Publications

Category: White-Collar Crime

The Superior Court of Justice (STJ) opened a crucial criminal precedent by granting, via habeas corpus, the withdrawal of the freezing of the defendant's assets because of the unreasonable delay in the criminal proceeding (three years between the freezing of the assets and the pressing of charges). The Court's decision was handed down on March 22, at the judgment of the Ordinary Appeal in Habeas Corpus 147.043/SP.

The decision is relevant because, in recent years, it has expanded the legal hypotheses for the decree of provisional remedies for indefinite periods. There is also a disproportion of the amounts of the restrictions, no differentiation between licit and illicit assets, and even vagueness about the kind of the measure imposed, which is often called "unavailability" of assets.

The abusive constriction of assets can cause immeasurable damage to the accused, who must face the criminal process without the resources affected by the provisional remedy. To withdraw the freezing, it is necessary to prove the absence of just cause for criminal prosecution what is an apparent inversion of the burden of proof.

In the case in question, the habeas corpus originates from a criminal proceeding derived from Operation Brazilian Cost, a splitting of Operation Lava Jato underway in the Federal Court of São Paulo/SP. The criminal proceeding investigates the existence of a criminal organization involving public officials and people linked to a company responsible for the development and management of consigned credit control software, with payment of bribes to public officials and political party.

In an ordinary appeal in habeas corpus, the defense claimed, in summary:

- the existence of an excess of time of the criminal case, since it had been ready for follow-up for more than a year, and there was not even a forecast for the beginning of the criminal trial, since the Court did not even decided about the receipt of the accusation offered two years ago; and

- that the central point of the original claim and ordinary appeal was not the maintenance of the freezing of the appellant's assets per se (which has lasted for almost five years), but the excess of time for the formation of guilt that could legitimize the provisional remedy.

STJ precedents

The STJ’s precedents are firm in the sense of not accepting the request for withdrawal of property remedies with the use of habeas corpus. The Court holds that "the determination of freezing of assets (...) does not characterize current or near constraint on his freedom of locomotion, for which reason the writ is not the appropriate way to address the issue. (AgRg in HC 508.036/SC, reporting justice Jorge Mussi, Fifth Panel, judged on 05/28/2019, DJe 04/06/2019)

In addition, the Court has established a precedent that "the procedural deadlines do not have the characteristics of fatality and non-extendability, making it essential to reason the excess of time, not considering the mere arithmetic sum of the deadlines for procedural acts (precedents)" (RHC 88.588/MS, reporting minister Felix Fischer, Fifth Class, judged on 14/11/2017, DJe 22/11/2017).

In the judgment of the Ordinary Appeal in Habeas Corpus 147.043/SP, the dissenting vote of the minister, Rogerio Schietti Cruz, emphasized the need to observe precedents and respect the case law of the STJ.

The minister said that the correct way to address the issue is to request restitution to the judge and, of this rejection, as Article 593, II, of the Code of Criminal Procedure, the appeal. If the situation is teratological, a writ of mandamus may be filed and, in the STJ, an appeal in a writ of mandamus against a decision denying it at its origin.

However, the other ministers that made up the panel understood that the controversy of the ordinary appeal was whether there is excess in the formation of guilt and that, consequently, the issue would affect the maintenance or not of precautionary measures.

The rapporteur's vote

In his vote, the rapporteur emphasizes the premise that "the guarantee of reasonable duration of the process prevails both for judicial proceedings and for pre-procedural investigation, and should be based not only on the arithmetic criterion of time but also on the nuances of prosecution.

The rapporteur also pointed out the need to ensure isonomic treatment among the accused, even in habeas corpus, considering that, previously, the regional Court had already granted the withdrawal to a codefendant in a writ of mandamus for the delay in the progress of investigations.

The illegal constraint in the present case would be configured, therefore, in face of the abusive use of the property provisional remedy, which directly violated the guarantee of the reasonable duration of the process, foreseen in article 5, subsection LXXVIII, of the Federal Constitution of 1988, according to which "everyone, in the judicial and administrative sphere, is assured a reasonable duration of the process and the means that guarantee the celerity of its proceedings".

Furthermore, article 131, item I, of the Code of Criminal Procedure states that when the freeze is determined during the course of an investigation, it must be withdrawn if the charges are not pressed within 60 days. In the case in question, the restriction had already lasted for more than five years, and the charges had not even been accepted. Therefore, the norm could be used as a parameter to assess the reasonableness of the length of the process.

