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July 14, 2005.

In re PARMALAT SECURITIES LITIGATION. This document relates to: 04 Civ. 9771. DR. ENRICO BONDI, Plaintiff,

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


In December 2003, the Parmalat dairy conglomerate collapsed in scandal.*fn1 Dr. Enrico Bondi, the Extraordinary Commissioner of Parmalat Finanziaria, S.p.A., Parmalat S.p.A. and its affiliates in Extraordinary Administration in Italy (collectively "Parmalat"), brings this action against Parmalat's former auditors and their affiliates on the grounds of professional malpractice, fraud, aiding and abetting fraud and constructive fraud, negligent misrepresentation, aiding and abetting breach of fiduciary duty, theft and diversion of corporate assets, conversion, aiding and abetting fraudulent transfer, deepening insolvency, and unlawful civil conspiracy. Defendants move to dismiss the complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). These motions raise issues similar to those resolved in a prior opinion in the related securities action.*fn2

  I. Facts

  The complaint alleges the following facts, which the Court assumes to be true for purposes of this motion.

  A. The Parties

  1. Plaintiff

  Plaintiff Dr. Bondi has been appointed by the Italian government as the Extraordinary Commissioner of Parmalat, a position he contends is similar to that of a bankruptcy trustee in the United States.*fn3 He brings this action on behalf of Parmalat against its former auditors Grant Thornton S.p.A. ("GT-Italy"), now known as Italaudit, S.p.A., and Deloitte & Touche S.p.A. ("Deloitte Italy") and their respective affiliates Grant Thornton International ("GTI") and Grant Thornton LLP ("GT-USA"), and Deloitte Touche Tohmatsu ("DTT") and Deloitte & Touche USA LLP and Deloitte & Touche LLP (collectively "Deloitte USA").*fn4

  2. Defendants

  a. Deloitte Defendants

  DTT is a Swiss verein,*fn5 headquartered in New York and the umbrella firm for the international accounting enterprise commonly known as "Deloitte."*fn6 DTT claims that a Swiss verein is similar to an incorporated membership association and is legally distinct from its members.*fn7 Deloitte USA is Deloitte & Touche LLP and Deloitte & Touche USA LLP, both of which are Delaware limited liability partnerships and together comprise the United States member firm of the Deloitte organization. Deloitte Italy is a società per azione, an Italian limited liability entity, and the Italian member firm of DTT. Plaintiff alleges that Deloitte Italy partners Adolfo Mamoli and Guiseppe Rovelli, who served as lead partners on the Parmalat audit, "were Deloitte's contact persons in Italy"*fn8 and that they held positions with specialized groups of DTT.*fn9

  According to plaintiff, Deloitte firms hold themselves out as an integrated worldwide accounting organization with DTT at the helm of "a global strategy executed locally in nearly 150 countries."*fn10 The Deloitte firms report revenue on a combined basis*fn11 and have a centralized decision making process.*fn12 DTT creates professional standards to which member firms must adhere and oversees that adherence to ensure that "clients receive `uniform, quality service wherever they do business, anywhere in the world.'"*fn13 It enforces compliance also with a global ethics program, the violation of which subjects a member firm or partner to expulsion.*fn14

  Plaintiff asserts that Deloitte operated as a unified accounting firm in respect of the Parmalat audit with 32 member firms or offices joining together to audit Parmalat and its subsidiaries. DTT, Deloitte Italy and the member firms shared in the compensation received for the Parmalat audit and each contributed funds and/or resources to that project.*fn15

  b. Grant Thornton Defendants

  GTI is an Illinois nonprofit corporation headquartered in London that serves as the umbrella organization for the Grant Thornton firms providing accounting services to mid-size companies.*fn16 GT-USA is an Illinois limited liability partnership and the United States member firm of GTI.*fn17 Prior to January 2004, GT-Italy, a società per azione, was the Italian member firm of Grant Thornton.*fn18

