On January 27, 2009, the U.S. District Court for the Southern District of New York denied the motions of Deloitte Touche Tohmatsu and Deloitte & Touche LLP for summary judgment dismissing the complaints of shareholders against them in the protracted Parmalat litigation. In dismissing the motions, the Court has raised the possibility that the two entities could be held vicariously liable for the actions of Deloitte & Touche SpA, the Italian firm that audited Parmalat prior to its collapse in 2003.
Deloitte Touche Tomatsu (DTT) is a Swiss verein that serves as the professional services organization for its member firms throughout the world. The member firms are individual entities organized under the laws of their respective home jurisdictions. The Southern District specifically rejected the defendants’ argument that the Supreme Court’s recent decision in Stoneridge extended to theories of vicarious liability based on principal-agency relationships. The Court found that plaintiffs had recited sufficient facts that could lead to a conclusion that DTT controlled its members and, accordingly, DTT was a principal responsible for the actions of its agents, namely the members of DTT. While the Court held that there were sufficient issues of fact raised to preclude a dismissal of the complaint, the Court did not reach a conclusion as to whether the member firms were indeed agents of DTT. This issue was left to be determined by the trial court. Similarly, the Court also concluded that the plaintiffs had introduced sufficient facts as to whether DTT was a controlling person of its members, so the Court could not dismiss claims against DTT under Section 20(a) of the Securities Exchange Act of 1934.
Deloitte & Touche LLP (DT-US) filed separate motions to dismiss the complaints against it. The plaintiffs argued that DT-US controlled DTT because many of the DT-US partners occupied key positions in DTT, including the chief executive officer, chief financial officer and the director of independence issues. The Court held that the overlapping officer positions were informative but not dispositive in establishing control. Another fact raised by the plaintiffs was that DT-US provided a substantial portion of the funding of DTT through contributions, loans and guarantees of financing. Here, the Court found that significant funding is a factor indicating control, but is not sufficient to establish control. Finally, the Court also found a reasonable inference of control of DTT by DT-US from examples of the infl uence that DT-US had over decisions made by the DTT board of directors. Given the totality of the facts raised by the plaintiffs, the Court concluded that there is a genuine issue of material fact as to whether DT-US controlled DTT. The Court also extended the analysis in refusing to dismiss claims against the chief executive officer of DTUS and DTT.
The full impact of this decision for auditing firms who participate in networks or other alliances is not yet clear since a trial must still be held on the shareholder claims. This ruling leaves open the possibility of vicarious liability of an accounting firm membership organization for actions of its members. Whether such liability will actually be imposed in Parmalat will depend on findings by the judge or jury at trial.