Parmalat Francisco

8/2/2019 Parmalat Francisco

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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

Documents

Parmalat Francisco