In Re Parmalat Securities Litigation

Citations: 640 F. Supp. 2d 243; 2009 WL 510736Docket: Master Docket 04 MD 1653(LAK)

Court: District Court, S.D. New York; February 25, 2009; Federal District Court

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Parmalat Finanziaria, S.p.A. and its affiliates faced a significant collapse due to a massive fraud involving an understatement of nearly $10 billion in debt and an overstatement of $16.4 billion in net assets. Plaintiffs, including Parmalat security purchasers and the Italian-appointed representative of Parmalat's estate, are seeking damages from Parmalat's accountants and banks. The United States District Court for the Southern District of New York is considering motions for summary judgment filed by Grant Thornton International (GTI) and Grant Thornton LLP (GT US) aimed at dismissing the claims against them. The plaintiffs' case relies on Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, asserting that GTI and GT US are vicariously liable for the alleged fraudulent actions of GT Italy, another member of the Grant Thornton network and Parmalat's former auditor.

GTI functions as a non-profit umbrella organization for its member firms, which include GT Italy and GT US. Member firms conduct auditing and accounting independently while adhering to both local regulations and the professional standards set forth by GTI. Despite disclaimers asserting the legal separateness of GTI and its members, GTI has directed members to present themselves under a unified branding, emphasizing their connection as part of a cohesive international organization. This branding strategy is intended to promote the member firms collectively to international clients.

Summary judgment is appropriate when no genuine issue of material fact exists and the movant is entitled to judgment as a matter of law. Typically, if the burden of proof lies with the nonmoving party at trial, the movant can establish a lack of evidence regarding an essential element of the non-movant's claim, thereby shifting the burden to the non-moving party to produce admissible evidence that raises a genuine issue of fact to avoid summary judgment.

Liability for securities violations by GT Italy against GTI and GT U.S. hinges on the existence of a principal-agent relationship, as defined under Illinois law, where the principal has the right to control the agent's work. Such relationships can be demonstrated through actual or apparent authority, established by direct or circumstantial evidence, including the parties' conduct and relevant circumstances. The predominant factor in determining agency is the right to control.

Plaintiffs assert that GTI exercised significant control over its member firms, including GT Italy, evidenced by agreements mandating compliance with GTI policies and a detailed audit manual outlining procedures to be followed. GTI required adherence to quality control standards and a code of ethics, and while it did not mandate a specific risk management policy, it required firms to implement one that met GTI specifications. Additionally, GTI controlled branding and marketing practices, requiring member firms to adopt consistent branding elements and submit marketing materials for compliance checks. GTI also directed member firms on how to refer to themselves and GTI in communications, emphasizing the use of specific terminology to avoid client confusion regarding their organizational structure.

GTI prohibited member firms from using terms like "member firm," "correspondent firm," and "network" to avoid drawing attention to its structural hierarchy. Evidence suggests GTI exercised control over member firms through periodic reviews and disciplinary actions, requiring comprehensive evaluations every three years that included oversight of audit work. GTI had various disciplinary options, such as demotion to correspondent status, personnel changes, and expulsion, and it enacted these measures in practice. For instance, after a poor review, it reclassified the El Salvador member firm, stripping it of the Grant Thornton name and mandating new hires. In another case, GTI imposed strict requirements on an Indonesian member firm following a public dispute.

GTI claimed entitlement to summary judgment by arguing insufficient evidence of its control over GT Italy's audit work related to alleged injuries. However, legal principles establish that a principal can be liable for the torts of its agent if the agent acted within the scope of employment, regardless of the principal's direct involvement. Historical legal doctrine supports this, emphasizing that principals are liable for their agents' misconduct in civil suits. The Restatement of Agency outlines that vicarious liability applies when an employee acts within the scope of employment, which includes work assigned by the employer or conduct under the employer's control. GTI has not disputed that GT Italy acted as its agent and within that scope; thus, the key issue is whether evidence exists to suggest GTI controlled or had the right to control GT Italy's audit work. Evidence indicates that GT Italy was contractually obligated to adhere to GTI's policies and was required to utilize GTI's audit methodologies and proprietary software.

The tools outlined for audit procedures mandated specific methods for member firms, surpassing mere guidelines and establishing detailed instructions for auditors. The GTI Audit Manual required audits to include comprehensive procedures for understanding clients' accounting systems and internal controls, alongside directives for employing various analytical procedures. This evidence indicates that GTI exercised control over GT Italy during its audits, despite GT Italy and its auditors having some discretion in their execution. The limited adjustments made by GT Italy, as described by partner Massimo Barbaria, involved merely translating procedures and applying them to particular clients, particularly large companies like Parmalat. GTI's claim that its control did not prevent GT Italy’s fraud is irrelevant, as principals are liable for their agents' actions within the scope of their roles. GTI's arguments against control—such as the lack of GTI personnel on the audit team and the ignorance of some partners about GTI—are insufficient to negate the evidence of control. Additionally, GTI’s actions to suspend auditors and terminate agreements do not eliminate the question of control; plaintiffs only need to show a genuine issue of material fact regarding GTI's control over GT Italy. 

In a separate matter, GT U.S. seeks summary judgment, asserting it did not control either GTI or GT Italy, thus warranting dismissal. Plaintiffs argue that GT U.S. indirectly controlled GT Italy through GTI, establishing a subagent relationship. Given the potential for a jury to conclude that GTI controlled GT Italy, the pivotal issue is whether there is enough evidence to suggest that GT U.S. controlled GTI.

