Legal News

New York Judge Puts Possible Bulls-eye on Deloitte Touche

By Nathan Koppel

New York federal judge Lewis Kaplan issued a ruling yesterday in the Parmalat securities litigation which could have accountants quaking, and plaintiffs’ lawyers licking their chops.

Parmalat, an Italian dairy conglomerate, collapsed in 2003 following the discovery of a massive fraud in which the company allegedly overstated its assets by $16 billion.

At issue in yesterday’s ruling was whether Deloitte Touche Tohmatsu potentially could be held liable for an allegedly defective Parmalat audit by its Italian member firm, Deloitte & Touche, S.p.a. Yes, Kaplan held, in denying a Deloitte Touche Tohmatsu’s motion for summary judgment.

“This is huge,” says Stuart Grant, plaintiffs’ counsel in the matter. Accounting firms, he says, often assert that their foreign affiliates are legally separate, thus limiting the asset pool available to investors who file suit. “They always argue that you can’t pursue the worldwide organization, sometimes successfully,” Grant says. “Judge Kaplan has finally made the law reflect reality. These accounting firms sell themselves as worldwide, seamless organizations. Now they are going to be held responsible in the same fashion.”

Deloitte did not immediately respond to a request for comment.

Whether Deloitte Touche Tohmatsu could be held liable turned on whether it had a “principal-agent” relationship with its Italian affiliate. In deciding that in the affirmative, Kaplan noted that “DTT exercised substantial control over the manner in which its member firms conducted their professional activities.”

But the reach of Kaplan’s decision is not yet clear, as it depended partly on the particular facts of the case. The judge found evidence that DTT exercised some control in particular over the Parmalat engagement.

Full post as published by Law Blog - WSJ.com on January 28, 2009 (boomark / email).