio de Janeiro. The Securities and Exchange Commission of Brazil (Comissao de Valores Mobiliarios) started administrative proceedings against the companies and their officers, board members, and auditors; yet the U.S. Securities and Exchange Commission did not take any action. Because the alleged wrongdoing was the same in the U.S. and 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 case studies show that U.S. enforcement was superior in terms of private shareholder financial recovery but inferior when it came to public discipline and out-of-pocket liability costs for corporate actors. This Article advances normative conclusions for improving private and public enforcement and the comparative corporate governance debate.