Stressed Out: Vale's Shares Fall on News of Class Action Securities Litigation

 | Feb 01, 2016 | 10:30 AM EST
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This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.

Brazilian mining giant Vale's (VALE) shares fell on Monday after a U.S. law firm specializing in securities litigation announced it had filed a class action lawsuit on behalf of investors, seeking damages from the company.

The New-York listed shares of the company, which is included in Real Money's  Stressed Out index, opened 4% down, at $2.35. The shares have lost more than 65% of their value over the past year.

The lawsuit, filed on behalf of investors who bought Vale shares between Nov. 7, 2013 and Nov. 30, 2015, alleges that the company has violated the Securities Exchange Act of 1934, by issuing "false and misleading statements" related to an accident in November last year when a dam in Brazil burst, killing several people and contaminating a major river with toxic waste and mud.

In a statement, the Bottini & Bottini law firm alleged that Vale failed to disclose to investors that "contrary to defendants' statement that the tailings from the Fundao Dam were 'not dangerous and [would] not react with any other substances,' the waste that was spilled as a result of the accident at the Fundao Dam was toxic."

The lawyers also accuse the company of failing to disclose that it had a contract with Samarco, a joint venture between it and Australian minter BHP Billiton (BHP) that owns the dam that had burst, which allowed it to deposit iron ore waste into the dam.

The lawyers also said that Vale failed to disclose to investors that its procedures for the mitigation of environmental, health and safety incidents were inadequate.

"As a result of defendants' false statements and/or omissions, Vale securities traded at artificially inflated prices during the Class Period, with the price of its common stock ADRs reaching over $16.00 per ADR and preferred stock ADRs reaching over $15.00 per ADR," the statement said, adding that "when the true details entered the market beginning in May 2015 [the company's credit rating was downgraded in May last year], however, the price of Vale's ADRs began to decline."

Vale representatives did not immediately respond to Real Money's requests for comment.

The company's stock price jumped by more than 6% on Friday, when it announced it suspended the dividend for this year. Analysts saw the move as a way for the heavily indebted company to start to reduce its debt and improve its efficiency.

Vale is rated a D by TheStreet's Quant Ratings service, with a "sell" recommendation. TheStreet's analysts base their recommendation on some weaknesses displayed by the company, such as "disappointing return on equity, weak operating cash flow, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share."

For more on Real Money's 20 distressed companies to watch:

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