In what seemed like the blink of an eye, Parmalat went from being the corporate crown jewel of Italy to the largest financial scandal in European history. The now-infamous collapse of the Italian dairy company, which had over 35,000 employees in 30 countries, ended with the arrest of senior Parmalat management, criminal investigations, regulatory proceedings on both sides of the Atlantic and, ultimately, bankruptcy.
The Parmalat scandal involved shady financial schemes and massive accounting misstatements, as well as the discovery that a $4.9bn Bank of America account in the name of a Parmalat subsidiary in the Cayman Islands was simply a fake. By late December 2003, Italian investigators revealed that Parmalat had used dozens of offshore companies to report non-existent assets to off-set at least $11bn in liabilities. As it turned out thereafter, Parmalat had falsified its accounting for over a decade.
After two years, it is still too early fully to know the truth about the extent and size of the fraud at Parmalat, particularly how many other individuals and entities were culpable participants. For example, while various well-known financial institutions initially maintained that they, like the investing public, were fooled by Parmalat, prosecutors have now asked for the criminal indictments of at least five global banks and securities companies. Indeed, former CEO Calisto Tanzi recently stated that the people at Parmalat had a “drugged” relationship with various banks, noting further that “Parmalat never had problems getting credit, and it was the banks themselves that pursued the company and promised as much money as was needed, despite the fact that the finances were not transparent and the company continued to seek more and more credit.”
It is not too early, however, to begin to discuss the lessons that foreign investors can learn from this massive fraud. The Parmalat litigation drives home many lessons, three of which are highlighted here.

US companies do not own a monopoly on securities fraud
This first lesson is probably the most obvious: Fraud can happen anywhere in the world, particularly as securities markets increase the trend toward globalisation. After the Parmalat scandal shook the financial world, the press quickly dubbed it “Europe’s Enron” – making it painfully obvious that major corporate fraud could no longer simply be considered an American phenomenon.
Indeed, the current chairman of the US Securities and Exchange Commission, Christopher Cox, made this point in his first major speech to the public: “For more than a year after Enron, the WorldCom, Health South, Global Crossing, Qwest, and Tyco scandals made it appear that financial fraud was a uniquely American problem. But this dubious distinction was shattered when the Vivendi, Royal Dutch/Shell, Parmalat and other European frauds emerged.” Recent events have only added to this list of financial high jinks, as non-US-based companies such as DaimlerChrysler, Converium, Royal Ahold and Repsol are now names that many investors also associate with securities fraud.

Using the US courts to recover money for European ­investors
The second lesson from Parmalat may be less apparent but is just as important: European institutional investors are increasingly using US courts and American law to recover money for damages caused by securities fraud. Multiple commentators have noted that, whenever possible, both Parmalat’s Extraordinary Commissioner (Dr Enrico Bondi, who acts on behalf of the company and its creditors) and investors in Parmalat have brought civil actions in the US and avoided the jurisdiction of Italian courts. Indeed, the lead plaintiffs in the US-based shareholder lawsuit against Parmalat – the investors who the US court has appointed to head the litigation – are exclusively European.
There are a number of reasons why Europeans have brought their actions in the US but one of the most important is that US law generally provides a more effective and efficient remedy for investors who have been damaged by fraud. Parmalat again demonstrates the point. The Associated Press has reported that in Italy 70,000 Parmalat investors want to join an Italian civil suit if the case against various banks goes to trial. Despite the fact that these investors lost their money over two years ago, the court has yet to decide which investors will be allowed to join the suit.
Meanwhile, Parmalat investors who brought suits in the US have found the US courts receptive to resolving their claims. Indeed, the American class action litigation regarding Parmalat has already made substantial progress in prosecuting investors’ claims and the court there has already determined not only who will be allowed to represent the potential class of Parmalat investors but which financial institutions, auditors, law firms and individuals can be potentially held accountable at trial.
An additional important motivation for European investor involvement in Parmalat and other cases is to ensure that Europeans are not excluded from American class actions by US investors. This is a key point, since it is the lead plaintiff that makes the initial determination of how a class will be defined (ie, whether the class will include or exclude Europeans). Such exclusion is not unprecedented. For example, when DaimlerChrysler settled a lawsuit for $300 million, non-US investors were excluded from the class settlement, and therefore did not receive any of the monies recovered. European investors were also excluded from actions against Deutsche Telecom, Lernout & Hauspie, Marconi and Elan. If non-US investors had been appointed as lead plaintiff in these cases, these exclusions might have been prevented.
Consider what has happened in the case against Deutsche Telecom, where the US lead plaintiffs excluded non-US investors from the action – which meant that the $120 million recovery was distributed only to those who purchased Deutsche Telecom shares in the US. By not being included in the US class action settlement, 15,000 European investors have now been forced to divide into almost 2,200 groups and employ 750 lawyers to file individual lawsuits in Germany against Deutsche Telecom to recover money. This mass action, according to public accounts, has been described as a “landmark lawsuit”.
Parmalat is, of course, also being lauded as a landmark case but for much better reasons. European institutional investors have opted to use the US class action device to prosecute their rights. By doing so, they have helped to protect their interests and the interests of many other investors (both US and non-US) harmed by a massive corporate fraud.

Implementation of corporate governance measures
As recent studies have confirmed, private shareholder litigation has a dramatically positive impact on effectuating strong corporate governance measures in the US. The investor appointed as lead plaintiff has the unique opportunity to seek to incorporate good governance measures as part of a negotiated settlement.
Non-US lead plaintiffs, such as those in the Parmalat action, often have the ability to effectively import key governance measures into settlements with defendant companies, regardless of where the company is based. In other words, companies which may be based outside the US, but choose to do business globally, may be subject to the same tools that US investors have historically wielded against American companies engaging in corporate fraud.
It is clear that as the markets of the world transition from local to global, so do corporate frauds. As the American class action regarding Parmalat illustrates, however, US laws have the potential to provide a global remedy for injured investors.

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