Operation Greenfield: a new watermark post-Lava Jato?

Towards the end of 2016, news broke of a Federal Police investigation designated Operation Greenfield, a major fraud investigation that the Brazilian press labelled the “new Lava Jato”.

While the scale and potential ripple effects of this operation throughout the (re)insurance industry make Greenfield undoubtedly a topic of interest, perhaps even more fascinating  will be the way the Brazilian legal system reacts to Greenfield in the wake of Lava Jato.


Greenfield is the code word that the Brazilian Federal Police have used for the initial stages of the investigation, that is focused on Brazil’s four largest state-run pension funds:

 Funcef – pension fund of the state-run bank Caixa Economica Federal

  • Previ – pension fund of the state-run bank Banco do Brasil
  • Postalis – pension fund of the postal service Correios
  • Petros – pension fund of Petrobras.

Other private pension funds are also under investigation, as well as the private banks Bradesco and Banco Santander Brasil, and the fund manager Rio Bravo Investimentos.

After the targeted pension funds suffered many years of successive losses, and following a parliamentary inquiry filed in August 2015, the Brazilian Federal Police and the Public Prosecutor began to analyze whether these losses were connected with a potentially fraudulent scheme.

Systemic fraud

In April 2016, a Congressional Committee of Enquiry into pension fund corruption reported that individuals within these pension funds perpetuated “systemic fraud” and requested the indictment of 353 individuals and institutions. In an official statement, the Federal Police said that its latest operation was based on 10 cases that were uncovered as part of an investigation into pension-fund deficits, eight of which allegedly relate to “fraudulent or reckless” investments made by the various funds’ private-equity investment arms.

The Federal Police alleged evidence of “organized criminal activity” between senior business executives, pension fund managers, asset rating companies, and private equity funds. The alleged scheme involved:

  • high-level directors of the pension funds;
  • auditing companies that issued reports about the financial health of the invested entities;
  • directors of the Fundos de Investimentos em Participações (FIPs); and
  • the invested companies.

Alleged scheme

The Federal Police allege that the scheme ran as follows.

Auditing companies were issuing fraudulent reports to the pension funds, recommending that they buy the shares through FIPs. FIPs are special funds launched by private and publically traded companies wherein shares of these companies are sold in order to generate revenue for further investments.

These recommendations in turn inflated the value of the shares of those companies. Subsequently, the acquisition of the shares, with an artificial value, were approved by the pension fund directors, who were involved in the scheme and knew the recommendations were not accurate. Finally, these transactions were executed by the FIPs. From the beginning of the investment, the pension funds were paying artificially inflated values for shares.

Following the surfacing of these allegations, the Federal Police has taken a number of actions against the alleged perpetrators. This has included suspending the managerial and corporate roles of many individuals, as well as requiring the forfeiture of their passports and, in some cases, suspending some companies’ market activity altogether.

The total estimated losses arising out of this fraudulent scheme is BRL$6.6 billion (US$2.6 billion) between the four pension funds.


Impact on (re)insurers of D&O policies

The scale and potential ripple effects of this operation throughout the (re)insurance industry, particularly in D&O programmes, make Greenfield undoubtedly interesting.

However, in our opinion, it will be even more interesting to see how the investigation develops and how it interacts with the evolving Brazilian legal system in the wake of the Lava Jato investigation.

Almost every D&O policy has a provision stating that the (re)insurer will advance/indemnify the insured for the costs the insured may incur in defending a legal action brought against them.

At the same time, every D&O policy has an exclusion for the wilful wrongful acts committed by the insured. However, barring an insured’s confession, this exclusion may only be applied once a final, un-appealable judgment has been rendered against the insured.

If the defendant insured is found guilty, then the policy provides that the (re)insurer has the right to have the advanced defence costs reimbursed. However, this provision has largely gone untested and it is not known how effective it really is.

This limitation on the application of the wilful misconduct exclusion is mandated by law, usually constitutionally, so that the policy complies with the presumption of innocence. In Brazil, this law is embodied in Article 5, LVII, of the Brazilian Federal Constitution, which states: “No one shall be considered guilty before the issuing of a final and unappealable penal sentence.”


 Interaction with Brazilian legal system

The Brazilian legal system is three-tiered and, in some cases, there is the option to appeal to a fourth level, the Superior Federal Tribunal, Brazil’s highest court. This means that a defendant insured may be found guilty at the first level, but he may go on to appeal this decision wherein a court of second instance will review the case and either affirm or repeal the first court’s decision. Furthermore, the decision of the second instance court may also be appealed.

According to the provisions of most D&O policies, the wilful misconduct exclusion may only be applied when the defendant insured has exhausted every possible legal recourse. One can imagine how expensive legal fees incurred can get whilst the defendant insured navigates the many levels of the Brazilian legal system. In the past, (re)insurers had no choice but to continue fronting these hefty legal fees.

However, in the light of the Lava Jato investigation, a new trend in Brazilian jurisprudence leaves room for (re)insurers to apply the wilful misconduct exclusion before the defendant insured goes through every level of the Brazilian judicial system.

 New trend

The presumption of innocence has recently been in the centre of discussion at the Superior Federal Tribunal, Brazil’s highest court. Multiple discussions have been had on the subject and, on 17 February 2016, the Superior Federal Tribunal issued a polemic decision holding that penal sentences rendered by second instance courts may be executed before a final and un-appealable decision.

Further solidifying this new trend, on 5 October 2016, the Superior Federal Tribunal ruled that the presumption of innocence is not absolute, and therefore a decision rendered by second instance courts could be executed, even if the defendant still has the right to appeal to higher courts.

The reasoning behind this decision lies in the fact that because the state has such a high burden of proof when bringing a criminal action against a defendant, even a guilty sentence in the second instance is enough to dilute the defendant’s presumption of innocence.

Further complicating matters for (re)insurers is Brazilian law’s tenuous notion of reasonableness when it comes to defence costs. It is a given that most, if not all, D&O policies will cover the insured’s reasonable defence costs. However, in Brazil, the notion of reasonableness is heavily skewed towards the insured; so much so that SUSEP, the Brazilian Insurance Superintendence, in its Circular No. 541 of 14 October 2016, completely removed the qualitative term “reasonable” from its definition of defence costs.

In addition, the practice of a (re)insurer challenging an insured on the reasonableness of the defence costs they have incurred is almost unheard of in Brazil. Therefore, the scenario could very well arise that a (re)insurer must continue advancing defence costs to a potentially guilty insured, even if these costs are so high that, in other jurisdictions, insurers would be able to bring them down by alleging their unreasonableness.


Many in the industry have already categorized Lava Jato as a watermark event in Latin America’s insurance industry, particularly in the relatively young and still-developing D&O market. The notion is that the industry will speak of times “before Lava Jato” and “after Lava Jato”.

With over US$2.6 billion in losses suffered by these pension funds and 353 individuals and institutions implicated, the ripple effects of Operation Greenfield may be felt just as strongly. It also provides the Brazilian legal system with another opportunity to address a wide-scale corruption investigation.

It remains to be seen whether applicable policies for this first major “post-Lava Jato” event will reflect any lessons learned.

Alex Guillamont,  Javier Vijil and Isadora Tálamo


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