In re Parmalat Securities Litigation
| Decision Date | 21 September 2009 |
| Docket Number | Master Docket No. 04 MD 1653 (LAK). |
| Citation | 659 F.Supp.2d 504 |
| Parties | In re PARMALAT SECURITIES LITIGATION. This document relates to: 04 Civ. 9771, 06 Civ. 0704, 06 Civ. 2991. |
| Court | U.S. District Court — Southern District of New York |
John B. Quinn, Kathleen Sullivan, Peter E. Calamari, R. Brian Timmons, Johanna Y. Ong, Terry L. Wit, Adam S. Cashman, Quinn Emanuel Urquhart Oliver & Hedges, LLP, for Plaintiff Dr. Enrico Bondi.
Joseph B. Tompkins, Jr., Alan C. Geolot, Mark P. Guerrera, Robert D. Keeling, A. Robert Peitrzak, Thomas McC. Souther, Daniel A. McLaughlin, Sidley Austin LLP, for Defendants Bank of America Corporation, Bank of America, N.A., Bank of America National Trust & Savings Association, Banc of America Securities LLC, Banc of America Securities Limited, and Bank of America International Limited.
Allan B. Diamond, J. Gregory Taylor, J. Benjamin King, P. Jason, Collins, Diamond McCarthy LLP, for Plaintiff Parmalat Capital Finance Limited.
Linda T. Coberly, Bruce R. Braun, Andrew R. DeVooght, Winston & Strawn LLP, for Defendant Grant Thornton LLP.
James L. Bernard, Stroock & Stroock & Lavan LLP, for Defendant Grant Thornton International.
(Corrected)
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 $1
Parmalat, an Italian dairy conglomerate known for its long shelf-life milk, began as a small dairy distributor in Parma, Italy, and grew to a diversified, multi-national food company by 1990.4 Beginning in the late 1980s, however, the company experienced some difficulties including a 100 billion Italian lira loss as a result of the purchase and subsequent bankruptcy of a media company and, following the Chernobyl disaster, an investigation for radioactive milk and related product recall and drop in consumer confidence.5 It needed constant infusions of cash to cover its losses and service its massive debt.6 But cash could be obtained only so long as Parmalat appeared to be a sound investment. To this end, insiders at Parmalat and its outside auditor concocted schemes involving misleading transactions and off-shore entities that created the appearance of financial health.7 Loans obtained on the basis of these transactions were used to service debt and obtain more loans. These schemes were hidden in financial statements prepared by Parmalat's directors and approved by its auditors.8 Parmalat continued its fraud until its massive collapse more than a decade later.
Parmalat used its fraudulently gained financing to keep the company afloat and expand. It obtained over Q14.353 billion from debt and equity markets and used it to expand its operations across the globe.9 Between 1990 and 2003, Parmalat opened 136 production facilities and enlarged its workforce from 1,217 to 36,356 employees and its product line to 10,000 items.10 During this time also, the company spent roughly Q4 billion on acquisitions as it expanded operations from five countries to thirty.11
Grant Thornton, S.p.A. ("GT-Italy"), the Italian member firm of GTI,12 acted as Parmalat's principal outside auditor between 1995 and 1999.13 Parmalat relied on its auditors to advise and assist it in concealing the fraud through the use of sham entities and transactions and provided those auditors with false financial statements and other documentation.14 In one particular scheme, insiders at Parmalat and GT-Italy used misleading transactions and off-shore entities to create the appearance of a fictitious sale of 300,000 tons of powdered milk to Cuba for $620 million.15
PCFL, a wholly owned subsidiary of Parmalat, played another important role in the perpetuation of the Parmalat fraud. Organized in the Cayman Islands in 1997, PCFL was a financing vehicle that made over $1 billion in loans to other Parmalat entities using funds raised by issuing securities.16 It was also the parent of Bonlat Financing Ltd. ("Bonlat"), a wholly-owned subsidiary, that falsely claimed to have sold the powdered milk to Cuba, among other non-existent transactions.17
BoA allegedly became involved in the fraudulent scheme by engaging in transactions with Parmalat and PCFL that generated more than $800 million for Parmalat. Parmalat used these funds to repay existing debts and finance acquisitions, among other corporate needs.18
