Operation Greenfield: a new watermark post-Lava Jato?

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

The scale and potential ripple effects of this operation throughout the (re)insurance industry, particularly in D&O programmes, make Greenfield undoubtedly interesting. However, it will be even more fascinating to see how the investigation develops and how it interacts with the evolving Brazilian legal system, in the wake of the Lava Jato investigation.


Greenfield is the code word that the Brazilian Federal Police has 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.

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 - special funds launched by private and publically traded companies) (FIPs)
  • The invested companies.

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

Impact on (re)insurers of D&O policies

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.

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. 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.

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.

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.

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.


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.

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

Read related items in London Market Brief - February 2017