Thus, although habeas corpus is a constitutional remedy aimed at guaranteeing the right of locomotion, its use must be admitted in cases where the excessive delay in the formation of guilt can cause harm to the constitutionally guaranteed right of the accused.

Although there is no definition in the legal system on what is understood by the reasonability of the duration of the process, the constriction of the accused's property cannot persist indefinitely in time, when there is not even a forecast for the end of the case and, in this case, for the very receipt of the charges.

Category: Compliance, investigations and corporate governance

With the enactment of Law 12.846/13 (Anti-Corruption Law or Brazilian Clean Company Act) and its Regulatory Decree 8.420/15, the responsibility to combat corruption ceased to be a majority public attribution and began to be shared with private sector companies, which became allied in this process by developing more upstanding corporate environments.

As a way of seeking an environment of greater collaboration between the public and private spheres in the fight against corruption and encouraging the implementation of integrity programs, the so-called anti-corruption stamps have emerged.

Normally granted by entities of the Public Administration, the stamps recognize the adoption of integrity measures by legal entities, highlighting them for their good corporate practices of compliance.

By publicly recognizing these good practices, the Public Administration encourages preventive action of companies in relation to integrity, showing that the fight against corruption can no longer occur only by sanctioning means.

The use of positive and preventive corporate governance tools in companies fosters a more healthy corporate performance and brings benefits to the business and society as a whole.

In addition to being able to gain public recognition, a compliance program well implemented, aligned with best market practices and Brazilian anti-corruption legislation, it helps the legal entity to protect itself from risks arising from breach of integrity, mitigating risks inherent to the interaction with the Public Administration.

A compliance program  can also promote an ethical culture capable of being spread to the entire company, in addition to the third parties with whom it relates. In financial terms, the program can be a mechanism to reduce economic losses resulting, for example, from internal fraud or, even more serious, harmful acts committed against the Public Administration, which can lead to financial sanctions and reputational damages.

It is also worth noting the positive image value that the recognition of compliance initiatives can generate for legal entities and the brand itself, as an important asset for attracting clients and businesses, increased credibility in the relationship with the Public Administration and other stakeholders, such as partners and other third parties aligned with company values.

Considering the benefits of preventive action in the sphere of corporate integrity, initiatives have emerged to create regional anti-corruption stamps. In early 2022, the Supervision, Governance, Transparency and Control Committee of the Legislative Chamber of the Federal District (Comissão de Fiscalização, Governança, Transparência e Controle da Câmara Legislativa do Distrito Federal) approved the Projeto de Lei (“PL” - Draft Bill) 1.237/20, which creates an anti-corruption stamp for companies that adopt integrity programs. If approved, the PL may be one of the first local laws to create such a stamp.

At the state level, there is the PL 47/18, pending in state of Espírito Santo, which suggests the creation of an anti-corruption stamp to be granted to legal entities governed by private law that adopt good conduct practices in the state. Espírito Santo is known as one of the first states to regulate the Anti-Corruption Law and was recognized and well evaluated by organizations such as Transparency International for its anti-corruption initiatives.

In the municipal sphere, PL 722/17 of the city of São Paulo stands out, which presents a proposal for a stamp valid for two years and subject to renewal. The criterion for granting and renewing this stamp is the submission of a profile report and a compliance report to the competent body. These materials are similar to those introduced by the Office of the Comptroller General (CGU) in the evaluation of a company's integrity program as part of an Administrative Liability Proceeding (PAR) or Leniency Agreement, based on the legal basis of the recommendations contained in the items of Article 42 of Regulatory Decree 8.420/15.

Other capitals also have similar initiatives, such as PL 68/19 in Recife, which suggests the creation of an anti-corruption stamp designed to attest to the quality and integrity of companies installed in the municipality, and PL 2.741/20, in Porto Velho, which suggests the adoption of an anti-corruption stamp for companies that adopt integrity programs.

In addition to legislative proposals not yet in force, there are already options in the Brazilian market for companies that want to obtain public recognition of their efforts in the fight against corruption.

In 2010, the CGU, in a joint initiative with the Ethos Institute of Business and Social Responsibility, created the Pro-Ethics Company. The initiative was restructured in 2014 to adapt to the changes brought about by the Anti-Corruption Law. In addition to the expansion of the number of participants, the dissemination around the companies positively evaluated increased, with the granting of a specific stamp that can be used by them.