  Plaintiff alleges that GTI and its member firms hold themselves out as a unified accounting organization with offices in 100 countries.*fn19 Member firms are required to adhere to certain standards and to comply with Grant Thornton procedures.*fn20 GTI performs a regular review of its member firms and requires that they use the Grant Thornton logo and name when bidding for and providing services.*fn21 Members firms cooperate on certain engagements, plaintiff alleges, and individual partners of these firms attend meetings together and participate in global practice groups.*fn22

  B. Grant Thornton and the Origins of the Parmalat Fraud

  Beginning in the mid-1990s, Parmalat faced mounting losses from its operations in South America and elsewhere.*fn23 To hide these losses, as well as the personal diversion of funds by Parmalat's founder and chief executive Calisto Tanzi,*fn24 insiders at Parmalat, including Tanzi, chief financial officer Fausto Tonna, and its auditors, Lorenzo Penca and Maurizio Bianchi from GT-Italy, devised a scheme to use offshore companies to offload debt and manufacture the appearance of revenue.*fn25

  Initially, the scheme involved three shell companies incorporated in the Cayman Islands and Netherlands Antilles that were used to remove debt from Parmalat's balance sheet.*fn26 In 1998, Parmalat insiders and its auditors at Grant Thornton incorporated Bonlat Financing, Ltd. ("Bonlat"), a Cayman Islands company that became the principal vehicle for the fraud.*fn27 Bonlat then served as a dumping ground for Parmalat liabilities, all the while booking fictitious sales and revenue.*fn28

  One of the more notable fictitious transactions involved the "sale" of 300,000 tons of powdered milk to a Cuban state importer for $620 million.*fn29 Bonlat purportedly sold the milk through Camfield Pte. Ltd. ("Camfield"), a Singapore based company with the same address as the offices of Foo Kon Tan Grant Thornton, the Singapore member firm of Grant Thornton.*fn30 In fact, no such sale took place. Instead, Tonna had drawn up the papers supposedly documenting the sale and forged the signature of the supposed buyer.*fn31

  As a result of the fictitious and dummy transactions that Parmalat's insiders and GT-Italy auditors executed through Bonlat, its holdings represented forty percent of Parmalat's assets by the end of 2002.*fn32 Indeed, it reported ownership of a Bank of America account containing $4.9 billion.*fn33 Grant Thornton*fn34 drafted a request to Bank of America to confirm the existence of the account during its audit of Bonlat's financial statements for 2002, but apparently never sent it.*fn35 "Instead, Grant Thornton accepted, directly from Parmalat, a letter purporting to be from Bank of America dated March 6, 2003" that certified the existence of the bank account.*fn36 The bank account, however, did not exist, and the letter turned out to have been forged by a member of Parmalat's finance department.*fn37

  Notwithstanding its success, there were limits to the extent to which Bonlat could be used to hide Parmalat's massive losses. Accordingly, the Parmalat insiders and the company's lawyer, Gian Paolo Zini, created Epicurum, Ltd., a Cayman Islands investment fund that was "`given' a $100 million receivable from Boston Holding, Inc., another allegedly fake company run by Zini in New York.'"*fn38 Other assets were transferred to Epicurum, and Bonlat's books revealed a $625 million investment from Epicurum in the form of promissory notes.*fn39 Grant Thornton accepted the assurances of Parmalat insiders that the Epicurum investment had been made on an arm's length basis and did not independently investigate the transaction other than to assure itself that the names of Epicurum's directors did not "sound Italian."*fn40

  Grant Thornton apparently had every reason to doubt the legitimacy of the Epicurum fund. Although Bonlat's supposed investment in Epicurum was in the form of promissory notes, there was nothing to indicate that they were collectible or that the interest due on them was being paid.*fn41 Once GT-Italy partners Bianchi and Pena pointed out these deficiencies, Tonna and the GT-Italy auditors decided to transform the promissory notes into an equity investment*fn42 in consequence of which Parmalat's financial statements reflected a nonexistent asset of $625 million.*fn43

