In a recent decision, Judge Lewis A. Kaplan of the U.S. District Court for the Southern District of New York was asked to consider what effect the Supreme Court’s decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008), would have on certain third-party banks and a law firm accused of contributing to the collapse of the international dairy conglomerate, Parmalat Finanziaria S.p.A (“Parmalat”). See In re Parmalat Securities Litigation, No. 04 MD 1653 (LAK), 2008 U.S. Dist. LEXIS 61541 (S.D.N.Y. Aug. 7, 2008). In conjunction with pending motions for summary judgment, the court had to decide whether the rules for imposing liability on non-speaking defendants set forth in Stoneridge had been satisfied as to these secondary actor defendants.

This decision is an important one for those who have followed the issue of “scheme liability” claims over the years. In an earlier decision in this same case, Judge Kaplan refused to dismiss the claims against these same defendants, holding that the plaintiffs had adequately pled that they engaged in a fraudulent scheme along with their client, Parmalat, for which a claim was possible under Section 10(b) of the Securities Exchange Act of 1934. See In re Parmalat Securities Litigation, 376 F. Supp. 2d 472 (S.D.N.Y. 2005). This earlier decision was cited frequently by the plaintiffs’ bar in support of the scheme theory of liability and, in particular, was relied upon heavily by the plaintiffs in the Stoneridge case.

Earlier this year in Stoneridge, the U.S. Supreme Court set forth the standard for imposing liability on secondary actor defendants who are accused of conspiring with a public company client or customer to inflate that company’s stock price. The Supreme Court rejected the concept of “scheme liability,” holding that the implied right of action it had previously recognized under Section 10(b) could not reach non-speaking defendants where the plaintiff did not rely on any statements or conduct of those defendants in making the decision to purchase or sell securities. Stoneridge, 128 S. Ct. at 766. It was undisputed in Stoneridge that the defendants owed no disclosure duty to the plaintiffs, who were all investors in an unrelated company. Id. at 769. Accordingly, the presumption of reliance that the Supreme Court had previously recognized for material omissions where a duty to speak exists could not apply in that case. See id. 

Also, to the extent that the plaintiffs in Stoneridge claimed that the defendants should be liable for deceptive acts as opposed to speech, those claims also failed because the plaintiffs could not satisfy the mandatory requirement of reliance. See id. Liability cannot exist where “[n]o member of the investing public had knowledge, either actual or presumed, of [defendants’ allegedly] deceptive acts during the relevant times.” Id. It was undisputed that, at the time they made their investment decision, the plaintiffs in Stoneridge were unaware of the conduct of which the secondary actor defendants were later accused. See id. In the recent Parmalat decision, as in Stoneridge, the plaintiffs also could not prove that the defendants owed an affirmative duty of disclosure and they could not establish that the secondary actor defendants engaged in any deceptive acts that were known to and relied upon by the market.

The Absence of a Disclosure Duty. The plaintiffs in Parmalat argued that two defendants, Bank of America and a foreign law firm, each breached a separate duty of disclosure that they owed to the plaintiffs. Parmalat, 2008 U.S. Dist. LEXIS at *9-*10. Bank of America was alleged to have withheld information from investors who purchased Parmalat securities in private placements, and the law firm was alleged to have concealed Parmalat’s conduct with respect to a divestiture of certain brands and trademarks, purportedly in violation of the Model Rules of Professional Conduct. See id. The court rejected both of these claims.

As to the bank defendant, the court found that the named plaintiffs had failed to show that they actually purchased the securities at issue from Bank of America. Id. at *10. Under Stoneridge, “only investors to whom the duty [of disclosure] was owed may avail themselves of th[e] presumption [of reliance]” previously recognized by the Supreme Court for omissions where a duty to speak exists. Stoneridge, 128 S. Ct. at 769. Because the named plaintiffs did not purchase their shares from Bank of America, the bank did not owe them a duty of disclosure. And, while certain unnamed members of the putative class may have purchased their securities from the bank, the court noted that “reliance is not presumed merely because named plaintiffs in a purported class action allege that a duty was owed to other members of the proposed class.” Parmalat, 2008 U.S. Dist. LEXIS at *11.

Liability also could not be imposed on the law firm for allegedly violating the Model Rules of Professional Conduct. The parties disputed whether the Model Rules actually governed, but the court held that, even if they did apply, the plaintiffs could not demonstrate that the law firm owed them an independent legal duty of disclosure based on the existence of these rules. See id.

No Reliance on Allegedly Deceptive Conduct. The court then turned to the issue of whether the defendants’ allegedly deceptive acts were made known to the investing public so as to satisfy the reliance requirement under Stoneridge. See Stoneridge, 128 S. Ct. at 769-70. The plaintiffs attempted to satisfy this requirement by showing that Parmalat had issued press releases, bond prospectuses, and offering memoranda in which it named Bank of America and some of the other financial institution defendants as lead investors in some of the disputed transactions. Parmalat, 2008 U.S. Dist. LEXIS at *12-*13. In rejecting this argument, the court noted that nothing in these disclosures revealed any information on the conduct of Bank of America or the other financial institutions, nor did these disclosures actually reveal any conduct that could be considered deceptive in any respect. Id. at *13-*14. At most, the disclosures described transactions enacted by Parmalat in which these secondary defendants were involved. Id. at *14. Absent evidence that the secondary actor defendants engaged in their own deceptive conduct which was known to the market or that breached a duty specifically owed to the plaintiffs, the most that could be said of the defendants’ conduct was that it was part of “an indirect chain” of events that the Supreme Court in Stoneridge would have considered to be “too remote for liability.” Id. (citing Stoneridge, 128 S. Ct. at 769).

Because the plaintiffs had failed to establish the required elements of duty and reliance as to their claims against these secondary actor defendants, the court granted summary judgment to these defendants and dismissed the claims against them.