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IN RE PARMALAT SECURITIES LITIGATION

July 12, 2005.

In re PARMALAT SECURITIES LITIGATION. This document relates to: 04 Civ. 0030.


The opinion of the court was delivered by: LEWIS KAPLAN, District Judge

MEMORANDUM OPINION

Defendant Maria Martellini moves to dismiss the first amended consolidated class action complaint on a variety of grounds including lack of personal jurisdiction and failure to allege fraud with particularity. Facts

  Maria Martellini is a citizen and resident of Italy. She is a professor of economics at the Universitá degli Studi de Brescia where she has taught business and economics for nearly 15 years. She is a defendant in this case because she was a minority shareholder representative on the Board of Statutory Auditors ("Statutory Board") of Parmalat's holding company, Parmalat Finanziaria S.p.A. ("Finanziaria") during the period commencing with the Statutory Board's 1999 Half-Year Report and concluding with its 2001 Annual Report.*fn1 She never was an officer or director of Finanziaria or any of its subsidiaries.

  The complaint alleges in substance that reports issued by the Statutory Board during Prof. Martellini's tenure stated that the Board (1) had "verified the adequacy of the administrative/accounting and internal audit systems"*fn2 as well as "compliance with legal provisions concerning the drawing up and layout of the statutory and consolidated financial statements and the directors' report through direct checks and information received from" Deloitte,*fn3 (2) had "carried out the checks required by law in accordance with the principles for boards of statutory auditors established by the Italian accounting profession,"*fn4 (3) was unaware of any atypical or unusual related party or intercompany transactions and that the notes to the financial statements relating to such transactions were adequate,*fn5 (4) had carried out its obligation to supervise the administration of the company and had checked the adequacy of the internal controls and administrative and accounting system,*fn6 and (5) Parmalat had complied substantially with the Voluntary Code of BestPractice set up by the Italian stock exchange.*fn7 Plaintiffs allege that the Board in fact was under the control of company management, that it recklessly failed to oversee the accuracy of Parmalat's financial statements and to see to it that internal controls were working effectively, that it recklessly failed to recognize that Parmalat's web of affiliates and special purpose entities were not accounted for properly,*fn8 that the Board members and others "individually and collectively were responsible for the . . . preparation and review of [Parmalat's] audited and unaudited financial statements,"*fn9 that the members of the Board were reckless in not knowing of — or directed or participated in — Parmalat's fraudulent overstatement of assets and earnings and understatement of liabilities,*fn10 and that they recklessly or deliberately issued false reports.*fn11 II

  On a motion to dismiss under Rule 12(b)(2) for lack of personal jurisdiction, the plaintiff bears the burden of showing jurisdiction. The standard applicable to plaintiff's burden depends upon the procedural context in which the jurisdictional challenge is raised.*fn12 Where, as here, no discovery has taken place, the plaintiff need make only a prima facie showing of jurisdiction "by pleading in good faith, see Fed.R.Civ.P. 11, legally sufficient allegations of jurisdiction."*fn13

  Section 27 of the Securities Exchange Act of 1934*fn14 allows the exercise of personal jurisdiction to the limits of the Due Process Clause of the Fifth Amendment.*fn15 The question whether due process permits an exercise of jurisdiction requires "an analysis consisting of two components: the `minimum contacts' test and the `reasonableness' inquiry."*fn16 The former looks to "whether the defendant has certain minimum contacts [with the forum] . . . such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice."*fn17 The latter "asks . . . whether it is reasonable under the circumstances of the particular case" to assert personal jurisdiction.*fn18

  A. Minimum Contacts

  Under the minimum contacts analysis, contacts with the forum may confer two types of jurisdiction — specific and general.*fn19 Specific jurisdiction exists when a forum "exercises personal jurisdiction over a defendant in a suit arising out of or related to the defendant's contacts with the forum."*fn20 A court's general jurisdiction, on the other hand, "is based on the defendant's general business contacts with the forum state and permits a court to exercise its power in a case where the subject matter of the suit is unrelated to those contacts."*fn21 In this case, plaintiffs assert only that the Court has specific jurisdiction, although they make this contention on two grounds. They argue first that Martellini is subject to jurisdiction based on foreseeable reliance by U.S. investors on the Statutory Board reports and Parmalat financial statements. They contend also that her alleged position as a controlling person of Parmalat within the meaning of Exchange Act Section 20(a)*fn22 subjects her to jurisdiction on that basis alone.

