Parmalat: Claims Dismissed Against Banks, Auditors, and Attorneys

After three years and seven opinions, the U.S. District Court for the Southern District of New York has issued a final order regarding motions to dismiss claims against firms and individuals associated with Parmalat. Parmalat is the Italian-based international dairy conglomerate that perpetrated massive shareholder fraud for ten years. The company collapsed at the end of 2003 with a deficit of over $16 billion. Shareholders brought 10(b) fraud and 20(b) control person claims against Parmalat’s auditors, lawyers, banks, and related individuals. The claims asserted the defendants helped to market Parmalat securities that were based on fraudulent transactions. Allegations included securitizing duplicate invoices, restructuring loans through shell companies to appear as asset sales, and using outdated audits to overvalue the private placement of securities.

Court decisions issued over three years were generally grouped according to categories of defendants: auditors, banks, law firms, and one shareholder on Parmalat’s board. The auditing companies are the U.S. parent companies and certain international subsidiaries of Deloitte & Touche and Grant Thornton. The bank defendants are local and parent companies of Citigroup, Bank of America (“BoA”), Banca Nazionale del Lavoro (“BNL”) and Credit Suisse First Boston (“CSFB”). The defendant law firm is Pavia e Ansaldo (“Pavia”). Maria Martellini is the defendant minority shareholder representative on Parmalat’s Board of Statutory Auditors. Defendants’ motions to dismiss predictably included arguments against jurisdiction, lack of control over subsidiaries, lack of specificity in pleadings, failure to plead the necessary elements of a 10(b) claim, including committing a deceptive or manipulative act, scienter, affecting a market, and causation.

In In re Parmalat Securities Litigation, 375 F.Supp.2d 278 (S.D.N.Y. 2005) (“Parmalat I”), the court dismissed claims against auditors Deloitte, Grant Thornton and Deloitte Director James Copeland. It held that plaintiffs failed to show that the auditors committed a 10(b) violation as primary actors, therefore the 20(b) control person claims also fail. The court, however, gave plaintiffs leave to amend the complaint.

In the second memorandum opinion, issued July 12, 2005 (“Parmalat II”), the court dismissed the claim against Ms. Martellini. The plaintiffs failed to plead with particularity and the court lacked jurisdiction over nine of eleven plaintiffs who are not U.S. citizens and did not purchase securities in the U.S. Plaintiffs chose not to amend this complaint.

The court used the July 13, 2005 decision (“Parmalat III”) to issue an extensive and scholarly analysis of the elements of a Rule 10b-5 claim, noting the difference between claims based on the (a), (b) or (c) subsections. The 10b-5(a) and (c) claims do not require allegations of misrepresentation or omission, but rather allegations describing what “manipulative acts” were performed, by whom and when, and how those manipulative acts or schemes affected the securities at issue. The court pointed out that the case Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994) made it clear that “there is no private civil liability for aiding and abetting a violation of Section 10(b) and Rule 10b-5.” Therefore, the issue in this case was whether the claims indicate the banks “directly or indirectly used or employed any device or contrivance with the capacity or tendency to deceive.” The court held that securitizing worthless invoices and overstating the value of a conversion right, if proven, would qualify as deceptive, whereas merely handling transactions would not.

In the fourth memorandum opinion, issued August 17, 2005, the court dismissed claims against law firm Pavia as it made no misleading statements. The court, however, upheld claims for participating in a deceptive scheme to use shell companies to defraud investors.

The court’s fifth memorandum opinion, issued in February 2006, addressed the Second Amended Complaint. The court dismissed claims that BoA used a Cayman Islands “special purpose vehicle” to deceptively restructure an asset sale on the basis that the transactions themselves were not deceptive. The court upheld claims that BoA knowingly used an outdated audit to overstate the value of securities and redirected the payee on a political risk insurance policy to disguise increased risk.

The court waited until the fifth opinion to comment extensively on the length of the 389-page complaint. The court in Parmalat I did not dismiss under FRCP Rule 8 (“short and plain statement of the claim”) even though it noted that “the requirement of pleading fraud with particularity does not justify a complaint longer than some of the greatest works of literature.” The fifth opinion noted that “this brontosaurus of a pleading” did not “serve the interests of the alleged class” because it delayed resolution of the action. The court further opined that “[s]hould there ever be a fee application in this case, the efficiency and dispatch with which counsel have handled the case are likely to be prominent considerations.”

The sixth memorandum opinion of July 24, 2007 dismissed claims brought by foreign purchasers for lack of jurisdiction. There was no evidence of U.S. purchases or sufficient activity in the U.S.

After the Supreme Court’s decision in Stoneridge, on August 7, 2008, the U.S. District Court for the Southern District of New York issued its final memorandum opinion. Under the Court’s holding from Stoneridge “[r]eliance by the plaintiff upon the defendant’s deceptive acts is an essential element of the § 10(b) private cause of action.” The Court may presume reliance where “(1) a party omits a material fact in breach of a duty to disclose or (2) a party’s deceptive acts are communicated to the public.”

Applying the Stoneridge factors to the present case, the court ruled that BoA did not have a duty of disclosure because none of the plaintiffs were BoA private placement purchasers. Nor did Pavia owe a duty to any plaintiff. The claims, therefore, did not prove the first element of reliance. The court in Stoneridge held that the second element, deceptive acts, requires that plaintiffs show reliance on the deceptive conduct of the defendant companies. Reliance on deceptive acts of the primary fraudulent perpetrator—in this case Parmalat—is not enough. The court found that the Third Amended Complaint did not include evidence that defendants themselves made deceptive disclosures.

Plaintiffs, therefore, failed to establish the necessary reliance element of their 10(b) claims against BoA, Citigroup, and Pavia. The court’s final decision granted the outstanding motions to dismiss against banks and the law firm. Since the claims against auditors were dismissed in an earlier decision, and BNL and CSFB settled, all remaining claims against auditors, banks, and law firms associated with Parmalat have now been dismissed.

The primary materials for this post are available on the DU Corporate Governance web site.