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“Fake News” Brazilian Style

Magnifying glass on U.S. Securities and Exchange Commission Website

On Monday, April 18, 2022, the U. S. Securities and  Exchange Commission (“SEC”) announced charges against Fernando Passos, the former executive Vice President of Finance and Investor Relations of a Brazilian reinsurance company, IRB Brazil Resseguros S. A., for planting a story with the media claiming that Warren Buffett (the “Oracle of Omaha”)’s company, Berkshire Hathaway, Inc. (“Berkshire”), had made (in the words of the SEC Press Release) “a substantial investment in IRB.” Passos’ actions came in response to a February 2020 letter issued by a Brazilian asset management firm that was short-selling the stock of IRB. This “short-seller letter” questioned both the reliability AND the sustainability of IRB’s financial results, much like some of the well-known Muddy Waters letters about U.S. company stock such as Block, Inc., Danimer Scientific Co., Inc., and Lemonade, Inc. At the time of the short-seller letter there were, according to the SEC’s Complaint, “substantial U.S. investors in IRB whose holdings were valued at approximately $1.6 billion,” and the IRB stock was actively traded on the Brasil, Bolsa Balcao stock exchange in Sao Paolo, Brazil.

Among other bases for its skepticism of IRB, the short-seller letter cited comments by Warren Buffett, the CEO of Berkshire, about the reinsurance industry generally, expressing concerns about the industry’s ability to earn an adequate return on exposures acquired by reinsuring the financial risks of primary carriers. The SEC Complaint notes that in “the wake of the short-seller letter, the price of IRB’s stock declined significantly.” Passos apparently decided that the best way to rebut the short-seller letter and raise the price of IRB stock would be to get an endorsement from Buffett. The mere fact that neither Berkshire nor Buffett had had anything to do with IRB was apparently viewed by Passos as only a momentary impediment. On February 22, 2020, Passos sent text messages to the IRB Communications Manager that Berkshire was an investor in IRB, and that it had recently “sharply increased its position in IRB stock.” Noting the references to Berkshire in the short-seller letter, Passos “urged the Communications Manager to work with IRB’s public relations firm to leak the purported information about Berkshire’s investment to a journalist who would be willing to publish it without attribution to IRB.”

Passos then fabricated an IRB shareholder list showing that Berkshire “had made substantial purchases of IRB stock in February 2020 and was the fourth largest shareholder of IRB as of February 18, 2020.” He authorized the Communications Manager to share the fabricated list with the media. He then created a fake e-mail from the IRB CEO thanking Berkshire for its investment. Thereafter, from February 24 to February 28, 2020, Passos went on a “Roadshow,” meeting with investors and security analysts in Europe and the United States to reassure them of IRB’s financial condition and prospects. As was disclosed on February 27, 2020, by Bloomberg in a report entitled “IRB Climbs Amid Report Buffett’s Berkshire Increased Stake,” IRB’s stock price increase was the “most intraday on record,” rising by more than 6%.  Then, on March 3, 2020, Berkshire issued a press release “denying that it had ever invested, or had any intention of investing, in IRB.” On March 4, 2020, the price of IRB stock fell more than 30%, and IRB announced that both the IRB CEO and Passos had resigned. On March 5, the IRB stock price continued to fall, closing down over 40% from its March 3 price.

The SEC Complaint, filed in the Southern District of New York, asserts “violations of the antifraud provisions of the [Securities] Exchange Act” and seeks: i) an injunction permanently enjoining Passos from violating, directly or indirectly, the federal securities laws; ii) a permanent bar preventing Passos from serving as an officer or director of a public company; and iii) a civil penalty in an amount set by the Court. In a parallel action, the U.S. Department of Justice announced criminal charges against Passos.

The Gospel according to St. John (King James Version), chapter 8, verse 32, includes the following:

                  You shall know the truth, and the truth shall make you free.

Passos is poised to learn that those who falsify the truth may NOT remain “free.”

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