  C. Deloitte Takes Over as Parmalat's Primary Auditor

  Meanwhile, Parmalat had hired Deloitte Italy as its principal auditor in 1999, when it was obliged by Italian law to switch auditors.*fn44 Deloitte Italy and other Deloitte member firms audited Parmalat and its various subsidiaries and affiliates around the world, while GT-Italy served as the auditor for Bonlat and some of Parmalat's other offshore entities.*fn45 The audit reports that Deloitte Italy and its member firms prepared for Parmalat Finanziaria bear the names and logos of DTT and Deloitte & Touche, with an Italian address.*fn46

  The complaint details several transactions that, plaintiff argues, should have revealed to Deloitte that there was a massive fraud taking place at the company. One such allegedly questionable transaction began on July 10, 2001, when Parmalat Finance Capital Ltd. ("Parmalat Finance") recorded a receivable from the Western Alps Foundation in the amount of $18,126,584.*fn47 That amount increased to $21.9 million by the end of 2001 and then grew to $28,853,000 on March 1, 2002. "It then was reversed and disappeared from Parmalat Capital's books on March 15, 2002."*fn48 There never was any documentation for this transaction, which was just as well, plaintiff contends, since the telephone and address for the Western Alps Foundation were the same as for Zini in New York and the Western Alps Foundation had been dissolved as of September 25, 2001.*fn49 Dr. Bondi contends that the Deloitte auditors did not investigate this transaction or others that would have alerted them to the scope of the fraud.*fn50 In toto, he claims, Deloitte*fn51 auditors "`missed' some $5.176 billion in debts that had been `offloaded' to Bonlat as `intercompany debt'" and then removed from Parmalat's financial statements.*fn52

  In addition to failing to blow the whistle on the alleged fraud, plaintiff contends that Deloitte auditors actively assisted Parmalat insiders in their efforts. One example involved the audit of Parmalat's Brazilian subsidiaries in 2001 and 2002.*fn53 In 2002, Wanderlay Olivetti, the partner at Deloitte Touche Tohmatsu Auditores Independentes ("Deloitte Brazil") in charge of auditing Parmalat Participações do Brasil ("Parmalat Participações"), Parmalat's Brazilian subsidiary, raised questions with respect to certain intercompany transactions that were not documented properly.*fn54 The chief financial officer of Parmalat's Brazilian operations told the Brazilian auditors that "the transaction was designed and instructed by the Parent company to improve the margin of Parmalat [Participações] sales and also not report material losses in Brazil."*fn55 On February 4, 2002, Olivetti sent an e-mail to Adolfo Mamoli, the Deloitte Italy partner in charge of the Parmalat audit, about his concerns, stating that Deloitte would have to include "a detailed footnote in the financial statements to disclose the transaction."*fn56 He noted also that other transactions would have to be explained in an "emphasis paragraph."*fn57

  On April 5, 2002, Mamoli sent a note to James Copeland, the chief executive officer of DTT and Deloitte USA. He stated that Deloitte Brazil was having problems with certain transactions, expressed concern that Parmalat would fire Deloitte as its worldwide auditor, and asked Copeland to intervene.*fn58 Although the complaint does not indicate whether Copeland in fact did anything in response to this request, in May 2002, Olivetti apparently agreed not to issue a qualified opinion. Instead, he included only an emphasis note, which plaintiff claims would not raise the same red flags as an auditor's exception or qualification.*fn59 Deloitte Italy then certified Parmalat's 2001 financial statements without any note of these problems.*fn60

  Olivetti again raised concerns about the financial statements of Parmalat Participações with Mamoli, particularly in respect of $554 million in receivables it had from Bonlat.*fn61 He asked Mamoli to "`perform certain investigations at Bonlat' and to `verify if your team in Italy has information about Bonlat.'"*fn62 Subsequently, he "threatened to refuse to sign off on Parmalat Participações' financials, which in turn would have made it difficult for the other Deloitte member firms to sign off on Parmalat's overall consolidated financial statements."*fn63 In consequence, plaintiff alleges, the "global Deloitte organization `removed' Olivetti from any further role in auditing Parmalat's Brazilian operations."*fn64

  The complaint alleges other instances in which Deloitte auditors omitted significant qualifications or exceptions from Parmalat's consolidated financial statements or failed to follow up on clear warning signals. Plaintiff contends that insiders at the company were able to waste, steal or squander approximately $10 billion as a result of Deloitte and Grant Thornton's failure to audit Parmalat properly and to disclose the fraud and their participation in and furtherance of it.