With this restructuring, the Pro-Ethics Company began to stand out in the market, receiving even international recognitions from the OAS (Organization of American States), The Organization for Economic Cooperation and Development (OECD) and the United Nations Office on Drugs and Crime (UNODC). The program was also awarded in the 14th edition of "Compliance & Ethics Award", award Society of Corporate Compliance & Ethics (SCCE).

The evaluation of the Pro-Ethics Company is documentary and follows a pre-established regulation, in which there are criteria for registration and guidance on filling out a Profile Analysis form and an evaluation questionnaire. Although the analysis is documentary, the judging committee, composed of public and private sector entities recognized in the business environment, can, for example, conduct tests to evaluate the whistleblower channel and conduct an electronic research with the company's employees to assess the perception about the application of the integrity program. The maximum rating is 100. To be approved and included in the list of Pro-Ethics Companies, the company must receive at least 70 points.

There are also other federal initiatives related to specific branches of business, such as Infra+Integrity Promotion Stamp, for the infrastructure sector, and the More Integrity Stamp, for agribusiness companies and agribusiness worker-owned companies. These initiatives also undergo documentary evaluations, according to a predetermined regulation and with their own criteria.

The Infra+Integrity Promotion Stamp, for example, requests the completion of a form on the compliance program, the submission of proof of signature of the Business Pact for Integrity and Against Corruption (promoted by the Ethos Institute), among other requirements contained in Ordinance 127/21 of the Ministry of Infrastructure. There are also social responsibility requirements, such as proof of "nothing on record" from the Dirty List of Slave Or Slave Labor, and negative criminal and negative certificates of environmental debts.

The More Integrity Stamp follows the ESG trend and provides for the joint evaluation of three dimensions – anti-corruption, labor and sustainability – also with specific documentary requirements to be presented by the participating legal entities. A brand use manual guides the awarded company through the visual identity of the three stamps to be used by positively evaluated companies:

• Green Stamp – First Award;
• Yellow Stamp – Renewal;
• More Integrity Stamp – Special Version, for companies and agribusiness worker-owned companies awarded with the More Integrity Of MAPA Stamp and the Pro-Ethics Company Stamp.

Although these stamps, for the most part, recognize only the existence of integrity practices in a documentary manner, without evaluation on site or an analysis of the effectiveness of such initiatives, the requirements for their granting are detailed and oriented to contribute to the installation of effective compliance mechanisms for legal entities.

Considering the technical stringent and robustness of ISO standards, companies can also opt for certification in specific ISOs related to integrity, especially ISO 37001, anti-bribery management, and the latest ISO 37301, compliance management.

In the always positive exercise of implementing good practices, companies that aim to recognize their compliance initiatives must first of all understand what their day-to-day needs are. This can be done, for example, by conducting a gap analysis, which helps to decide which type of recognition available is the most appropriate for the business, without losing sight of the possibilities that may arise in the market or even by legislative initiative.

It is important to note that an anti-corruption stamp is only a consequence of the controls and policies previously implemented in the company as part of effective integrity practices, whose main objective is to implement or improve a compliance program so that the company reaps the rewards of effective actions and not merely pro forma.

Formal recognition can be facilitated after the company has mapped and addressed its specific risks, improved its internal controls and initiatives, and adequately appropriated its internal structure of compliance and its operation for a possible evaluation. The reputational benefit of obtaining the anti-corruption stamp after this effort will be driven by the effective benefit that a robust compliance program can go into business.

Category: Litigation

The evidence production phase plays a key role in a lawsuit, and may be decisive for its success – or not. The current Code of Civil Procedure (CPC) introduced the early production of evidence as an autonomous claim. Therefore, the production of evidence will no longer be a procedure phase, or an injunction plead, but a litigation claim, which expanded – and greatly – its suitability.

What previously required the proof of urgency can now be filed with the certainty that evidence will be produced but not analyzed by the judge. As a result, the involved amount will not be related to the economic benefits expected by the Plaintiff which will reduce the payment of judicial costs and, except in cases of resistance by the defendant, lawyers’ fees do not apply. Moreover, art. 382, §4, of CPC does not allow the parties to file a defense or an appeal, except in case of total dismissal of the early evidence claim.

