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In re Parmalat Securities Litigation

January 27, 2009


The opinion of the court was delivered by: Lewis A. Kaplan, District Judge


This document relates to:


Parmalat Finanziaria, S.p.A., Parmalat S.p.A. and their affiliates (collectively, "Parmalat") collapsed upon the discovery of a massive fraud that reportedly involved the understatement of Parmalat's debt by nearly $10 billion and the overstatement of its net assets by $16.4 billion.*fn1 Plaintiffs, purchasers of Parmalat securities between January 5, 1999 and December 18, 2003 (the "Class Period"), seek damages against Parmalat's accountants, banks and others. In a series of decisions, the Court granted in part and denied in part various motions to dismiss. It certified a class consisting of domestic parties who purchased or otherwise acquired Parmalat securities during the Class Period.*fn2 The matter now is before the Court on the motions of Deloitte Touche Tohmatsu ("DTT"), Deloitte & Touche LLP ("DT-US"), and James Copeland (collectively, the "Deloitte defendants") for summary judgment dismissing the complaint.


The class plaintiffs represent a class of individuals who purchased ordinary Parmalat shares and bonds during the Class Period. They sue the Deloitte defendants and others under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934*fn3 (the "Exchange Act") and Rule 10b-5 thereunder.*fn4

Deloitte's Structure

Defendant DTT, a Swiss verein*fn5 headquartered in New York,*fn6 is a professional services organization of member firms, which sometimes are referred to collectively as a "global firm."*fn7 These member firms, including defendants Deloitte & Touche, S.p.A. ("Deloitte Italy") and DT-US, generally are organized as limited liability entities under the laws of their respective jurisdictions.*fn8

Accounting and auditing standards and regulation of the accounting profession often are country specific. In addition to complying with any locally applicable rules, however, Deloitte firms follow general professional standards and auditing procedures promulgated by DTT. Member firms regularly cross check each other's work to ensure quality,*fn9 and they cooperate and join together under the direction of a single partner to provide audit services for international clients.*fn10

Partners and associates of member firms participate in global practice groups and attend DTT meetings.*fn11

Although disclaimers on DTT's website assert the legal separateness of DTT and its members, DTT's goal, as expressed by its chief executive officer, James Copeland, was for clients to "get[] consistent seamless service across national boundaries."*fn12 Member firms therefore use the Deloitte name when serving international clients "in order to project the image of a cohesive international organization."*fn13

The Parmalat Scandal and Deloitte Italy

The claims against the Deloitte defendants all rest on the premise that they are vicariously liable for the alleged fraud of Deloitte Italy, one of Parmalat's former auditors, which has not joined in the motion. The motion itself seeks dismissal only on the ground that the Deloitte defendants are not vicariously liable. It does not dispute that Deloitte Italy itself is primarily liable for the alleged fraud. Accordingly, it suffices for present purposes to outline briefly plaintiffs' allegations with respect to the Parmalat scandal generally and Deloitte Italy's role.

In the early 1990s, Parmalat, an Italian dairy conglomerate known for its long shelf-life milk, pursued an aggressive growth strategy financed largely by debt. Its expansion into South America, however, turned out to be ill-advised, and it began to lose hundreds of millions of dollars there.*fn14 The company needed constant infusions of cash to cover these losses, service its massive debt, and hide the personal diversion of funds by Parmalat chief executive officer Calisto Tanzi and his family.*fn15 But cash could be obtained only so long as Parmalat appeared to be a sound investment. To this end, insiders at Parmalat and Grant Thornton S.p.A.*fn16 ("GT-Italy") concocted a scheme involving misleading transactions and off-shore entities that created the appearance of financial health.*fn17 One such transaction, for example, involved a fictitious sale of 300,000 tons of powdered milk to Cuba for $620 million.*fn18 Loans obtained on the basis of this transaction were used to service debt and obtain more loans.*fn19 In short, Parmalat and its confederates were operating something akin to a Ponzi scheme.

