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 32nd 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.