In accordance with the Article 381 of the CPC, the filing of the lawsuit to be suitable requires the demonstration that the evidence is needed to:

• prevent certain facts from becoming impossible or very difficult to be verified;
• enable an alternative dispute resolution; or
• avoid or justify the assessment of future claims.

Except for the first hypothesis, which is still related to the urgency requirement, the others can be claimed with greater flexibility.

In addition to facilitate the production of evidence, the new Code of Civil Procedure was even more generous in trying to forbid any kind of defense or appeal to reduce the number of disputes and, as in other articles of the new CPC, to stimulate alternative dispute resolution methods and the autonomy of the parties.

As a result, in theory, the party can avoid the knowledge phase of the lawsuit and move straight to the production of different types of evidence (cumulation is allowed). This wide range of scenarios in which the early production claim is suitable is combined with the restriction of eventual defense or appeal and the lower risk regarding the payment of judicial costs and lawyers’ fees, which reduces the financial exposure of filing such type of claim.

Despite the legal provisions mentioned above, case law has already reduced some attractive points of the demand, mainly to prevent abuses and ensure due compliance with principles of civil procedural law.

Effects on the corporate context

In corporate law, the early production of evidence claim has benefited mainly minority shareholders and started to be used as an instrument to access information of the company and to exercise the right of supervision. This is so because the claim can be filed only with a short description of the context involved, based on the Article 381 of the CPC. Therefore, minority shareholders gained a judicial means of requesting the disclosure of documents regarding the company without incurring in significant costs. In this case, it would not be necessary to effectively litigate against the company, the other partners or the managers.

Furthermore, considering that the power to determine the delivery of a specific document is exclusive of the judicial courts, the advance production of evidence may be used for the minority shareholders to disassociate from an arbitration clause. This hypothesis, however, is discussed by scholars.

In case law it is already possible to identify lawsuits regarding the early production of evidence filed by minorities to obtain:

• accounting and financial information of the company, even to determine the calculation of amounts due in cases such as withdrawal
• documents related to corporate transactions; and
• contracts in general, including those related to strategic issues or related parties, for example.

Therefore, it is perceived the use of the early production of evidence lawsuit by minority partners to obtain access to sensitive information about the company, corporate transactions, including in relation to valuation, and investigation of unfair competition.

Due to the increased use of the early production of evidence lawsuit, doctrine and case law began to modify the understanding towards Article 382, §4º, of the CPC, which prevented, completely, the presentation of defense or appeal, except when the early production of evidence is totally rejected.

Therefore, for example, is already allowed defense on procedural issues or the filing of an appeal, including the arguments related to:

• interest in court pleading;
• possibility of access to confidential documents; or
• legitimacy for a certain party to be able or not to require the submission of a certain document or the production of any evidence.

This modification of the legal provision ensures the application of principles of civil procedural law such as broad defense and contradictory – principles that were even enhanced in the current CPC, by means of hearing the parties after any new document be attached to the case or after a judge’s decision on a subject not yet addressed by the parties.

In addition to procedural defenses, in the corporate context, it is also necessary to determine the extent and scope of the right of supervision and access to information by minority shareholders.

Although the right of supervision is an essential right of the shareholder, pursuant to Article 109, III of the Law 6,404/76, it is neither unlimited nor unrestricted and must be exercised in the form of the law. The same reasoning applies to other corporate types, especially to limited companies.

It is undeniable that the duty to supervise – as well as any other right – cannot be exercised in an abusive manner or to impair the progress of social business and the management of the company.

In addition, it should be recognized that many documents and data that minorities intend to access can be strategic for the company, subject to confidentiality obligations or even related to business secrets or competitive sensitive information.

In cases such as these, the judge is expected be reasonable when evaluating in a balanced way the right of supervision of minority shareholders, the merits of the request and the impacts on the company, including in relation to the confidentiality of documents presented in the lawsuit.

Another concern is with the equal treatment of the shareholders. When not all shareholders are parties to the demand, could the management disclose information to the shareholders who have filed such a measure or should it guarantee the same access to the others?

Case-law required the demonstration, by the plaintiff, of the suitability of the measure, its interest in court pleading and, finally, its legitimacy for such a claim, which will only be analyzed after the judge's assessment of procedural issues related.

On the one hand, the relevance of the early evidence lawsuit to the legal system is undeniable, on the other hand, it is also undeniable that the easing of requirements should not be used as a loophole for abuses. In the corporate context, this has even more relevance, to preserve the conduct of the corporate businesses. It is expected that the measure could be an additional tool for minority shareholders without reverting into an abusive practice.

