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IN RE PARMALAT SECURITIES LITIGATION

August 16, 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

Pavia e Ansaldo ("Pavia"),*fn1 an Italian law firm named as a defendant in the first amended consolidated class action complaint filed by purchasers of the securities of Parmalat Finanziaria S.p.A. and affiliates (collectively "Parmalat"), moves to dismiss for failure to state a claim, failure to plead fraud with particularity, and lack of subject matter jurisdiction. This action has been the subject of three previous opinions — disposing of the motions to dismiss of the auditor defendants (the "Auditors Opinion"),*fn2 a member of Parmalat Finanziaria S.p.A.'s Board of Statutory Auditors,*fn3 and the financial institution defendants (the "Banks Opinion")*fn4 — familiarity with which is assumed.

  I. The Complaint as It Applies to Pavia

  Gian Paolo Zini was a partner in Pavia and one of Parmalat's most important outside lawyers.*fn5 In 1997, he left Italy to open Pavia's New York office, of which Parmalat was the major, if not the only, client. In February 2001, Pavia's New York office closed, and all of the lawyers and staff working in it began working for Zini & Associates, P.C. ("Zini & Associates"), a new firm established by Zini.*fn6 Accordingly, the plaintiffs seek to hold Pavia liable only for activities conducted from January 5, 1999 (the start of the Class Period, as defined in the earlier opinions)*fn7 to February 2001.*fn8

  The complaint alleges that Pavia's New York office and later Zini & Associates were "the nerve center" of the Parmalat fraud. Zini and Pavia "drafted, negotiated and reviewed many of the legal documents that were necessary to effectuate the fraudulent transactions described" throughout the complaint. They "created various entities and engineered transactions to hide the Company's growing debt and divert Parmalat funds to [founder and chief executive officer Calisto] Tanzi and companies owned by his family."*fn9 Beyond these generalities, however, the complaint specifies Pavia's involvement in only two schemes.*fn10

  First, the complaint alleges that Pavia and Zini were involved in a scheme to fake the sale of certain Parmalat trademarks. Some years ago, Italy's antitrust authority ordered Parmalat to divest several brands and trademarks. Parmalat, however, allegedly could not find a buyer. On November 16, 2000, Parmalat therefore sold the trademarks for a stated value of $56 million to Newlat S.r.l. ("Newlat"), an Italian corporation that Pavia had created nine days before. In a set of transactions "arranged"*fn11 by Pavia, Newlat or its parent issued to Parmalat $56 million in promissory notes, which Parmalat recorded in its financial statements as a receivable from a third party.*fn12 This was quite misleading, because Parmalat knew that Newlat was a shell with no assets and never would pay the notes.*fn13

  The other alleged scheme also involved Parmalat's booking receivables from a shell corporation created by Zini. On June 23, 2000, Parmalat reported that it had purchased $88.4 million in bonds from Web Holdings, Inc. ("Web Holdings"), a company created by Pavia. Again, this was misleading because Web Holdings was merely a shell with the same address and telephone number as Pavia's New York office and Zini & Associates.*fn14 Indeed, Web Holdings, along with other shell companies, was used to divert funds to the Tanzi family and commit other frauds.*fn15 On July 10, 2001 — after Pavia's New York office closed but possibly in consequence of actions taken when it was still open — Parmalat booked a receivable in the amount of approximately $18 million from Western Alps Foundation, a Delaware entity that was controlled by Web Holdings and that had the same address as Zini & Associates. The amount of the receivable increased to $21.9 million at the end of 2001, and was $28.853 million by March 1, 2002.*fn16

  The complaint asserts causes of action against Pavia under Section 10(b) of the Securities Exchange Act of 1934*fn17 and Rule 10b-5 thereunder.*fn18 It asserts also a claim against Pavia under Section 20(a) of the Act*fn19 for alleged primary violations of Section 10(b) and Rule 10b-5 by Zini.

  II. Motions to Dismiss

  In deciding a Rule 12(b)(6) motion, the Court accepts as true all well-pleaded factual allegations in the complaint and draws all reasonable inferences in the plaintiffs' favor.*fn20 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."*fn21 III. Pleading a Violation of Rule 10b-5

  Section 10(b) makes it unlawful "for any person, directly or indirectly . . . [t]o use or employ, in connection with the purchase or sale of any security . . ., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." Rule 10b-5 in turn provides:
"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
"(a) To employ any device, scheme, or artifice to defraud,
"(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
"(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
"in connection with the purchase or sale of any security."
  Most claims under Rule 10b-5 allege misrepresentations or omissions in violation of Rule 10b-5(b). The elements of such claims are different from those based on alleged violations of subsections (a) and (c). Both types of claims, however, are subject to heightened pleading requirements regarding scienter. Under the Private Securities Litigation Reform Act ("PSLRA"), the complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind."*fn22 The required state of mind is "an intent to deceive, manipulate, or defraud."*fn23 A plaintiff may allege this intent sufficiently "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."*fn24
  To state a claim based on a misrepresentation or omission in violation of Rule 10b-5(b), plaintiffs must allege that a defendant "(1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury."*fn25 These allegations must satisfy Rule 9(b) and the PSLRA. Rule 9(b) requires that the circumstances constituting fraud be stated with particularity, which means that the complaint must "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent."*fn26 The PSLRA is to similar effect, providing that for each allegation of a misrepresentation or misleading omission:
"the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed."*fn27
  To state a claim based on conduct that violates Rule 10b-5(a) or (c), the plaintiff must allege that a defendant (1) committed a deceptive or manipulative act, (2) with scienter, that (3) the act affected the market for securities or was otherwise in connection with their purchase or sale, and that (4) defendants' actions caused the plaintiffs' injuries.*fn28

  The PSLRA's pleading requirements regarding misleading statements and omissions do not apply to claims that allege no misrepresentation or omission but rest instead on Rule 10b-5(a) and (c). Such claims, however, nevertheless sound in fraud and therefore come within Rule 9(b). The plaintiffs therefore must specify what deceptive or manipulative acts were performed, which defendants performed them, when the acts were performed, and the effect the scheme had on investors in the securities at issue.*fn29

 
IV. Pavia's Liability for the Acts of Zini and Other Lawyers in Its New York Office
  Pavia argues that it is a studio associato, an Italian organizational form that is not liable for the torts of its member lawyers, and that the allegations regarding Zini therefore do not state a claim against it.*fn30 The plaintiffs respond that (1) New York, not Italian, law governs Pavia's liability for the actions of its New York lawyers because the relevant activities occurred here, (2) even if Italian law did govern, the Court should disregard Pavia's submissions regarding it because they consist only of translated ...

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