In re Parmalat Securities Litigation

376 F.Supp.2d 472

In re PARMALAT SECURITIES LITIGATION This document relates to: 04 Civ. 0030.

No. 04 MD 1653(LAK).

United States District Court, S.D. New York.

July 13, 2005.

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James J. Sabella, New York City, Stuart M. Grant, John C. Kairis, Diane Zilka, Grant & Eisenhofer P.A., Wilmington, DC, Steven J. Toll, Catherine A. Torell, Mark

S. Willis, Julie Goldsmith Reiser, Joshua S. Devore, Cohen, Milstein, Hausfeld & Toll, P.L.L.C., Washington, DC, for Plaintiffs.

George A. Schieren, Mark A. Kirsch, Mark Holland, Jeff E. Butler, David Cook, Clifford Chance U.S. LLP, New York City, for the Citigroup Defendants.

Joseph B. Tompkins, Jr., A. Robert Pietrzak, Thomas McC. Souther, Daniel A. McLaughlin, Alan C. Geolot, Mark P. Guerrera, Sidley Austin Brown & Wood LLP, Washington, DC, for Bank of America Defendants.

Michael S. Feldberg, Todd S. Fishman, Kelly A. Berkell, Allen & Overy LLP, New York City, for Defendant Credit Suisse First Boston.

Howard A. Ellins, Nancy B. Ludmerer, Antoinette G. Ellison, Davis Polk & Wardwell, New York City, for Defendant Banca Nazionale del Lavoro S.p.A.

OPINION

KAPLAN, District Judge.

Table of Contents
  I.  The Complaint and the Motions to Dismiss .......................................480
      A.  Citigroup ..................................................................481
          1.  Factual Allegations ....................................................481
              a.  Securitization of Invoices .........................................481
              b.  The Geslat/Buconero Arrangement ....................................482
              c.  Parmalat Canada Arrangement ........................................484
          2.  Causes of Action, Grounds for Motion to Dismiss ........................485
      B.  Bank of America ............................................................485
          1.  Factual Allegations ....................................................485
              a.  The Parmalat Administracao Private Placement .......................485
              b.  Loans Backed by Funds Raised Through Private Placements ............486
          2.  Causes of Action, Grounds for Motions to Dismiss .......................487
      C.  Banca Nazionale del Lavoro .................................................487
          1.  Factual Allegations ....................................................487
          2.  Causes of Action, Grounds for Motion to Dismiss ........................489
      D.  Credit Suisse First Boston .................................................489
          1.  Factual Allegations ....................................................489
          2.  Cause of Action, Grounds for Motion to Dismiss .........................490
 II.  12(b)(6) Motions to Dismiss ....................................................490
III.  Pleading a Violation of Rule 10b-5 .............................................490
      A.  Scienter ...................................................................491
      B.  Rule 10b-5(b): Misrepresentations and Omissions ............................491
      C.  Rule 10b-5(a) and (c): Deceptive and Manipulative Acts and Devices .........491
 IV.  Primary Liability Versus Liability for Aiding and Abetting......................493
      A.  Rule 10b-5 Liability for Outside Financial Institutions Prior to Central
            Bank .....................................................................493
          1.  Confusion Between Primary and Aiding and Abetting Liability ............494
          2.  Aiding and Abetting Liability for Lenders that Facilitate Fraud ........496
          3.  Most Cases Did Not Focus on the Distinction Among the
                Subsections of Rule 10b-5 ............................................497
      B.  The Central Bank Decision ..................................................498
      C.  Liability for Outside Financial Institutions After Central Bank ............499
  V.  Sufficiency of the Section 10(b) Claims ........................................503
      A.  Allegations Regarding Structuring and Participating in Transactions ........504
          1.  Violation of Rule 10b-5(a) and (c) .....................................504
              a.  Securitization and Factoring of Invoices ...........................504