Category: Labor and employment

The deputy chief judge of the Superior Labor Court (TST), Justice Dora Maria da Costa, recognized, on May 20, the general repercussion of extraordinary appeals RE 1387795 (filed in the record of Labor Action 0010252-81.2015.5.03.0146) and RE 1387794 (filed in the record of Labor Action 0010023-24.2015.5.03.0146), both represented by the law firm Machado Meyer.^[1]

The issue is possible violation of the right to due process of law, the adversarial process, and a full defense, as well as of the principle of legality, when companies are included in the as defendants in labor proceedings in the execution phase, due to alleged joint and several liability with the principal debtor.

On May 24, the Justice clarified that, while the Federal Supreme Court (STF) has not analyzed the controversy over the existence of general repercussion and whether the Labor Courts have violated the principles cited, the decision to suspend proceedings that deal with the issue will be incumbent on each reporting judge for the corresponding appeal within the TST and the TRTs.

In any case, with the Justice's decision, all the cases that reach the deputy chief judge's scrutiny will be put on hold, as in the cases that gave rise to the aforementioned decision, highlighted above.

Understand the case

In the case under discussion, the company that filed the Extraordinary Appeals in question was surprised by its inclusion in as a defendant in the claim when the case was already in the execution phase, after the bankruptcy of the principal debtor company was found.

At the time, the Regional Court of Labor Appeals for the 3rd Circuit (Minas Gerais) upheld the decision handed down by the Judge of the Labor Court of Nanuque, which recognized the existence of an economic group between the judgment debtor company and the main debtor, on the understanding that there was coordination between the companies, and ordered the inclusion of the former as a defendant and its summons to pay.

The TST did not accept the appeals initially filed by the company. However, when reviewing the extraordinary appeal, the deputy chief judge of the TST recognized that the matter under discussion is extremely controversial and must be decided by the STF.

The decision that guarantees suspension of the proceedings in the enforcement phase in which companies are included as defendant without having the right to an adequate defense in the fact-finding phase is of utmost importance. One of the reasons is the need to guarantee the effectiveness and correct application of the provisions of article 2 of the CLT and its respective paragraphs, if the STF decides that it is impossible to include companies at such a late stage in the labor proceeding.

It is not difficult to understand the great injustice that companies included in the execution phase face, because at this stage of the proceeding it is impossible to discuss whether there was a legitimate formation of an economic group. This is because, for procedural reasons, once the fact-finding phase of the lawsuit has been exhausted, companies can only discuss, in the execution phase, the amounts they will be forced to pay or any direct and literal constitutional violations that do not permeate the analysis of the infra-constitutional legislation.

It is important to ponder that, although the effectiveness of judicial relief is an important constitutional principle, one cannot, under the pretext of allowing the worker the execution of his judgment debt claim, accept that this claim be borne by a company that should never have been party to the dispute. The risk is that it also violates the constitutional right that everyone has to not be deprived of his property without due process of law (article 5, subsection LIV, of the Federal Constitution).

To understand the impossibility of including in the execution phase a company that did not participate in the fact-finding phase does not mean, in any way, it is impossible to enforce a decision, but to prevent a company that should not be liable for a debt from bearing it. It is nothing more than the application of several basic constitutional precepts and guarantees, especially the principle of the adversarial process, the principle of a full defense, and due process of law.

As well acknowledged in the decision by Justice Dora, the issue has already reached the STF through Motion to Resolve a Breach of a Fundamental Precept (ADPF) 488 and 951, which deal precisely with the unconstitutionality of including in the labor execution phase a company belonging to an economic group that did not take part in the case and is not included in the enforcement order, since this violates the fundamental guarantees of due process of law, a full defense, and an adversarial proceeding.

Although the ADPFs mentioned are still awaiting judgment, there is a good chance that the Supreme Court will decide that it is impossible to include a company that did not participate in the fact-finding phase in the execution proceeding.

This is because, on September 14, 2021, STF Justice Gilmar Mendes granted relief to an extraordinary appeal (ARE 116036) to modify the decision by the Labor Court for execution against a company in a similar situation.

