Brazil Finally Moves in on Insider Trading

Under Brazil’s Corporation Act, insiders include “corporation officers, directors, or controlling shareholders, but virtually anyone may be subject to the prohibition, as long as he/she possesses information and, knowing it has not yet been made public.” The Act also states that insider trading occurs when “anyone with any information not yet revealed to the public, which he obtained directly or indirectly and which may significantly affect the quotation of securities, and that they may not make use of such information to obtain any advantages for himself or for third parties by purchasing or selling securities.”

Only a fraction of suspicious trades are investigated and because Brazil’s prosecutors lack the employees and technology to pursue the cases. In Brazil, no one ever goes to jail for insider trading … until now.

Eike Batista, one of Brazil’s richest men, is facing accusations of insider trading and stock market manipulation. If convicted, Batista will be the first person in Brazil to serve time for this crime. In October 2012, Batista promised to inject $1 billion into the petroleum company he founded, OGX, if management requested it. This pledge caused a temporary increase in the company’s stock. In May 2012, he began to sell millions of his shares. A few months later, the company acknowledged that key petroleum fields were economically unviable. When management requested the $1 billion he promised, Batista refused. As a result, OGX defaulted on $5.8 billion and filed for bankruptcy, causing creditors and shareholders to lose billions. Prosecutors accuse Batista of trading the OGX stock with insider knowledge about key petroleum fields’ lack of economic viability.

Insider trading is harmful to the economy because it makes investors reluctant to invest in the stock market since they believe they do not have an equal chance to make a profit. When investors are driven from the market, the market becomes less liquid and less able to fuel expanding capital demands.

I think Brazil is sending the right message in prosecuting Batista. This prosecution comes at a time where the country is seeking to restore confidence in the country’s institutions. Punishing a high-profile person sends the message that this conduct will no longer be tolerated.   Although I get the impression that they are simply using him as a scapegoat, other corporate officers and directors will think twice before engaging in insider trading, knowing that the government is no longer sitting back and tolerating this conduct. I hope that Brazil continues its efforts to prosecute those who engage in insider trading.

Do you think that Brazil is prosecuting Batista out of a genuine effort to decrease the amount of insider trading in Brazil or do you think it is using him as a scapegoat?  What should Brazil do to improve its insider trading prosecutions? Do you see a connection between insider trading convictions and economic conditions in countries around the world, including the United States?

Sources: Bloomberg, New York Times, Macrothink Institute

Picture: Telegraph UK

One comment

  1. Taking the entire situation as a whole into light, it seems that Brazil is using Batista to set an example for the country and insider trading tactics. The magnitude of this case in itself will act as a deterrent for insider trading and Batista will be the (somewhat) unsolicited figurehead fort he movement against such acts.

    As the post astutely asks, there is something to be said about a connection between falling or stagnant economies and insider trading. As South America’s largest economy, Brazil is often under fire. While the economy has grown over the past decade, the government and corporations are under scrutiny as there seems to be a plateau. With this stagnancy comes scrutiny, thus the light on insider trading. The United States is no different in many aspects. With the 2008 market crash came the fall of many major corporations, most famously “The Wolf of Wall Street” firm of Lehman Brothers.

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