              b.  Other Transactions that Resulted in Mischaracterization of Debt ....505
              c.  The CSFB Transactions ..............................................505
          2.  Effect on Market for Securities or Connection with Their Purchase
                and Sale .............................................................505
          3.  Scienter ...............................................................506
          4.  Causation ..............................................................507
              a.  Transaction Causation ..............................................508
              b.  Loss Causation .....................................................510
          5.  Subject Matter Jurisdiction over Claims Against BNL and CSFB ...........510
      B.  Alleged Misstatements and Omissions ........................................512
          1.  The Geslat/Buconero Press Release Allegedly "Approved" by
                Citigroup ............................................................513
          2.  The Parmalat Administracao Press Release Allegedly Co-Written by
                BoA ..................................................................514
          3.  Misrepresentations and Omissions by BoA in Connection with Loans
                and Private Placements ...............................................515
 VI.  Section 20(a) Claims ...........................................................515
      A.  Pleading a Violation of Section 20(a) ......................................515
      B.  Sufficiency of the Allegations .............................................516
VII.  Conclusion .....................................................................517

The plaintiffs in these consolidated class actions were investors in the securities of the international dairy conglomerate Parmalat Finanziaria S.p.A. and subsidiaries and affiliates (collectively "Parmalat"). They allege that Parmalat's officers, directors, accountants, lawyers, and banks made representations and structured transactions that operated to defraud Parmalat's investors in violation of Sections 10(b)¹ and 20(a)² of the Securities Exchange Act of 1934 and Rule 10b-5³ thereunder.

This opinion addresses the motions of the defendant banks to dismiss the actions as to them pursuant to Rules 12(b) and 9(b) of the Federal Rules of Civil Procedure. They require consideration of, among other issues, the contours of subsections (a) and (c) of Rule 10b-5, which prohibit "any device, scheme, or artifice to defraud" and "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.

I. The Complaint and the Motions to Dismiss

As described in an earlier opinion,⁴ the plaintiffs purport to represent classes of persons who purchased Parmalat securities from January 5, 1999 to December 18, 2003 (the "Class Period.").⁵ The 368-page amended consolidated complaint details various fraudulent acts allegedly perpetrated by Parmalat and the defendants.

A. Citigroup

1. Factual Allegations

Citigroup Inc. and Citibank, N.A. ("Citibank"), and their subsidiaries and affiliates (collectively "Citigroup"), are alleged "knowingly and actively [to have] participated in the fraudulent scheme" and to have had "intimate knowledge" of Parmalat's finances through its "close relationship with its important client" and its "direct participation in the fraudulent activities."⁶ The complaint describes three specific arrangements involving Citigroup.

a. Securitization of Invoices

The first involved Citigroup's purchase and securitization of allegedly worthless invoices.⁷

Under agreements entered into in 1995, 1999, 2000, and 2001, invoices for goods sold by various Parmalat subsidiaries were purchased by defendant Eureka Securitisation plc ("Eureka"), a Citigroup affiliate, as well as by Eureka's wholly-owned Italian subsidiary, Archimede Securitization S.r.l. ("Archimede"). Archimede and Eureka then sold commercial paper secured by the invoices.⁸ This securitization alone would appear to have been neither unusual nor deceptive.

The deception allegedly stemmed from Parmalat's billing system, under which many of the invoices were in effect duplicates that did not represent anything actually due. Parmalat supplied supermarkets and other retailers through a network of wholesale dealers. These dealers were invoiced for each delivery and typically paid Parmalat the full amount of the invoices. The dealers sometimes sold to retailers on their own account and sometimes distributed Parmalat's products to supermarkets on Parmalat's behalf. In the latter case, the dealer would furnish to Parmalat proof of delivery to the supermarket. Parmalat then would issue a second invoice, this one directly to the supermarket, and undertake to reimburse the dealer for the goods it distributed to the supermarket. In other words, when a dealer acted purely as Parmalat's distributor, amounts that the dealer owed Parmalat for goods distributed for Parmalat were offset by Parmalat's corresponding obligation to reimburse the dealer.⁹ Like the securitization of receivables, there appears to have been nothing remarkable or deceptive about this billing system — which the complaint implies had been used for forty years¹⁰ — standing alone.

The problem was that Parmalat assigned to Archimedes and Eureka, and they then...