The decision, in our opinion, is correct, because it guarantees application of what the law provides. According to paragraph 5, of article 513, of the Code of Civil Procedure, execution of judgment cannot be filed against the guarantor, co-obligor, or co-responsible party who did not participate in the fact-finding phase. It is incumbent on the Labor Court, therefore, to apply the law or declare the unconstitutionality of the provision.

However, the TST has failed to apply the legal provision, without having previously declared its unconstitutionality, which violates the provision that such a matter must be resolved by the court en banc (Federal Constitution, article 97). The TST's position also violates the STF's Binding Precedent 10, according to which the en banc jurisdiction rule (Federal Constitution, article 97) is violated by decisions of a single body of the appellate court which, despite not expressly declaring the unconstitutionality of a law or normative act of the Government, prevents its application, in whole or in part.

Other justices of the STF have already taken a position that it is not possible to execute the judgment against the party that did not participate in the fact-finding phase, as in the in limine decisions issued by Justice Nunes Marques in Constitutional Complaints 51.756 and 51.682, both handled by Machado Meyer.

Some plaintiffs' lawyers point out that it is difficult to include, in the fact-finding phase, all the companies that may be liable for the labor debt. However, this argument is not justified. It is the worker who determines the formation of the defendants in the claim.

If, on the one hand, no one is obliged to litigate against anyone they don't want to, on the other hand, it is unreasonable to think that the same worker who indicated which companies he was interested in including as a defendant in the lawsuit, could, in execution, indicate companies other than those that were part of the fact-finding phase so that they could respond for a judgment debt of which they were not even aware.

If the STF confirms the impossibility of including a company in the execution phase, it will bring about legal certainty and encouragement for companies and investors, who end up having difficulties in or even impediments to defending themselves extensively not only regarding their liability (if in fact they belong to the principal debtor's economic group), but also regarding the prayers for relief made by the worker, which are often not defended in a correct manner by the insolvent debtor.

The decision would also prevent expansion of the concept of economic group that has been promoted by the Labor Courts by finding that mere corporate and investment operations are sufficient to establish an economic group, without observing the correct corporate definition of the term.

In other words, the STF's decision can bring about legal security with a definitive solution for the issue and can certainly contribute to promotion of investments. The effect would be especially positive for the M&A and private equity market, where transactions are often incorrectly interpreted by the labor courts.

^[1] The leading cases selected by Justice Dora to represent the controversy were: case 10023-24.2015.5.03.0146, in which the 05/20 decision was issued, and case 10252-81.2015.5.03.0146, covers the same discussion and is being handled by the law firm Machado Meyer.

Category: Capital markets

Alessandra de Souza Pinto, Clarissa Freitas, Rafael Costa Silva and Tathiana Litter Bussab

The board of the Brazilian Securities and Exchange Commission (CVM), unanimously, acquitted the defendants in the context of a sanctioning administrative proceeding initiated to determine the responsibility of members of the board of directors for breach of the diligence duty , provided for in article 153 of Law 6,404/76 (Corporation Law).

The trial, which occurred in May, had its origins in complaints filed before the exchange commissionby a minority shareholder of the company.

The accusation was formulated for alleged failure to comply with the aforementioned fiduciary duty in monitoring of the terms and conditions of the trademark license agreement entered into with vehicle of the company's controlling shareholders (license agreement).

Prior to the establishment of the sanctioning administrative proceeding, the use of the trademarks had already been analyzed by the technical area of CVM, in a process initiated to verify any violation of the fiduciary duties that should be observed by the company's managers during the licensing of the trademark.

Although, at the time, no elements were identified to support the initiation of a sanctioning proceeding, the technical area of CVM found the existence of an inconsistent information in the company's reference form. According to the document, the licensing agreement was commutative and had been negotiated under "market" conditions, without describing the procedure adopted by the company's management to reach this conclusion.

After further investigation arising from minority shareholder complaints, the technical area of CVM understood that the directors would not have observed their diligence duty. It was pointed out the insufficient periodic review of the licensing agreement, which, besides of having economic relevance, directly benefited the company's controlling shareholders and had not been approved by the other shareholders, different treatment from that given to other contracts entered into by the company.

The term of the indictment stated that:

• it was responsibility of the directors to make efforts to monitor the terms of the contract on a routine and continuous basis;
• the defendants, by choosing not to analyse alleged existing warning signs, neglected the responsibility to investigate, comprised in the diligence duty; and
• the decision not to amend the licensing agreement and the consequent maintenance of the payment of royalties was taken without the necessary analyses having been carried out, as attested by the lack of evidence of sufficient discussions and studies on the subject.