  The second of these contentions is readily disposed of. Even assuming that Martellini's status as a member of the Statutory Board afforded a sufficient factual basis for inferring that she was a control person,*fn23 a proposition of which the Court is skeptical, that status alone would be insufficient to warrant the conclusion that her contacts with the United States satisfied the requirements of due process.*fn24 Those decisions that have reached the contrary result "impermissibly conflate? statutory liability with the Constitution's command that the exercise of personal jurisdiction must be fundamentally fair" and that the Due Process Clause is "made of sterner stuff' than a mere allegation of control.*fn25

  The question whether Martellini's role, whatever precisely it was,*fn26 with respect to the reports of the Statutory Board and the Parmalat financial statements involved sufficient contact with the United States to satisfy the minimum contacts branch of the due process analysis is somewhat more troublesome. Parmalat shares were traded actively in the United States.*fn27 There were many U.S. shareholders.*fn28 The company conducted note offerings to U.S. investors.*fn29 The company posted the Board's reports and certain regulatory filings on web sites where they were available to U.S. investors.*fn30 Plaintiffs therefore argue that it was foreseeable to Martellini that the Board's reports to Parmalat's shareholders and other allegedly misleading documents that she was involved in preparing would have effects in the United States and, accordingly, that the minimum contacts test has been satisfied.*fn31 It long has been recognized that effects in the United States attributable to conduct abroad may be sufficient predicate for the exercise of personal jurisdiction over the actor.*fn32 But this principle is not without limits. As then Chief Judge Friendly so pithily explained in Leasco Data Processing Equipment Corp. v. Maxwell:*fn33

 
"[T]his is a principle that must be applied with caution, particularly in an international context. [citations omitted] At a minimum the conduct must meet the tests laid down in § 18 of the Restatement (Second) of Foreign Relations Law, including the important requirement that the effect `occurs as a direct and foreseeable result of the conduct outside the territory.' We believe, moreover, that attaining the rather low floor of foreseeability necessary to support a finding of tort liability is not enough to support in personam jurisdiction. The person sought to be charged must know, or have good reason to know, that his conduct will have effects in the state seeking to assert jurisdiction over him."*fn34
The questions, in other words, are whether Martellini's actions caused effects in the United States, whether those effects were direct and foreseeable results of those actions, and whether she knew or had good reason to know that her conduct would have effects here.

  The allegations of the complaint satisfy this test when viewed in purely linguistic terms. It would be reasonable to infer that Martellini, as a member of the Statutory Board, knew that Parmalat securities traded in the United States and that Board reports and other Parmalat materials were posted on company web sites in English, thus suggesting that she knew that U.S. investors would rely upon them. The likelihood that U.S. investors would be injured by the issuance by Parmalat of false and misleading financial statements and Statutory Board reports must have been palpable. Hence, if, as plaintiffs claim, Prof. Martellini knowingly participated in the issuance of false financials and reports, she knew or had good reason to know that her actions would have effects here. But, as Justice Frankfurter once wrote, words can be "empty vessels into which [one] can pour anything he will."*fn35 It therefore is important to look at how Judge Friendly applied the test he formulated for our Circuit in order better to discern its meaning.

  The gist of the claim there was that the late Robert Maxwell caused the plaintiffs to buy stock in Pergamon Press, an English company listed on the London Stock Exchange, at an inflated price.*fn36 So far as is relevant here, the plaintiffs contended that Maxwell sent them an annual report, certified by Chalmers, Impey & Co., an English accounting firm, that contained false reports of profits.*fn37 They alleged, among other things, that Chalmers "`knew or had good reason to know' that the allegedly false and misleading financial reports it had prepared `would be given by the defendants to plaintiffs as prospective purchasers . . . and that plaintiffs would receive them and rely upon them.'"*fn38

  Following the purchase, the plaintiffs sued Chalmers, among others. Chalmers challenged the exercise of jurisdiction over its person, submitting an affidavit contending that it did not learn of the purchase negotiations until after most of the plaintiffs' purchases had been made, and there was no evidence that the Chalmers-certified financial statements caused any of the few subsequent purchases. Plaintiffs — critically — did not dispute this.*fn39 They thus "relied simply on the fact that Chalmers ...


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