SEC Sues Vale on Dam Disaster

The Securities and Exchange Commission is bringing charges against Brazilian mining company Vale, accusing the company of misleading investors for years about the safety of dams it built and managed in Brazil, until the Brumadinho dam collapsed in 2019 and killed 270 people in one of the worst mining disasters in history.

The SEC filed its charges against Vale in federal court on Thursday morning. Across 76 pages, the agency accused Vale executives of manipulating safety audits, obtaining false safety certificates, and misleading local governments and communities about the safety of dams Vale operated in the southeastern part of Brazil. The dam collapse on Jan. 25, 2019, erased more than $4 billion in Vale’s market capitalization, although that’s small beer compared to the awful human and environmental losses Brazilians suffered. 

While Vale was engaging in its deceptions, the SEC said, the company’s corporate sustainability reports and other public filings fraudulently assured investors that Vale adhered to the “strictest international practices” for dam safety and that all of its dams were certified as in stable condition. 

Even worse: Vale was making all those statements about dam safety because of a previous collapse in 2015 that killed 19 people. So executives and the board knew Vale had gigantic safety risks that needed close attention — and rather than address those concerns, the SEC said, Vale safety executives took extensive steps in the late 2010s to cover up the deficiencies and portray everything as normal.

Clearly this is a difficult case to analyze, because the fundamental issue here seems to be a horrific, amoral disregard for public safety. If an organization’s senior leaders are so cavalier about jeopardizing the lives of hundreds of innocent people… well, I don’t really know what to say about a control environment like that. (In 2020 Brazilian authorities filed homicide charges against 11 Vale executives and five others who worked at its audit firm, TÜV SÜD.)

Still, we have a few other points in the SEC’s allegations that are worth considering. Let’s get to them. 

Sustainability Report Disclosures

Throughout its complaint, the SEC pointed to disclosures Vale made in its corporate sustainability reports as examples of misleading investors about dam safety. For example, in its 2017 sustainability report (issued to the public in 2018), Vale affirmed that “100 percent of the audited structures were certified to be in stable condition” and that all of its dams “are completely normal.”

Vale’s 2017 sustainability report also  “[i]n addition to applying best practices pertaining to dam safety management, Vale submits its structures to audits conducted by specialized external consultants, and rigorously complies strictly with applicable legislation.” 

The SEC’s lawsuit subsequently offers a litany of allegations about why those disclosures were not true, and they certainly seem pretty damning to me. Most interesting, however, is that the SEC mentions sustainability report disclosures at all. Sustainability reports aren’t subject to SEC oversight.

To be clear, the lawsuit also alleges misleading disclosures in Vale’s Form 20-F and 6-F filings too, which are subject to SEC oversight; the agency does have grounds to bring its lawsuit. Still, this is another example of how the SEC is paying more attention to what companies are saying in those sustainability reports. 

We’ve already seen SEC staff send comment letters to companies asking how they square their ESG disclosures in the 10-K or 10-Q with statements the companies make in their sustainability reports. Now we have the SEC citing statements in sustainability reports as evidence of misleading disclosures. That feels like an escalation to me.

My question, then, would be how companies assure the accuracy and reliability of statements they make in sustainability reports. What disclosure controls and procedures do you have? How do you assure consistent disclosures, especially if one team is in charge of the 10-Q and another in charge of the sustainability report?

Of course, the accusation against Vale is that it lied across multiple statements, which is even worse. But for most filers, the lesson here is to watch what you’re saying in sustainability reports. The SEC clearly is.

Poor Governance

Another pressing issue here is simply how such a disaster was allowed to happen at all. Vale is one of the largest mining businesses in the world ($36.6 billion in 2018, immediately before the dam collapse), with sophisticated processes and seasoned executives. 

So how did the management of environmental safety risk — obviously one of the most pressing risks for the whole enterprise — go so wrong? 

The SEC included a chart mapping out who managed safety risks and the reporting relationships around that role. The executive immediately responsible for dam safety was the “executive manager of risk management and mine closure.” That person reported to a planning director, who reported to an executive director of minerals and coal, who then reported to the CEO. See Figure 1, below. 


Does Executive One in the chart above seem sufficiently high up to you? He was three rungs away from the CEO, in a business where engineering and safety risks were the most pressing issue the company faced — and he was three rungs away after the first dam collapse in 2015. 

This is a reminder that the board of directors must always engage vigorously with the organization’s most pressing risks, and assure that executives are giving that risk the attention it deserves. In Vale’s case, I would’ve expected a chief risk officer reporting directly to the CEO and the board, not the scribbles we see in Figure 1. 

Such direct engagement drives the control environment, and from there everything else starts to fall into place. Would that seriousness of purpose have prevented the disaster at Vale? We’ll never know. Such a sad, terrible tragedy.

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