“It’s a manipulated market,” said a Brazilian trader. Though Brazil made the use of privileged information illegal in 2001, it’s a fact that no one has ever been in jail because of insider trading.

A few investors in the past five years years were punished for trading on non-public information, but most cases were dropped because of a lack of proof. “It’s very difficult to prove that you have some kind of misconduct. You know it happened but you can’t prove it,” said an HSBC fund manager about the Brazilian market regulation. Like Brazilian bank BTG Pactual’s recent unusual activity before OGX’s stock meltdown… does the Brazilian regulator (CVM) really look into that?

According to a Bloomberg article, regulators fined financier and speculator Naji Nahas $11.7 million in 1994 for manipulating stock prices and causing the market to collapse. Nahas was convicted in 1997 by a federal court and sentenced to 24 years in prison. But, did he serve time in prison? Nope. A state court later overturned the conviction, and he’s been free like a bird ever since.

A recent article at Valor Economico discussed the recent case of Brazilian public company Grupo Randon. Here is an excerpt of the article which highlights the complete lack of punishment in such cases:

“The criminal proceedings against Randon executives for the crime of insider trading has been suspended. The company executives accepted the proposal of the Federal Prosecutor to pay individual fines that altogether total the ridiculous amount of R$51,000. Therefore, the criminal action processed in the Sao Paulo federal court will be suspended for two years and, thereafter, closed. 

To date, only two prosecutions for insider trading in capital markets were opened in the Brazilian judiciary. 

The process involving Randon started in 2010 when six directors of the group were indicted for the crime of “insider trading”. According to the complaint, executives have used information to buy shares of Randon’s stock less than two months before an American company acquired an equity stake in the Brazilian firm in August 2002. Allegedly, the six directors and executives bought 754,000 shares by July 2002, having profited about 120% within the next few months.”

A few years ago, Bloomberg called Brazil’s stock market a “hot spot for insider trading,” when it gave examples of how trading volume spiked up a couple days before the mergers and/or acquisitions of Varig, Telemar, and Ipiranga (see below). It certainly seemed like progress the fact that a few months ago it was reported that Brazil was stepping up efforts to fight insider trading related to earnings releases after identifying suspicious patterns.

“We’re starting a new line of investigation that focuses on earnings releases,” said the president of the Brazilian securities commission (CVM) at that time.“Depending on what we get, there could be sanctions.”

Considering that we haven’t heard about anyone going to jail, one can only conclude that it was all noise to show that something was being done. Note: A law without reinforcement doesn’t count.

And that, by the way, is another reason individual investors barely make any money in the market. After all, it belongs to the “sharks”.


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