GTI exhibits a significant dependency on GT-US, primarily due to GT-US's substantial influence over GTI's governance and operational structure. GT-US holds veto power on key decisions regarding GTI's governance, including the addition of member firms and changes to bylaws, and has two seats on GTI's board of directors. Financially, GTI relies heavily on GT-US, which is its largest contributor and provides essential resources such as office space and personnel, with GTI lacking its own offices or employees. Leadership positions, including the CEO role, have historically been filled by individuals connected to GT-US or GT-UK, further indicating GT-US's control. 

Moreover, GT-US's involvement in the Executive Partners Group (EP Group) highlights its influence over GTI's decision-making processes. The EP Group, comprising leaders from GTI, GT-US, GT-UK, and Canadian firms, has seen GT-US representatives dominate discussions and decisions, as evidenced by a situation where a proposal was removed from the GTI agenda after EP Group disapproval. GT-US attempts to counter claims of control by arguing that individual elements of influence do not collectively signify control; however, the court is tasked with assessing whether the overall evidence could allow a rational jury to conclude that GT-US indeed controlled GTI.

The Court concludes that it cannot resolve conflicting inferences from the evidence presented. Defendants argue that GTI and GT U.S. prevented GT Italy from acting as their agent, referencing the member firm agreement that states a member firm cannot bind another member firm or GTI. However, the disclaimers in these agreements do not conclusively determine the rights of non-parties and do not warrant summary judgment in favor of the defendants given other evidence favoring the plaintiffs. 

While the defendants assert that agency relationships require mutual consent, this consent can be inferred from actions. The Court finds that actions taken by GTI and GT U.S., such as encouraging the use of the Grant Thornton name and enforcing operational policies, suggest consent for GT Italy to act on their behalf. Additionally, GT Italy’s compliance with the defendants' regulations supports this inference.

Regarding the plaintiffs' claim that GTI is the alter ego of GT U.S., the Court does not address this due to a genuine issue of fact regarding U.S. control over GTI. In relation to liability under Section 20(a) of the Exchange Act, the Court rejects the defendants' argument for summary judgment, affirming that control over a liable entity does not require direct participation in the violation. Sufficient evidence exists indicating that GTI and GT U.S. could control audit report preparation, creating a material fact issue regarding their status as controlling persons.

On vicarious liability, the defendants claim that the plaintiffs' arguments are invalid post-Stoneridge Investment Partners, but the Court determines that Stoneridge does not preclude vicarious liability claims for principals regarding agents operating within their employment scope, allowing such claims to proceed.

Consequently, the defendants' motion for summary judgment to dismiss the complaints is denied.

The Third Amended Consolidated Class Action Complaint pertains to violations of federal securities laws, specifically referencing 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5. The parties have submitted a Rule 56.1 Statement, which indicates that the averments cited are undisputed. The document outlines three consolidated cases, with two cases—Bondi v. Grant Thornton International and Parmalat Capital Finance Ltd. v. Grant Thornton International—transferred from the Northern District of Illinois to the Southern District of New York for coordinated pretrial proceedings. The court applies Illinois law to the first two cases, while New York law governs the third case, In re Parmalat Securities Litigation. 

It notes that definitions of agency relationships under Illinois and New York law are materially similar, allowing the court to primarily reference Illinois authority for convenience. Multiple Illinois case precedents regarding agency law are cited, establishing a framework for the court's analysis. The defendants' briefs reference both Illinois and New York cases but emphasize that there is no significant difference in applicable agency law, while the plaintiffs primarily rely on Illinois authority.

In the legal proceedings referenced, various points highlight the structure and operations of GTI in relation to its member firms. Key elements include:

1. **Member Firm Agreements**: Member firms are required to execute agreements and adopt GTI's mission statement and strategic framework, as detailed in GTI's Policies and Procedures Manual.

2. **Performance Reviews**: GTI and member firms conduct periodic performance reviews to maintain oversight and accountability, with GT Mexico being involved in sanctioning a firm in El Salvador under GTI's direction.

3. **Control in Dispute Resolution**: GTI's involvement in mediating disputes among member firms, such as in Indonesia, exemplifies its control. The imposition of non-negotiable conditions on one firm during a dispute illustrates GTI's authoritative role, irrespective of the initiation of the mediation.

4. **Legal Liability**: The excerpt discusses the principle of respondeat superior, establishing that an employer can be liable for the actions of its employees conducted within the scope of their employment, including intentional torts.

5. **Audit Methodology**: GT Italy utilized GTI's audit methodology and software during its audits of Parmalat, indicating operational reliance on GTI’s standards.

6. **Judicial Precedents**: Citations from case law reinforce that liability can be imposed under certain circumstances, challenging the notion that professional judgment restricts control from a principal.

These points collectively illustrate GTI's governance structure over member firms, its dispute resolution capabilities, and the implications of liability under agency law.

The testimony from GT Italy partners, specifically Massimo Barbaria and Francesco Bertolli, lacks clarity regarding the existence and structure of Grant Thornton International (GTI). Barbaria's deposition reveals uncertainty about GTI, where he mentions various Grant Thornton entities but refers to GTI as a "big hat." Bertolli indicates that "Grant Thornton International" represents a network of all Grant Thornton entities, but states that GT Italy did not select auditors for its review, as they were sent by GTI.

The legal principle of respondeat superior suggests that a principal can be held liable for the actions of an agent causing injury to a plaintiff, even without direct involvement. Defendants argue that GTI merely recommended the suspension of two auditors, while plaintiffs assert that GTI coerced the suspension by threatening GT Italy's membership status. Evidence indicates that GTI exercised control over GT Italy, notably through its authority to terminate relationships, which supports the plaintiffs' position.

Control can also be inferred from financial involvement, such as contributing significantly to operating costs. Additional details include GTI's operations from managing director Robert Kleckner’s Florida home and the title changes within GTI leadership. Case law establishes that agency relationships can arise from implied conduct rather than express agreements, with various precedents cited to support these points.