The opinion of the court was delivered by: Lewis A. Kaplan, District Judge.
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, Dr. Enrico Bondi, the Italian-appointed representative of Parmalat's estate, and a Parmalat affiliate, seek damages against Parmalat's accountants, banks and others. The matter now is before the Court on the motions of Grant Thornton International ("GTI") and Grant Thornton LLP ("GT US") for summary judgment dismissing the complaints. The motion raises issues similar to those resolved in a recent opinion in involving another large accounting firm, familiarity with which is assumed.*fn2
Plaintiffs sue under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934*fn3 (the "Exchange Act") and Rule 10b-5 thereunder.*fn4 Their claims against GTI and GT US rest on the premise that those defendants are vicariously liable for the alleged fraud of GT Italy, one of Parmalat's former auditors, which has not joined in the motion. The Court assumes familiarity with plaintiffs' allegations with respect to the Parmalat scandal and GT Italy's role. Accordingly, it suffices for present purposes to outline briefly Grant Thornton's structure.
GTI is a non-profit corporation organized under Illinois law.*fn5 It describes itself as an "international membership organization" or "umbrella" organization of member firms.*fn6 These member firms, including Grant Thornton S.p.A. ("GT Italy") and GT US, are organized under the laws of their respective jurisdictions.*fn7 It is the member firms that actually carry out the auditing and accounting functions.
Accounting and auditing standards and regulation of the accounting profession often are country specific. In addition to complying with any locally applicable rules, however, Grant Thornton member firms follow professional standards and auditing procedures and use software promulgated by GTI in conducting their audits.*fn8 Member firms are required to submit to regular quality assurance reviews and almost universally practice under the name "Grant Thornton."*fn9 They must promote other GT member firms to their international clients and provide information about international clients to GTI.*fn10 Partners of member firms attend GTI meetings and serve on GTI committees.*fn11
Although disclaimers on GTI's website assert the legal separateness of GTI and its members,*fn12 GTI in 2001 directed its member firms to omit "International" from its name and to use a standardized description of the organization in publications, press releases and on websites. This description referred to GTI as "Grant Thornton" and member firms as "local firms."*fn13 The change was part of a rebranding effort by GTI designed to demonstrate that member firms are part of "one confident and unified organization."*fn14
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.*fn15 Where, as here, the burden of proof at trial would fall on the nonmoving party, 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.*fn16 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.*fn17
B. Respondeat Superior Liability for Section 10(b) Violations by GT Italy Whether GTI and GT
US may be held liable for the securities violations and other actions of GT Italy turns on whether they had principal-agent relationships with GT Italy.
An agency relationship exists under Illinois law*fn18 when the principal has the right to control the manner and method in which the agent performs its work.*fn19 "An agent's authority may be either actual or apparent, and actual authority may be either express or implied."*fn20 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."*fn21 The alleged agent's authority, however, may be established only by the words or conduct of the alleged principal.*fn22
1. Right to Control GT-Italy
"There is no rigid rule for determining whether a person is an agent."*fn23 Courts consider a number of factors, "but the right to control the manner in which the work is performed is considered to be the predominant factor."*fn24 The Court therefore first will consider the issue of control.
Plaintiffs point to numerous facts indicating that GTI exercised control over "the manner and method"*fn25 by which its member firms, including GT Italy, performed their work.*fn26 GTI executed an agreement with each of its member firms in which the member firm agreed to conduct itself "in a manner consistent with GTI policies, procedures, guidelines, specifications and directions issued by GTI . . . including . . . the GTI Policies and Procedures Manual and any GTI communications on technical and professional matters."*fn27 GTI's audit manual, in turn, provided nearly 200 pages of detailed auditing procedures and methods, known as the Horizon Audit Approach, "to be followed by all partners and staff."*fn28 GTI required member firms to use its Explorer auditing software.*fn29
Evidence of GTI's control extends beyond the manner in which member firms audited their clients. GTI required member firms to adopt its quality ...