In re Parmalat Securities Litigation

Decision Date28 June 2005
Docket NumberNo. 04 MD 1653(LAK).,04 MD 1653(LAK).
CourtU.S. District Court — Southern District of New York

Steven J. Toll, Mark S. Willis, Julie Goldsmith Reiser, Joshua S. Devore, Cohen, Milstein, Hausfeld & Toll, P.L.L.C., Washington, DC, Stuart M. Grant, John C. Kairis, Diane Zilka, Wilmington, DE, James J. Sabella, Grant & Eisenhofer, P.A., New York City, for Plaintiffs.

Brian M. Cogan, James L. Bernard, Quinlan D. Murphy, Stroock & Stroock & Lavan LLP, New York City, for Defendant Grant Thornton International.

Bruce R. Braun, Linda T. Coberly, Louise R. Radin, Winston & Strawn LLP, Chicago, IL, for Defendant Grant Thornton LLP.

Michael J. Dell, Robert A. de By, Jonathan A. Popolow, Kramer Levin Naftalis & Frankel, LLP, New York City, for Defendant Deloitte Touche Tohmatsu and James E. Copeland.

Alan N. Salpeter, Stephen M. Shapiro, Michele Odorizzi, Daniel L. Ring, Chicago. IL, Robert J. Ward, New York City, Mayer, Brown, Rowe & Maw LLP, for Defendants Deloitte & Touche USA LLP and Deloitte & Touche LLP.

KAPLAN, District Judge.

Parmalat Finanziaria, S.p.A. and Parmalat S.p.A. and its 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.1 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, most of whom now move to dismiss the complaint pursuant to Rules 12(b), 9(b) and 8(a) and (e) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 ("PSLRA").2 This opinion addresses the motions to dismiss of some of the accountants and addresses the question whether the complaint states a claim against the multinational accounting firms with which Parmalat's Italian auditors were connected.

I. Background

Plaintiffs purportedly represent a class of individuals who purchased ordinary Parmalat shares and bonds during the Class Period. They sue Deloitte Touch Tohmatsu, Deloitte & Touche LLP, Deloitte & Touche USA LLP, and James Copeland (collectively, the "Deloitte defendants"), and Grant Thornton International, Grant Thornton LLP and Grant Thornton S.p.A. (collectively, the "Grant Thornton defendants"), among others, under Sections 10(b) and 20(a) of the Securities Exchange Act of 19343 (the "Exchange Act") and Rule 10b-5 thereunder.4 The complaint alleges the following facts, which the Court accepts as true for the purposes of this motion.5

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 a year from its operations there.6 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,7 the company needed constant infusions of cash. 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.8 ("GT-Italy") concocted a scheme involving misleading transactions and off-shore entities that created the appearance of financial health.9 One such transaction, for example, involved a fictitious sale of 300,000 tons of powdered milk to Cuba for $620 million.10 Loans obtained on the basis of this transaction were used to service debt and obtain more loans.11 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.12 Parmalat then hired Deloitte & Touche, S.p.A. ("Deloitte Italy") as its auditor. Deloitte offices in a dozen countries audited Parmalat and its subsidiaries and affiliates as part of this worldwide engagement.13 Despite the company's fear that new auditors would not continue to perpetuate the fraud, Deloitte14 discovered or recklessly ignored the fraud, yet certified the company's financial statements as substantially accurate.15

By late 2003, the scheme became unsustainable, and Parmalat had a liquidity crisis. The collapse was rapid. In early December, Parmalat could not pay certain maturing bonds.16 By December 11, the company's stock had lost half its value.17 Trading was suspended for days by Italian regulators.18 Parmalat's bonds rapidly lost value as well.19 On December 19, the company announced that a Bank of America account allegedly held by Bonlat that supposedly contained $4.9 billion did not exist.

Parmalat filed for bankruptcy in Italy on December 24, and it was declared insolvent three days later.20 Italian authorities thereafter indicted a number of Parmalat executives and insiders as well as the company's auditor, Deloitte Italy, and individual partners of GT-Italy. Authorities also arrested many individuals connected with the fraud and seized their assets.21

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 plaintiffs' favor.22 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."23 Although such motions are addressed to the pleading, a district court may consider also the full text of documents partially quoted or incorporated in the complaint where the documents are "integral" to it and relied upon by plaintiffs.24 Accordingly, the exhibits submitted in connection with defendants' moving papers are taken into account.25

A. Section 10(b) and Rule 10b-5

Exchange Act Rule 10b-5 makes it unlawful:

"(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."

To state a claim under Rule 10b-5(b), "a plaintiff must plead that the defendant, in connection with the purchase or sale of securities, made a materially false statement or omitted a material fact, with scienter, and that the plaintiff's reliance on the defendant's action caused injury to the plaintiff."26 Plaintiffs asserting a claim under Rule 10b-5(a) or (c) — that is, on the basis of manipulative or deceptive conduct — must allege that the defendant committed a manipulative or deceptive act with scienter in addition to the other elements of the claim.27 Scienter is an "intent to deceive, manipulate or defraud."28

B. Rule 9(b) and the PSLRA

As this is a securities fraud case, those aspects of the complaint that allege fraud must satisfy the heightened pleading requirements of Fed.R.Civ.P. 9(b) and the PSLRA. To the extent that a claim is based on alleged misrepresentations, a plaintiff must: "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, (4) explain why the statements were fraudulent."29 Scienter must be alleged "either (a) by alleging facts 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."30 In addition, if an allegation is based on information and belief, "the complaint shall state with particularity all facts on which that belief is formed."31

Although the PSLRA's heightened pleading standard in respect of misrepresentations arguably does not apply when plaintiffs allege a violation by virtue of a deceptive or manipulative device,32 the complaint nonetheless must comply with Rule 9(b)'s requirement of particularity in respect of the conduct alleged and the basis for the requisite allegation of scienter.33

Finally, "[w]here 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."34 It is not necessary, however, that plaintiffs connect a particular insider or affiliate to an allegedly deceptive corporate statement.35 In other contexts, in contrast, a complaint will fail where plaintiffs lump separate defendants together in vague and collective fraud allegations.36

C. Rule 8

Not all the allegations of the complaint are averments of fraud. These allegations are governed by Fed.R.Civ.P. 8(a), which requires only a short and plain statement of the claim.37 Even under the liberal notice pleading standard of Rule 8, however, conclusory assertions are inadequate.38

III. Claims under Section 10(b) of the Exchange Act and Rule 10b-5: Misrepresentations & Scienter
A. Overview

Defendants Grant Thornton International ("GTI"), Grant Thornton LLP ("GT-USA"), Deloitte Touche Tohmatsu ("DTT"), and Deloitte & Touche LLP and Deloitte & Touche USA LLP (collectively "Deloitte USA") principally argue that they did not audit Parmalat and were not involved in any of the alleged fraud committed by Parmalat's auditors, Deloitte Italy and GT-Italy. They assert further that they each are factually and legally separate from their Italian affiliates and therefore cannot be liable for...

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