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Dr. Enrico Bondi, As v. Citigroup

December 22, 2011

DR. ENRICO BONDI, AS EXTRAORDINARY COMMISSIONER OF PARMALAT FINANZIARIA S.P.A., PARMALAT S.P.A., AND OTHER AFFILIATED ENTITIES IN EXTRAORDINARY ADMINISTRATION, PLAINTIFF-APPELLANT/ CROSS-RESPONDENT,
v.
CITIGROUP, INC., CITIBANK, N.A., VIALATTEA, L.L.C., BUCONERO, L.L.C., AND EUREKA SECURITISATION P.L.C.,*FN1 DEFENDANTS-RESPONDENTS/ CROSS-APPELLANTS.



On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-10902-04.

The opinion of the court was delivered by: Cuff, P.J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

APPROVED FOR PUBLICATION

Argued: May 4, 2011 -

Before Judges Cuff, Sapp-Peterson and Simonelli.

The opinion of the court was delivered by CUFF, P.J.A.D.

Between 1961 and 2003, Parmalat Finanziaria S.p.A., (Parmalat) grew from a regional dairy in Italy producing and distributing milk and milk products to a multi-national corporation producing and distributing food products, including dairy products. Its growth was initiated by a technique developed by it to extend the shelf life of milk. Parmalat accomplished its growth by acquiring other corporations. This growth required financing and many multi-national lenders, such as defendants Citigroup, Inc. and Citibank, N.A. (collectively Citi), were willing to loan large sums of money. Parmalat's collapse in December 2003 spawned a wide array of legal proceedings, including civil actions here*fn2 and in Italy by lenders and investors, as well as criminal prosecutions in Italy. Parmalat's collapse also triggered some reform in Italian bankruptcy law by instituting a type of reorganization known as extraordinary administration.

Dr. Enrico Bondi is the administrator*fn3 appointed by the Italian government to oversee the reorganization of Parmalat following its collapse in December 2003. On July 29, 2004, Bondi filed a complaint against Citi, Buconero, L.L.C. (Buconero), Vialattea, L.L.C. (Vialattea), and Eureka Securitisation Plc (Eureka). Citi was one of several financial firms that served as an investment banker for Parmalat. In essence, Bondi accused defendants of facilitating, covering up and profiting from various improper and illegal financial manipulations orchestrated by Parmalat's founder and key managers over a protracted period of time. The manipulations allowed Parmalat to artificially inflate company value and cash flow and to obscure debt ultimately resulting in the loss of billions of dollars to corporate creditors and investors.

Specifically, Bondi sought damages from Citi on ten causes of action: fraud (Count I), aiding and abetting fraud and constructive fraud (Count II), negligent misrepresentation (Count III), aiding and abetting breach of fiduciary duty (Count IV), diversion of corporate assets (Count V), unjust enrichment (Count VI), aiding and abetting fraudulent transfers (Count VII), deepening insolvency (Count VIII), and participation in civil and RICO conspiracies (Counts IX and X). Citi moved to dismiss the complaint on jurisdictional and forum non conveniens grounds. Judge Jonathan Harris denied this motion.

Defendants also sought dismissal of the complaint on other grounds, including in pari delicto and lack of recognition of deepening insolvency as an independent cause of action. Judge Harris denied defendants' motion to dismiss in large part without prejudice but dismissed Count VIII, the deepening insolvency cause of action.

Citi filed an answer and a counterclaim. The latter accused Bondi of fraud, negligent misrepresentation, conversion, and breach of warranties associated with securitization agreements executed in 1995 and 2000.

Prior to commencement of trial in May 2008, all parties filed summary judgment motions. In his April 15, 2008 opinion, Judge Harris held that the in pari delicto doctrine barred all of Bondi's tort and contract claims, except the claim that defendants had aided and abetted the Parmalat insiders' larceny and "looting" of company funds and their breach of fiduciary duty to the company. The judge also determined that Italian law governed whether Bondi had standing to seek damages for deepening insolvency, and held that Bondi lacked standing to pursue these damages.

At the conclusion of Citi's case on its counterclaim, Judge Harris dismissed the two breach of warranty claims. The jury returned a verdict against Parmalat on its remaining aiding and abetting claim and also returned a verdict in favor of Citi on its counterclaims.

In this appeal, we review the $431,318,824.84 judgment*fn4

entered following the seventy-day jury trial in favor of defendant-counterclaimant Citi and the judgment of no cause of action against Bondi. Bondi argues that the judge erred in granting summary judgment barring most of Bondi's claims against Citi. He also contends the jury verdict is the product of legal error committed by the trial judge, and further contends that the treatment of many, if not all, of Citi's monetary claims in Italian bankruptcy proceedings should bar relitigation of those claims here. In their protective cross-appeal, Citi reiterates an argument pressed four times in the trial court that the complaint should have been dismissed on forum non conveniens grounds. Citi also contends the trial judge erred in admitting evidence of Italian criminal proceedings involving Citi employees and hearsay statements in Italian police reports. Finally, it argues that the trial judge applied the wrong legal standard to the issue of Citi's knowledge regarding the aiding and abetting claim.