For diverging from the arguments presented by the technical area, the reporter director of the sanctioning administrative proceeding voted for the acquittal of the defendants in relation to the accusation of breach of the duty of care. He did not identify any omission in the monitoring of the license agreement by the company's directors.

The reporter director considered that the accusation did not provide elements that evidenced that the information used by the company's board of directors was insufficient to guide the decisions regarding the licensing agreement. Thus, the duty to "inform one another", which is considered one of the underduties of the diligence duty, had also not been violated by the directors.

After analyzing the facts, the CVM board followed the vote of the reporter director of the sanctioning administrative proceeding and decided, unanimously, for the acquittal of all the defendants.

Category: Corporate

In a rare procedure, two former directors of a publicly-held company in the oil and gas sector reversed CVM's decision issued in the administrative proceeding CVM RJ 2014-3225, which had considered both of them guilty for the use of privileged information (insider trading) and applied a fine of almost R$ 800,000.

Insider trading

The illegal conduct known as insider trading is based in four elements:

• existence of relevant information not disclosed to the market;
• privileged access to relevant information by the insider, that is, someone who is aware of the company's business;
• use of relevant information for securities trading; and
• purpose of obtaining an unfair advantage for itself or for third parties.

Insider trading is an illegal conduct because of the impact it may have on the functioning of the capital markets and on the pricing of traded securities, considering the asymmetry of information between those who know the company (such as officers, directors and others) and investors. The prohibition, therefore, is justified to preserve the credibility of the capital markets.

It is often difficult to identify and produce evidence of such illegal conduct, especially in cases of the so-called secondary insiders, which are people who receive information from the primary insiders, those who have direct contact with inside information.

Due to the difficulty in producing evidence, the use of signs and clues as evidence by the CVM is already peaceful. However, such signs and clues shall not be mere indications, but a strong trace of the illegal conduct. To support the accused conviction, such sign shall be robust:

"It is necessary to differentiate the evidence from the a strong indication. The mere sign does not authorize the conviction. These signs, when represented by multiple, firm, convergent and serious evidence authorize a robust and well-based conclusion about the fact that is to be proven".^[1]

Thus, the evidence of the unlawful act may be based on a set of sings capable of leading the judge to reasonable and robust conviction about the fact under analysis. That is, there should be no doubt about the culpability of the agent, under penalty of discharge: "It is required, however, that such indications be convergent and univocal. The existence of sufficient counterindications to inspire doubt in the judges should lead to acquittal, in honor of the principle of the presumption of innocence."^[2]

The administrative proceeding

The administrative proceeding was initiated by the Superintendence of Market Relations and Intermediaries (SMI). The purpose was to investigate the possible use of insider information by publicly-held company directors in the trading of shares prior to the disclosure of material facts related to the absence of oil and gas in oil wells held by the company abroad in July and September 2013.

The conduct would represent a violation of Article 155, §4, of Law 6,404/76^[3] and article 13, §1°, of CVM Instruction 358/02,^[4] (revoked and replaces by CVM Resolution 44/21). Both articles deal with the prohibition of using privileged confidential information not disclosed to the market.

The charges, in short, were:^[5]

• First director – sale of 300,000 shares for R$ 633,289.00, on July 7, 2013, and repurchase for R$ 513,719.00 one week after the disclosure of the first material fact, on July 19, 2013; and sale of 350,000 shares, on September 5, 2013, for R$ 563,260.00, before the drop in the value of the shares on September 10, 2013, due to the disclosure of the second material fact on September 9, 2013. The transaction would have saved R$ 228,280.00.

• Second director – sale of 500,000 shares on July 17 and 18, 2013 for R$ 1,049,204.00 (before the material fact of July 19, 2013) and sale of 52,600 shares on September 6, 2013 for R$ 80,478.00 (before the material fact of September 9, 2013), which would have saved R$ 181,400.60.

In the trial by CVM, at first, the rapporteur established that the absence of commercial value of oil wells held by the company abroad would be a relevant information, demonstrating the first element of the insider trading.

Having established the first requirement, in relation to the first accused, the rapporteur highlighted that the transactions were performed on a sporadic basis and in an urgent scenario, in which the sales order were transmitted establishing the repurchase intent. Considering the existence of "serious, robust and convergent evidence", the accused was convicted by CVM.

