Citigroup and CSFB had best break out the Stovetop, because they are definitely staying in the Parmalat securities class action, Central Bank or no Central Bank. You see, Judge Lewis A. Kaplan (S.D.N.Y.) has largely denied their motions to dismiss (as he did with Parmalat’s foreign auditors in another opinion reported by the Nugget last month, albeit on very different grounds). This time, Judge Kaplan tackles Plaintiffs’ 1934 Act claims against the banks for "(1) structuring and participating in transactions that were hidden or mischaracterized on Parmalat's financial statements" and (2) "making certain statements or omissions in connection with the foregoing, allegedly in violation of Rule 10b-5(b)."
The banks, hunkering down under Central Bank of Denver, N.A. v. First Interstate Bank of Denver, 511 U.S. 164 (1994) argued that "that they were at most aiders and abettors of a program pursuant to which Parmalat made misrepresentations on its financial statements." However, Judge Kaplan found that this argument "misses the mark," as "the transactions in which the defendants engaged were by nature deceptive" because "they depended on a fiction, namely that [certain worthless] invoices [that Citigroup purchased and securitized] had value."
Where most opinions simply analyze violation of Rule 10b-5, Judge Kaplan’s analysis went further. He analyzed the claims under 10b-5’s subsections, namely 10b-5(a) and (c). The banks argued that "subsections (a) and (c) apply only to the narrow category of acts understood as ‘manipulative’ in a technical sense." However, Judge Kaplan found that "this interpretation is refuted by the language of the rule as well as the case law, which make it clear that subsections (a) and (c) apply to at least some deceptive acts as much as to certain technical forms of market manipulation."
While being careful to note that his analysis of these subsections "is not a back door into liability for those who help others make a false statement or omission in violation of subsection (b) of Rule 10b-5," Judge Kaplan noted the "lack of precision" that many pre-Central Bank courts implemented when "dealing with primary violations as compared with aiding and abetting liability." For example, "for decades the distinction between the conduct covered by subsections (a) and (c) on the one hand, and subsection (b) on the other was largely insignificant. A corollary is that courts for the most part found it unnecessary to consider the extent to which the phrase ‘manipulative or deceptive device or contrivance’ in Section 10(b) applied to conduct other than misrepresentations, omissions, and market manipulation." He concluded that "it no longer is possible, however, to ignore these issues.
Thus, "the major question here is whether the banks directly or indirectly used or employed any device or contrivance with the capacity or tendency to deceive." He then parsed and separated each bank’s activities, finding that some of their activities satisfied this test, while others did not. He concluded by holding that "the complaint alleges that the banks' actions in connection with the relevant transactions actually and foreseeably caused losses in the securities markets. The banks made no relevant misrepresentations to those markets, but they knew that the very purpose of certain of their transactions was to allow Parmalat to make such misrepresentations. In these circumstances, both the banks and Parmalat are alleged causes of the losses in question. So long as both committed acts in violation of statute and rule, both may be liable."
Remains to be seen how many Plaintiffs will pick up this new twist against third party defendants.
You can read the decision, issued July 13, 2005, at 2005 U.S. Dist. LEXIS 14542.
Nugget: "It is impossible to separate the deceptive nature of the transactions from the deception actually practiced upon Parmalat's investors."
Nugget: "This analysis is not an end run around Central Bank. If a defendant has committed no act within the scope of Section 10(b) and Rule 10b-5 -- as in fact was the case in Central Bank -- then liability will not arise on the theory that that defendant assisted another in violating the statute and rule. But where, as alleged here, a financial institution enters into deceptive transactions as part of a scheme in violation of Rule 10b-5(a) and (c) that causes foreseeable losses in the securities markets, that institution is subject to private liability under Section 10(b) and Rule 10b-5."