Brazilian Mogul Eike Batista Facing Insider Trading Charges

Brazilian Mogul Eike Batista Facing Insider Trading Charges
By EIKE_BATISTA.jpg: JulianaCoutinhoderivative work: – JBarta (This file was derived from EIKE BATISTA.jpg:) [CC BY-SA 3.0], via Wikimedia Commons

Eike Batista, former billionaire and Chief Executive Officer of EBX Group Co. is facing insider trading charges in Brazil. Batista lost most of his $34.5 billion net worth when his energy and commodities conglomerate collapsed last year.

Prosecutors in Rio de Janeiro have filed charges for alleged insider trading against Eike Batista for illegally dumping shares of his O&G company based privileged information. Then known as OGX, the firm lost 95% of its value in 2013 after it filed for bankruptcy protection. Batista’s insider trading trial will start in a Rio de Janeiro court on November 18.

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Insider trading common in Brazil due to lack of enforcement

“Insider trading is clearly widespread in Brazil, and we as investors would be naive if we didn’t believe that,” noted David Riedel, president of Riedel Equity Research in Greenbrae, California. “There is a consistent pattern of leaking. But the problem is not the laws — it’s that they aren’t enforced.”

While laws governing financial markets are strict in Brazil, the CVM doesn’t have the technology, people or funding to fully enforce the rules, explained Eduardo Salomao Neto, a partner at the law firm Levy & Salomao Advogados in Sao Paulo.

“It’s a matter of money, but it’s also a matter of creativity,” he commented, noting that Brazil’s legal framework makes enforcement of all criminal laws difficult, especially white-collar crime. “The regulators could do partnerships with the police and prosecutors to conduct more sophisticated investigations that would uncover the big crimes and criminals. The crimes that are detected and punished now are very small — there has to be bigger ones nobody ever hears about.”

The auto-regulation board of BM&FBovespa SA, the operator of Brazil’s stocks and derivatives exchange, noted 91,000 transactions with irregular volumes or stock-price moves last year. The agency, however, ruled on just 10 cases in 2013 and three cases so far in 2014.

Eike Batista would be Brazil’s first insider trading criminal conviction

Of note, no one has ever been criminally convicted and sent to jail in Brazil for insider trading in the 13 years since the law was first passed. This would make a conviction of Batista a landmark case. Moreover, most of the fines are also just a slap on the wrist. All but seven of the 57 cases of insider trading rules on by securities regulator CVM between 2006 to 2013 ended up with fines of less than $160,000.

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