In relation to the second accused, in the first transaction, the rapporteur considered as decisive evidence for the conviction, the performance of the transaction on a sporadic basis and the transcript of the conversation between the accused and the employees of the intermediary of the negotiation, in which the accused reveals to be aware that the company would be preparing a material fact with bad news for the market about the exploitation of the well. As far as the second transaction, the rapporteur considered that there was no sufficient evidence towards the accused’s knowledge of such material. Therefore, in relation to such charge, the accused was found not guilty.

Against the CVM's decision, both directors filed an appeal to the National Financial System Appeals Council - CRSFN (case 10372.000123/2017-22), which unanimously dismissed the appeal and upheld the CVM's decision.

The judicial lawsuit

Then, the former directors filed an annulment lawsuit against CVM and the CRSFN before the Federal Justice, claiming, in summary, that:

• there was no negotiation based on insider information;
• when they issued the order to sell the shares, the information related to the wells did not exist;
• the plaintiffs were profoundly experts in the oil and gas sector, in which the company operated, and therefore their ability to analyze public information in the sector would be superior in relation to the average investor;
• historically, the company's share price was declining and, for such reason, there was public information to support the directors' decision;
• the leakage of information would not have been demonstrated; and
• CVM would not have appreciated all the facts and evidence, having focused primarily on the telephone recordings.

The judge of the 32^nd Federal Court of Rio de Janeiro dismissed the claim of lack of standing to be sued raised by both CVM and the Federal Union, because he understood that there were conducts attributed to both defendants (CVM and CRSFN), that is, the conviction decision by CVM and the maintenance of such decision by CRSFN. In addition, the judge dismissed the claim of lack of interest to act by the plaintiffs raised by the defendants due to the payment of the fines. The judge found that the plaintiffs had interest in the lawsuit, in view of the intention of obtaining the reimbursement of the debt.

On the merits, the judge established that the subject was mainly related to the strength of the evidence relating to the prior knowledge – or not – of an insider information by the plaintiffs. In this regard, the judge considered that the analysis of the evidence is attributed to the judge. Therefore, according to the sentence, no way to prevent the wide review of evidence and its value by the Judiciary.

Having established the premise above, the decision reinforced the need to demonstrate the four elements for the characterization of the insider trading: the existence of material information not disclosed to the market, the privileged access to it, the use of such information for negotiation and the purpose of obtaining advantage. For the directors (plaintiffs of the lawsuit), access to inside information could only be presumed in the case of primary insider which would not be the case for the plaintiffs at the time.

Considering the timeline of the events, the court considered that it would not be reasonable to assume that the plaintiffs would have had access to insider information before the company's officers and key management. Also, it would not be reasonable to presume the certainty of the directors in relation to the decision to sell the shares, in view of the uncertain nature of the data available regarding the oil wells.

Similarly, the court considered that the expertise of the plaintiffs in the oil and gas industry and the fact that they did not sell all of their shares would be signs that they would have superior analytical capacity than the average investor and that there was uncertainty with respect to the information.

In addition to the elements above, the court had a different view towards the telephone recordings focusing on their elements of uncertainty and insecurity. Such records had been considered as decisive by CVM.

In summary, the court understood that the signs available were favorable to the plaintiffs and that there was no sufficient evidence of the illegal conduct. Thus, the sentenced annulled the administrative lawsuit and the fines. This is a rare decision in which the judicial courts reverted a decision issued by CVM and confirmed by the CRSFN. An appeal was filed against of the sentence.

^[1] CVM PAS 22/94, j. 15/04/2004.

^[2] Vote of director Norma Parente in PAS CVM 06/95, of 05/05/2005

^[3] "Art. 155, §4. Any officer who may receive any confidential information not yet revealed to the public shall not make use of such information to obtain any advantages for himself or for third parties by purchasing or selling securities."

^[4] "Art. 13, §1. The same prohibition [of trading with securities] applies to anyone who is aware of information regarding a material act or fact, knowing that it is information not yet disclosed to the market, especially those who have a commercial, professional or reliable relationship with the company, such as independent auditors, securities analysts, consultants and institutions that are part of the distribution system, which are responsible for verifying the disclosure of information before trading with securities issued by or referenced to the company."

^[5] The administrative proceeding was filed against other defendants, who were acquitted by the CVM. This article will discuss the charges against the directors found guilty by CVM.