  II. Pleading Standards

  In deciding a Rule 12(b)(6) motion, the Court accepts as true the well-pleaded allegations in the complaint and draws all reasonable inferences in the plaintiff's favor.*fn65 Dismissal is inappropriate "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."*fn66 Although such motions are addressed to the pleading, a district court may consider also the full text of documents partially quoted in the complaint where the documents are "integral" to it and relied upon by the plaintiff.*fn67 Accordingly, review of the exhibits submitted in connection with defendants' moving papers is appropriate.*fn68

  Plaintiff must plead the circumstances of any alleged fraud with particularity.*fn69 The complaint in such instances therefore must "(1) detail the statements (or omissions) that the plaintiff contends are fraudulent, (2) identify the speaker, (3) state where and when the statements (or omissions) were made, and (4) explain why the statements (or omissions) are fraudulent."*fn70 Although intent may be averred generally, plaintiff nevertheless is required to "allege facts that give rise to a strong inference of fraudulent intent."*fn71 The requisite intent may be pleaded "either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness."*fn72

  "Where multiple defendants are asked to respond to allegations of fraud, the complaint should inform each defendant of the nature of his [or her] alleged participation in the fraud."*fn73 It is not necessary, however, that plaintiff connect a particular insider or affiliate to an allegedly deceptive corporate statement.*fn74 In other contexts, by contrast, a complaint will fail where a plaintiff lumps separate defendants together in vague and collective fraud allegations.*fn75

  III. Vicarious Liability

  The issues on this motion arise, in large part, in consequence of the defendants' organization, which is detailed above and in the Court's recent opinion on these defendants' motions to dismiss the securities complaint in this multi-district litigation,*fn76 familiarity with which is presumed. In brief, plaintiff claims that DTT and Deloitte USA had an agency, joint venture, or alter ego relationship with Deloitte Italy, and that GTI and GT-USA had an agency, joint venture, or alter ego relationship with GT-Italy, and that they therefore are liable vicariously for the acts and omissions of their Italian affiliates.*fn77

  Defendants respond that each is legally and factually separate from each other and their Italian affiliate and consequently is not liable for the acts or omissions of those firms. Moreover, they contend that plaintiff has failed to make sufficient allegations of their own conduct to state any claim for relief and that the entire complaint therefore should be dismissed as to them.

  As these arguments turn, in significant part, on issues of vicarious liability, the Court first considers the question whether defendants and their Italian affiliates had agency, joint venture, or alter ego relationships.

  A. Legal Standards*fn78

  1. Agency

  A principal-agent relationship exists when the principal has the right to control the manner and method in which the agent performs his work and the agent has the power to act on the principal's behalf.*fn79 "An agent's authority may be either actual or apparent, and actual authority may be either express or implied."*fn80 The existence of an agency relationship may be established by direct or "circumstantial evidence, including the situation of the parties, their acts, and other relevant circumstances."*fn81 The alleged agent's authority, however, is established only on the basis of words or conduct of the alleged principal.*fn82 While the "mere licensing of a trade name does not create an agency relationship, either ostensible or actual,"*fn83 a subsidiary nonetheless may be the agent of a parent so long as all the requirements of agency are met.*fn84

  2. Joint Venture

  "A joint venture is an association of two or more persons to carry on a single enterprise for profit."*fn85 The legal principles that govern partnerships govern joint ventures as well, "for a joint venture essentially is a partnership carried on for a single enterprise."*fn86 The touchstone of either form is that each party ...

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