Ultimately, the scheme became unsustainable. Parmalat experienced a liquidity crisis, and the ensuing collapse was rapid. In early December 2003, Parmalat could not pay certain maturing bonds.19 By December 11, the company's stock had lost half its value. Trading was suspended for days by Italian regulators. Parmalat's bonds rapidly lost value as well. 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.20
Parmalat filed for bankruptcy in Italy on December 24 and was declared insolvent three days later.21 Italian authorities thereafter indicted a number of Parmalat executives and two GT-Italy partners.22 Authorities arrested many individuals connected with the fraud and seized their assets.23
While the motion now before the Court relates to Dr. Bondi's suit against Grant Thornton (04 Civ. 9771) and PCFL's actions against both BoA and Grant Thornton (06 Civ. 0704,06 Civ. 2291), respectively, the issues it presents were framed by another of the cases in this multidistrict litigation, Bondi v. Bank of America,24 which was filed before and influenced the actions here at issue. It therefore is helpful to begin with a description of the relevant proceedings in that action before going on to the claims made in the cases that are the subject of the pending motions.25
In his original complaint against Bank of America, Dr. Bondi asserted that "Parmalat engaged in a massive fraud and [that] BoA assisted in some respects."26 More particularly, he claimed that BoA helped Parmalat and its managers structure and execute "a series of complex, mostly off-balance sheet, financial transactions that were deliberately designed to conceal Parmalat's insolvency."27 Through the bank's assistance, Parmalat presented false financial statements and its officers and managers continued to raise additional financing for "(a) their massive acquisition campaign, (b) their equally massive looting of the company, and (c) their effort to keep the company afloat amid a mounting wave of losses, debts and disappearing funds."28 The complaint went on to allege the particulars of several specific transactions, all of which "were obviously the business of, and intended to benefit, Parmalat and not just its agents."29 Moreover, "the detailed allegations regarding the challenged transactions ma[d]e it quite clear that the Parmalat entities were crucial actors in the[] transactions."30
The original complaint contained also "a number of vague allegations of looting by Parmalat insiders."31 If read generously, it alleged also that BoA, in addition to designing and entering into the transactions by which Parmalat deceived the outside world to further its activities, somehow facilitated the alleged looting by some Parmalat insiders.
BoA moved to dismiss. Accepting for purposes of the motion Bondi's allegations that BoA was a culpable participant in the Parmalat fraud, it argued that the action nevertheless was barred because Parmalat was in pari delicto. Inasmuch as the original complaint made clear that much of what Bondi complained of constituted fraudulent behavior by Parmalat, the Court granted the motion except to the extent that Bondi asserted that BoA assisted Parmalat insiders in stealing from Parmalat.32
BoA moved to dismiss the new complaint, again on in pari delicto grounds. Obliged to accept as true for purposes of the motion the allegations that Parmalat insiders engaged in the transactions complained of solely to steal from the company and that Parmalat did not benefit from them in any respect, the Court denied the motion.34 The Court added, however, that, "[n]eedless to say, it remains to be seen whether Bondi can prove that transactions that raised millions of dollars for Parmalat served no corporate purpose."35 That case recently settled.
In his original complaint against Grant Thornton, Dr. Bondi alleged various malpractice and fraud claims against GTI, GT-US and GT-Italy. Although the complaint used the generic term "Grant Thornton" to refer to all of the defendant Grant Thornton entities, it was apparent from the allegations that Bondi attributed the alleged wrongdoing to GT-Italy and that he sued GTI and GT-US entirely or, at least, primarily on vicarious liability theories.36 GTI and GT-US moved to dismiss the complaint. As the complaint contained no specific allegations against GT-US and provided no basis for an inference that it controlled any wrongdoer, the Court dismissed all claims against that entity as well as all or parts of some of the...
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