The Impact of the Financial Crisis on Nonfinancial Firms: The Case of Brazilian Corporations and the “Double Circularity” Problem in Transnational Securities Litigation

Érica Gorga


This Article discusses the impact of the international fiancial crisis on Brazilian capital markets. While the banking industry was not severely affected, leading nonfiancial corporations experienced severe fiancial turmoil. Two Brazilian corporations cross-listed in the United States — Sadia S.A. and Aracruz Celulose S.A. — suffered billion-dollar losses when the Brazilian real unexpectedly plummeted in relation to the dollar. Despite earlier disclosure that these companies had engaged only in pure hedging activity, these great losses were found to be the result of their highly speculative trading in currency derivatives. Consequently, several private lawsuits were fied both in the United States and in Brazil.
This Article takes a novel approach to the transnational securities litigation debate by examining the particular consequences of private litigation in a developed and in an emerging country. It compares the types of lawsuits fied and their fial outcomes. Despite substantially similar alleged wrongdoing, the outcomes for securities holders in each
jurisdiction contrast strikingly. Only U.S. investors of both companies were able to obtain substantial fiancial recoveries; Brazilian investors obtained none. This Article examines the reasons behind these discrepant results and the consequent economic distributional
effects on global securities markets after the U.S. Supreme Court decision in Morrison.

The Article argues that Morrison aggravates such (i) shareholder cross-border non pro rata compensation and (ii) transfers of company value from foreign to U.S. investors. It identifis a set of costs borne by foreign investors, and so far neglected by scholars, as a consequence of the current status of U.S. and international securities law regimes.

These costs are the result not only of the typical “circularity problem” in securities litigation, but also of a “double circularity problem” as they fall on foreign shareholders who also suffered equivalent damages to those experienced by the U.S. class being compensated. The Article then discusses potential policy reforms for fiing transnational
securities litigation.

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