Overview
In re Parmalat Securities Litigation is a high-profile securities fraud class action lawsuit filed by purchasers of Parmalat securities between January 5, 1999 and December 18, 2003 against Parmalat and Parmalat’s accountants and outside auditors, Deloitte & Touche Tohmatsu, Deloitte S.p.A., Deloitte & Touche – U.S., and Grant Thornton, S.p.A., banks and others for securities violations under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.
The class action stems from a massive Ponzi scheme, one of the largest corporate frauds in history that had significant repercussions on the Italian economy and financial markets, worldwide. The scheme was allegedly perpetrated by the founder of Parmalat and other insiders, as well as Parmalat’s accounting and auditing firm Grant Thornton S.p.A. (GT – Italy) and ultimately Deloitte S.p.A. (Deloitte-Italy), which allegedly discovered or recklessly ignored the fraud. The fraud led to Parmalat’s bankruptcy in 2003.
At the center of the scheme was Parmalat’s understatement of its debt by nearly $10 billion and its overstatement of its net assets by $16.4 billion. The scheme ultimately developed into one of Europe’s largest corporate frauds. Parmalat’s bankruptcy was also the biggest corporate bankruptcy in Europe. In December 2003, the U.S. Securities and Exchange Commission filed a suit charging Parmalat with “one of the largest and most brazen corporate financial frauds in history.”
As co-lead counsel, Cohen Milstein represented four European institutional investors, who were appointed co-lead plaintiffs. We successfully negotiated several settlements totaling over $90 million, including settlements with Parmalat’s outside auditors, Grant Thornton – Italy and the Deloitte entities.
Most notably, Cohen Milstein demonstrated an expertise in a complicated bankruptcy proceeding. During the litigation, Parmalat emerged from bankruptcy as a new entity called “New Parmalat.” So, Cohen Milstein then added “New Parmalat” as a defendant because of the egregious fraud committed by the now-bankrupt old Parmalat. New Parmalat strenuously objected. However, the court ruled in plaintiffs’ favor, a ruling which was affirmed on appeal.
This innovative approach of adding New Parmalat enabled the class to obtain an important additional source of compensation, as we subsequently settled with New Parmalat for shares worth approximately $26 million.
Judge Lewis A. Kaplan of the United States District Court for the Southern District of New York, remarked that plaintiffs’ counsel “did a wonderful job here for the class and were in all respects totally professional and totally prepared. I wish I had counsel this good in front of me in every case.”
Case Background
Parmalat, an Italian dairy conglomerate, embarked on an aggressive expansion strategy in the early 1990s, heavily financed through debt. A major part of this strategy included cross-border expansion around the globe, costing the company hundreds of millions of dollars. Parmalat required substantial cash flow to manage its mounting debt and to conceal the embezzlement of funds by its founder and CEO, Calisto Tanzi, and his family.
To sustain this, Parmalat insiders—along with the company’s auditor, GT-Italy—engaged in a Ponzi-style scheme. They orchestrated misleading transactions and used offshore entities in the Cayman Islands and the British Virgin Islands.to create a false impression of financial health. The scheme relied on fabricating sales and securing loans based on these fictitious transactions. The borrowed funds were then used to service existing debt and secure additional financing. Supervised by Fausto Tonna, Parmalat’s CFO, a complex structure was put in place to fabricate revenue and simultaneously hide liabilities from Parmalat’s balance sheets. According to the plaintiffs, this deception allowed Parmalat to receive substantial loans from banks, which were recorded as assets rather than liabilities—artificially inflating the company’s valuation.
In accordance with Italian law, Parmalat was required to change auditors in 1999. Fearing that the new auditors might uncover the fraud, Parmalat and GT-Italy shifted the questionable financial activity to a Cayman Island-based subsidiary, Bonlat, which remained under GT-Italy’s oversight. Meanwhile, Deloitte-Italy was appointed as Parmalat’s new primary auditor. However, the fear that Deloitte would expose the scheme proved unfounded; Deloitte-Italy allegedly either discovered the fraud and ignored it or failed to detect it due to reckless oversight. Instead, the firm certified Parmalat’s financial statements as accurate.
By late 2003, the fraudulent scheme unraveled, triggering a severe liquidity crisis. On December 19, 2003, Parmalat disclosed that $4.9 billion in cash supposedly held by Bonlat, did not exist. Parmalat filed for bankruptcy on December 24, 2003, and was declared insolvent three days later. Several Parmalat executives, insiders, and Deloitte Italy were subsequently indicted by Italian prosecutors.
For instance, eight people from Parmalat were arrested, including:
- Calisto Tanzi, the founder and former CEO of Parmalat, was arrested and charged with market rigging, false accounting, and obstructing regulatory authorities. He was sentenced to 18 years in prison. Ultimately, he served just over two years, after which he was placed under house arrest.
- Fausto Tonna, the former CFO of Parmalat, who helped create fake bank accounts and falsify financial statements was arrested and sentenced to 14 years in prison. His sentence was later reduced to two years.
- Gian Paolo Zini, a former Parmalat legal advisor, was sentenced to two years in prison.
The accounting firms were also held accountable for their roles:
- Grant Thornton, S.p.A., Parmalat’s auditor from 1990 to 1999, also faced arrests and fines. Lorenzo Penca, the auditor’s branch president, was arrested., as was Maurizio Bianchi, a partner. Both were accused of falsely certifying Parmalat’s balance sheets and suggesting ways for the company to commit fraud.
- Deloitte was fined €149 million. No executives were arrested.
Given the complexity and sophistication of the Parmalat scheme, the fraud also highlighted the need for improved corporate governance and greater transparency in financial reporting.
Case name: In re Parmalat Securities Litigation, Case No. 1:04-md-01653, United States District Court for the Southern District of New York