Summary Judgment as to Securities Fraud Claims against Various Deloitte Entities Denied because Genuine Issues of Fact Existed as to Liability for Claims in Class Action Complaint New York Federal Court Holds
Following the collapse of Parmalat Finanziaria, S.p.A., Parmalat S.p.A. and their affiliates because of a multi-billion dollar fraud that understated Parmalat’s debt by $10 billion and overstated Parmalat’s assets by $16 billion, various securities fraud class actions were filed against numerous parties: one such class action was filed against Deloitte Touche Tohmatsu (DTT), Deloitte & Touche LLP (DT-US), and James Copeland (collectively “Deloitte defendants”) on behalf of purchasers of Parmalat stock. In re Parmalat Securities Litig., ___ F.Supp.2d ___ (S.D.N.Y. January 27, 2009) [Slip Opn., at 2]. The class action alleged violations of Section Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and of Rule 10b-5 thereunder, id., at 2-3. Defense attorneys moved for summary judgment as to the class action claims against the Deloitte defendants, id., at 2. Alternatively, the defense argued that the Deloitte defendants were not jointly and severally liable under the Private Securities Litigation Reform Act of 1995 (PSLRA), id., at 8.
We do not here discuss Deloitte’s corporate structure, or the Parmalat scandal and the alleged fraud of Deloitte Italy. See In re Parmalat, at 3-7. In a detailed opinion, the federal district court first rejected the defense challenge to DTT’s vicarious liability, on a respondeat superior theory, for the federal securities class action claims arising out of the acts of its alleged agent, Deloitte Italy. See id., at 9-11. The question was whether DTT had a principal-agent relationship with Deloitte Italy, id., at 12, and the district court found that a triable issue of material fact existed as to whether it did, see id., at 12-19. As the court concluded at page 19, “In all the circumstances, the totality of the evidence…raises a genuine issue of material fact as to whether Deloitte Italy was an agent of DTT with respect to the Parmalat engagement.” It accordingly denied DTT’s motion for summary judgment as to those class action claims premised on respondeat superior liability for Section 10(b) violations. Id., at 19. Turning to the class action’s Section 20(a) claim against DTT, defense attorneys argued that “there is no evidence that would justify a conclusion that it controlled the alleged primary violator, Deloitte Italy,” and that in any event DTT is not liable because it “acted in good faith and did not induce the act or acts constituting the alleged violations.” Id., at 19-20. Again, the federal court found a genuine issue of material fact existed as to whether DTT was a “control person” within the meaning of Section 20(a), id., at 20-21, and that it could not find, as a matter of law, that DTT acted in good faith, see id., at 21-25.
With respect to the class action’s control person claims against DT-US, the defense argued that because DT-US did not control DTT, summary judgment was warranted. In re Parmalat, at 25. The federal court concluded, however, that “it is uncontroverted that several DT-US partners held key leadership positions at DTT, including the position of chief executive officer, and that DT-US, through loans and outright contributions provided a large portion of DTT’s funding.” See id., at 25-28. And the court similarly rejected the argument that DT-US acted in good faith and did not know of any fraud relating to Parmalat, id., at 28. Finally, with respect to Copeland’s challenges to the class action, the federal court observed that he was the CEO of both DTT and DT-US and that a triable issue of fact existed as to whether he was a control person of both entities, id., at 28, or whether he acted in good faith, id., at 29. Finally, the federal court rejected the summary judgment motion challenging joint and several liability under the PSLRA, “which limits joint and several liability to defendants who commit knowing rather than merely reckless violations of the securities laws.” Id. Accordingly, the district court refused to dismiss the class action claims against the Deloitte defendants. Id., at 30.