Italian law obliged Parmalat to switch auditors in 1999. Concerned that new auditors would discover and disclose the fraud, Parmalat and GT-Italy moved the allegedly fictitious financing transactions to Bonlat, a new company incorporated in the Caribbean that would continue to be audited by Grant Thornton.*fn20 Parmalat then hired Deloitte Italy as its auditor. Deloitte offices in numerous countries audited Parmalat and its subsidiaries and affiliates as part of this worldwide engagement.*fn21 Despite the company's fear that new auditors would not continue to acquiesce in the fraud, the Deloitte defendants allegedly discovered or recklessly ignored the fraud, yet certified the company's financial statements as substantially accurate.*fn22

By late 2003, the scheme became unsustainable. Parmalat had a liquidity crisis, and the ensuing collapse was rapid. In early December, Parmalat could not pay certain maturing bonds.*fn23 By December 11, the company's stock had lost half its value.*fn24 Trading was suspended for days by Italian regulators.*fn25 Parmalat's bonds rapidly lost value as well.*fn26 On December 19, the company announced that a Bank of America account allegedly held by its Bonlat affiliate that supposedly contained $4.9 billion did not exist.*fn27

Parmalat filed for bankruptcy in Italy on December 24 and was declared insolvent three days later.*fn28 Italian authorities thereafter indicted a number of Parmalat executives and insiders as well as the company's auditor, Deloitte Italy. Authorities also arrested many individuals connected with the fraud and seized their assets.*fn29


The Deloitte defendants move for summary judgment dismissing plaintiffs' claims under Sections 10(b) and 20(a) of the Exchange Act. Alternatively, they assert that they are entitled to summary judgment determining that they are not jointly and severally liable pursuant to Section 21D(f)(2)(A) of the Private Securities Litigation Reform Act of 1995 ("PSLRA").*fn30

A. Summary Judgment Standard

Summary judgment is proper when there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law.*fn31 Where, as here, the burden of proof at trial would fall on the nonmoving party,*fn32 it ordinarily is sufficient for the movant to point to a lack of evidence to go to the trier of fact on an essential element of the non-movant's claim.*fn33 In that event, the non-moving party must come forward with admissible evidence sufficient to raise a genuine issue of fact for trial in order to avoid summary judgment.*fn34

B. Vicarious Liability After Stoneridge

The Deloitte defendants first challenge plaintiffs' claim that DTT is vicariously liable on a respondeat superior theory for federal securities law violations of its alleged agent, Deloitte Italy. This claim, they argue, cannot survive the Supreme Court's decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc.,*fn35 which, in their view, foreclosed common law theories of secondary liability for Exchange Act claims. Section 20(a) of the Exchange Act, the Deloitte defendants argue, now is the exclusive basis for vicarious liability for Exchange Act violations.*fn36

In Stoneridge, the Supreme Court held that "[r]eliance by the plaintiff upon the defendant's deceptive acts is an essential element of the Section10(b) private cause of action."*fn37

The Court stated that "[t]he conduct of a secondary actor must satisfy each of the elements or preconditions for liability" and concluded that Section 10(b) "does not incorporate common-law fraud into federal law."*fn38

Were it considered in a vacuum, aspects of the Stoneridge Court's reasoning would seem to apply also to common law agency principles.*fn39 Nevertheless, Stoneridge did not deal with the question presented here, viz. whether a principal is liable vicariously for an Exchange Act violation committed by its agent acting within the agent's scope of employment. There are substantial reasons why its holding should not be extended, at least by a district court.

At the most basic level, the common law principle of respondeat superior -- i.e., that a principal is liable for the acts of its agent within the scope of the agent's authority -- is centuries old.*fn40 The Second Circuit -- and nearly every other circuit to have considered the question -- expressly has permitted the application of the common law principle of respondeat superior to hold principals liable for Section 10(b) violations by their agents.*fn41 While there doubtless are circumstances in which a Supreme Court decision so undermines the viability of established circuit precedent as to ...

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