CVM investigates more than 15 cases involving Eike's companies.

By Juliana Schincariol and Marcela Ayres
Reuters - The companies of the EBX Group, owned by businessman Eike Batista, are being scrutinized by the Securities and Exchange Commission, which has already opened 16 or 17 investigations against the group in recent quarters, according to an executive familiar with the matter.

Through these investigations, the regulator wants to find out if companies in the group, including the oil company OGX, released statements to the market on time and with the correct information.

"(The objective is to find out) if (Group X) was making disclosures according to the rules, if it made disclosures that it shouldn't have made, this is being investigated," said the source, who asked to remain anonymous. These investigations precede further investigations, which in turn could lead to the opening of legal proceedings and penalties.

Even with the sharp drop in company stocks, the CVM (Brazilian Securities and Exchange Commission) does not intend to accelerate investigations that have not yet become formal proceedings, the source said, adding that the agency also does not intend to suggest changes to corporate law to prevent losses for minority shareholders in similar situations.

The investigations include the statement in which OGX announced that it had signed a put option agreement with its controlling shareholder for up to 1 billion reais. The regulatory body treats the matter as "an analysis relating to the transaction announced in the material fact notice of October 24, 2012".

There is currently a lawsuit underway against Eike at the regulatory agency.

He refers to the disclosure of information by Eike and company executives, such as the former CFO of the EBX group and former president of LLX, Otavio Lazcano. Those involved may go to trial, but an agreement between the parties to end the process could also be reached.

Another process, already concluded after the signing of a settlement agreement, investigated a possible legal violation in the statements made by Eike and José Olympio Pereira, an executive at Credit Suisse, during the initial public offering of OGX shares in June 2008.

The CVM (Brazilian Securities and Exchange Commission) became even more alert to the situation of the EBX group companies after the resignation of the three independent directors of OGX, former ministers Pedro Malan (Finance) and Rodolpho Tourinho (Mines and Energy), and former president of the Supreme Federal Court Ellen Gracie.
"This shows that the situation is serious," the source said. "There is no red light for investors, for the market. All three were independent, reputable people," he said.

Since last year, OGX's exploration campaigns have yielded results far below the company's estimates. At the beginning of the month, the company suspended operations in 3 oil fields, halted construction of 5 platforms, and announced it would no longer invest in increasing production from the Tubarão Azul field wells, which may cease oil extraction in 2014.

Successive production setbacks and cash burn at OGX have led to a sharp drop in its shares, affecting other Eike Batista companies listed on the Bovespa stock exchange.

OGX shares have fallen more than 88 percent this year, while those of mining company MMX and logistics firm LLX have accumulated declines of over 64 percent during the same period.

When contacted, the CVM (Brazilian Securities and Exchange Commission) stated that it would not comment on investigations into the EBX Group beyond what it had already announced last week. The EBX Group was also contacted but did not immediately respond to requests for comment.

Minority groups in the justice system.

Alongside the actions of the CVM (Brazilian Securities and Exchange Commission), minority shareholders of the companies are organizing to obtain more clarification on the unfolding situation of the group.

The Union of Minority Shareholders of Companies X (Unax) was created last week to unify communication with the National Petroleum Agency (ANP), the Securities and Exchange Commission (CVM), risk assessment agencies, and independent external auditors, among others.

The minority shareholder group may take legal and administrative measures, including requesting the freezing of Eike's assets, depending on the information it receives from the CVM (Brazilian Securities and Exchange Commission), said the group's lawyer and also investor in the X companies, Adriano Sobrosa Mezzomo.

"The CVM needs to comment on this," he said. "We want information, and only with clear and precise information can we inform you of the judicial and administrative measures that will be taken. The freezing (of Eike's assets) is (being considered), depending on the information," he added.

According to the former president of the CVM (Brazilian Securities and Exchange Commission), Maria Helena Santana, if the irregularity is proven, the ideal course of action is for investors to seek legal recourse to obtain compensation for the losses suffered, and not be satisfied with any eventual punishment imposed by the regulatory body.

"This would help bring more discipline to the market, with much more powerful signaling and deterrent effects," he said.

"But, if there was no fraud, the minority shareholders took risks just as the entrepreneur and the creditors took risks when investing in pre-operational companies that were launching into complex projects with a high degree of inherent risk and financial leverage," he added.

Lawyers specializing in corporate law believe the company could be questioned by the regulator about inaccurate information. However, there is little chance that the CVM (Brazilian Securities and Exchange Commission) will take any specific action to protect minority shareholders.

"All investors were aware of the companies' conditions when they bought them," said a lawyer who asked not to be identified.

Some shareholders seem to have already realized this. São Paulo businessman Willian Magalhães created a Twitter profile, @minoritariosOGX. He has already met with the oil company's president, Luiz Carneiro, and the director of Investor Relations, Roberto Monteiro, but opposes legal action against OGX or Eike Batista, believing that risk is inherent in investing in stocks.

Next Saturday, a meeting in São Paulo, expected to bring together up to 200 shareholders, will discuss proposals to include a representative of minority shareholders on the company's fiscal committee and board of directors. "It's a moment for unity. The movement seeks to support the company through suggestions," Magalhães told Reuters.