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Sadia S.A.

Case Details

Class Period: April 30, 2008 - September 26, 2008
Date Filed: November 05, 2008
Case Number: 1:08-cv-09528
Jurisdiction: Southern District of New York
icon-casetype Case Type: Securities Case

Case Summary

The Complaint brought forth claims for violations of the Securities Exchange Act of 1934 against Sadia, S.A., and certain of its senior executives and directors. The Complaint alleged that Defendants made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects on behalf of all persons or entities that purchased or otherwise acquired Sadia ADRs during the class period.

Sadia is a major Brazilian corporation whose primary business is the production and distribution of refrigerated and frozen food products to retailers throughout Latin America, the Middle East, Asia, and Europe. In addition to the Brazilian Sao Paulo Stock Exchange (“Bovespa”) and the Spanish Market for Latin-American Stocks in Euros (ATOBEX”), Sadia’s stock trades as ADRs on the New York Stock Exchange. As of March 12, 2008, Sadia had over 29.0 million ADRs outstanding.  Sadia engaged in currency hedging to mitigate lost profits when foreign currency paid to it on future sales contracts declined against the value of its native currency before the transactions had been completed. Currency hedging is generally used as a precautionary measure, similar to an insurance policy, to enable exporting companies to reasonably predict the value that they will receive for future sales. Throughout the class period, Sadia assured its investors that the Company’s hedging strategy used currency hedging contracts as a form of mitigating exchange rate risk only and that Sadia did not use currency hedging contracts for trading on speculative purposes.

Specifically, the Complaint alleged that Defendants made false and misleading statements and/or failed to disclose that Sadia entered into twenty-two currency hedging contracts that were larger than necessary to insure Sadia’s losses in future sales and in violation of the Company’s internal hedging policy. In truth, the Company engaged in wildly speculative currency hedging through these contracts. Then all of these contracts were unwound at a loss in early-to-mid 2008. Sadia’s currency hedging activity was, in reality a high risk bet that carried the Company to the brink of financial ruin when the Brazilian real (“BRL”) depreciated in value against the U.S. dollar (“USD”). The cost of Sadia’s gamble was realized in September 2008, when the BRL plunged more than twenty percent against the USD. After the close of trading on September 25, 2008, Sadia announced that it had liquidated various currency hedging contracts, resulting in a loss of approximately $760 million in BRL (amounting to $410 million USD). On September 26, 2008, Sadia’s ADR price plunged $5.62, or nearly 37% to close at USD $9.50. On September 26, 2008, Sadia announced that it had fired the Company’s CFO. The following day, Sadia’s ADRs dropped another $1.51 per share, or nearly 16%. Less than two weeks later, on October 6, additional senior executives resigned.

Because the Individual Defendants in this case were also citizens of Brazil, they also had to be served pursuant to the Inter-American Convention on Letters Rogatory. Saxena White was successful in serving the individuals, accomplishing what few other law firms have been able to do.

After the Defendants’ motion to dismiss was fully briefed, the Court denied the motion on July 29, 2009, finding Plaintiffs “met their pleading burden with respect to Sadia’s mischaracterization of its currency hedging exposure” and that “a reasonable investor could have been misled” by the Defendants’ mischaracterizations. Additionally, the Court held that the Complaint sufficiently pled “that the conduct of the Sadia’s officers and agents was ‘highly unreasonable’ and ‘an extreme departure from the standard of ordinary care.’”

Discovery was then greatly complicated by the fact that the vast majority of the documents were in Portuguese, all fact witnesses lived in Brazil, and the Court had no subpoena power to force these witnesses to appear for deposition. In spite of this, the Firm hired attorneys fluent in Portuguese to help with the review, and was successful in deposing one of the Company’s executives.

On July 20, 2010, the Court granted Plaintiff ‘s motion for class certification. On September 16, 2011, after three mediations over the course of eight months, Saxena White successfully negotiated an agreement to settle the claims in the amount of $27,000,000 for the benefit of the class. This settlement represented a recovery of over 50% of maximum provable damages. The Firm was exceptionally proud of this result, as the average recovery was between 5 and 7% of maximum provable damages. On September 23, 2011, the Court preliminarily approved the settlement, and then on December 28, 2011, entered a final judgment finding the settlement to be fair, adequate and reasonable in all respects.