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Would a system of private enforcement create sufficient incentives to limit the
recurrence of a future Parmalat?
The financial scandals such as the Parmalat case that was, mainly a result of fraudulent
conducts evidenced the fragility of the gatekeepers and showed deficiencies in the legal
institutional framework between regulation and enforcement mechanisms, especially inEurope and US. Thus, in the US there was a reform in legislation leading to the creation
of the Sarbanes-Oxley Act in order to supervise and monitor the conducts of the
external auditors that didnt take any action in time to prevent this kind of situations. On
the other hand in the EU there were discussions concerning legislative reforms, but also
respecting the private enforcement which is mostly seen as a way to protect individual
interests instead of public interests. Besides that there are certain procedural
characteristics that put into question the efficiency of the private enforcement system,
such as the time and the lack of legal actions comparing with US civil actions (class
actions, pleading rules and discovery rules), since most of the biggest cases are subjectof public prosecutors actions, and in the case of Parmalat subject to an insolvency
proceeding where collective actions can be gathered and the liquidator can sue
gatekeepers and claim for compensation for the companys creditors losses. Other
difficulty that the private enforcement needs to deal with is the collective interest
approach that can only be protected by consumer associations that dont have powers to
recover damages; they can only obtain cease or desist orders, which mostly of the
actions that protects the public interest are based on a public enforcement mechanism
instead of a private enforcement.
The occurrence of Parmalat scandal created mass civil actions in US and in Italy. It wasin US Courts by a public agency (SEC) and class-action lawyers (actions brought by
SEC against Parmalat; Parmalats Commissioner against Grant Thornton and Deloitte
Touche Tohmatsu; asset managers against two banks, the auditor and the former
management) that gave the initiation of discussions of a possible introduction of class
actions in Italy. One of the underlined reasons for that is because the US civil procedure
offers to plaintiffs extensive weaponry of legal arms and not for forum-shopping
reasons, which means that there werent substantive rules in US that could bring more
advantages for the party that brought an action, but the fact that the private enforcement
procedure was more efficient than in EU, which lead to the initiation of civil actions in
the US, and in Italy what happened was that the investors joined as civil claimants the
criminal trial. Enron situation.
That shows the lack of a private enforcement that protects the public interest, and
highlights the differences between class actions and individual procedures: the pleading
and discovery rules are completely different because in US there are broader rules of
discovery and are based on notice pleading rules, and most of European countries
(including Italy) have broader rules of discovery but in a very limited way since it
requires to have an authorization by the Court to have access to the information, also is
based on fact pleading rules, in consequence the independence of civil actions used forinjured victims to claim damages will create situations of double actions, contrary to the
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effect of a private enforcement with class actions that can gather all the victims
interests in the same claim. This type of actions is very useful in cases where there are a
huge number of civil claims, such as the Parmalat case that requires an efficient system
of enforceability, especially an improvement in the private enforcement and not so
much an increase of regulation.
The other possible way is to have an efficient public enforcement, but the practice has
showed that is not possible due to three reasons1: the public enforcer dont have access
to all sorts of information that the private parties posses as it what happened with
Parmalat; it lacks of financial resources and agency costs such as the public enforcer
could be less strict with wrongdoers if it has any kind of benefit.
Other example to defend that a private enforcement system can incentive to limit
financial scandals, is through an explanation of the gatekeepers role and the private
enforcement system in the Parmalat case. In Parmalat the gatekeepers werent able to
prevent the scandal; all of their actions are guided by two characteristics: their
reputation and their civil liability. Reputation because the auditors have to defend in the
market their names as consultant companies and in the eventuality of lost of reputation
there are social consequences for the auditor. The auditors are liable by contract but also
by tort, which means that the auditors are responsible towards all economic agents that
they interact (such as shareholders, investors, creditors, the company audited,
employers). Within this legal and social scenario the private enforcement system didnt
manage to accomplish an efficient result due to the few settled cases involving auditing
companies.
The reputational cost for a firm is not deterrent enough for a small group of persons
that get 3000 million in the process
The reputational theory cannot be applied to the Italian case, as the smaller circles
were more concern about contacts and internal issues, not external reputation. They
had a personal relationship with the controlling shareholder so the main issue was not
to get angry with him
These are clear examples of a weak private enforcement mechanism, which can be
improved or to have a more deterrent effect in order to give more negative
consequences in case of fraud or wrongdoing conducts. A more efficient and
empowered private enforcement mechanism gives incentives to limit cases as Parmalat
but it doesnt eliminate possible future cases. Thus, the enforcement mechanism should
be used as a tool by corporate governance system with the objective to create
confidence in the market and to protect collective interests, so it can have a preventive
and punitive effect at the same time.
1According with the legal scholar professor Steven Shavell
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Additional argume:
- Enron: class actions not deterrent of anything- Negative consequences iof pr. Enf. In US many insurancesD&O, risk costs,
Chapter 10 of After Enron.
. Differences between pr. Enf. In US/EUdiscovery, long proceedings in court, success
fees, American Rule of costs; civil law overall does NOT match. Dont create incentive
for private enforcement in EU.
-public enforcement ADVANTAGES DISADVANTAGES
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