We hold that Judge Harris properly applied the in pari delicto affirmative defense invoked by Citi to defeat all of Bondi's claims against Citi, except for the claim that Citi aided and abetted larceny by Parmalat senior executives. We also hold that Bondi was not entitled to pursue damages for deepening insolvency under Italian law, and deepening insolvency is not an independent cause of action in this State. In addition, we hold Citi's counterclaims are not barred by res judicata, the verdict on the conversion claim is supported by the record, and Citi has standing to sue for losses sustained by its subsidiaries. Due to our disposition of Bondi's appeal, we do not address the cross-appeal.

I

We commence our discussion with certain undisputed facts.*fn5

We relate those facts and then highlight the disputed facts in the light most favorable to Parmalat, the party resisting Citi's motion for summary judgment. In some instances, such as the fraudulent acts orchestrated by the Chief Executive Officer (CEO), the Chief Financial Officer (CFO), and twenty-nine identified Parmalat insiders, the parties do not dispute the details of the transactions but dispute the import of those facts.

A. The Growth of Parmalat and Actions of Corporate Insiders.

Calisto Tanzi founded Parmalat, then known as Dietelat, in 1961. The family-owned company grew rapidly after developing a process that substantially extended the shelf life of milk. Parmalat became a publicly-owned company in 1990 and continued to expand its business and product lines in large part through acquisitions of existing businesses. By 2002, it was the leading milk distributor in Canada, Brazil and Italy, operating in thirty countries, including the United States, and employing more than 35,000 people world-wide. By 2002, the company also had over 200 subsidiaries worldwide, including Parmalat, a wholly-owned Italian company, and Bonlat Financing Corp. (Bonlat), a wholly-owned Parmalat subsidiary in the Cayman Islands. Bondi acknowledged that Tanzi was the majority Parmalat stockholder, and the governance structure vested the CEO position occupied by Tanzi with "all-controlling" power over the entire corporation. Bondi also admitted that Tanzi was involved in the fraudulent activities with a limited group of corporate officers and managers, and these fraudulent activities ultimately caused the collapse of the company.

Bondi identified Fausto Tonna, the CFO, and twenty-nine other persons who were involved in the various schemes, including thirteen directors, some relatives of Tanzi, Alberto Ferraris (the CFO's successor in March 2003), a company vice-chairman, the "outside" corporate legal counsel, and other individuals holding high-level positions. Among this latter group were the heads of customer accounting, treasury and finance, internal audit, director of sales, chair of the statutory board of auditors, CFOs of Parmalat subsidiaries, and members of some of Parmalat's internal boards. Tanzi and these insiders directed the distribution of €85 million in Parmalat dividends between 1998 and 2003, of which approximately €43 million went to Tanzi and the balance to insiders, including directors of the corporation. Not all directors were involved in the scheme.

In fact, Bondi also admitted that Tanzi and top executives associated with Tanzi and their consultants manipulated accounting devices and used off-shore financial companies to hide Parmalat's actual financial condition and to improve its performance artificially. One of the top executives was CFO Tonna.

It was also largely undisputed that Parmalat actually had a negative net worth as early as 1990, contrary to the financial statements produced by the corporation. It is not disputed that financial statements generally consist of a balance sheet, an income or profit and loss statement, a cash flow statement and explanatory notes. Investors routinely rely on financial statements to assess the health of a company. A financial statement provides a snapshot of assets, debts, and net worth at a given time. Financial statements also depict the relationship between a company's reported debt and equity (the debt-to-equity ratio). The parties agreed that the higher the debt-to-equity ratio, the riskier the company is considered by investors and lenders. The parties also agreed that a company's debt-to-equity ratio and its financial statements are key elements in determining a credit rating.

The financial statements produced by Parmalat between 1994 and 2002 indicated strong earnings, growth in production facilities and employees, large amounts of cash and other liquid assets and large amounts of debt. Bondi admitted that the publicly-filed Parmalat financial statements from 1990 to 2002 were not prepared in accordance with Italian law or in accordance with generally accepted accounting practices (GAAP) applicable to public Italian companies and did not accurately reflect the level of debt carried by the corporation. Bondi also admitted the company's board of statutory auditors*fn6 recommended approval of all of Parmalat's financial statements between 1990 and 2002 and, at various times, three external auditors certified that the financial statements accurately represented Parmalat's financial condition.

Parmalat generally reported large cash reserves and other liquid assets. By 2002, Parmalat reported that a Bank of America account contained over $4 billion. In December 2003, however, Citi and the public in general learned that neither the $4 billion nor the Bank of America account existed. This cash deposit was related to a Parmalat subsidiary known as Bonlat.

Bondi does not dispute that Bonlat was incorporated on November 25, 1998, in the Cayman Islands. Its financial results were consolidated into Parmalat's consolidated financial statements, but its activities were non-existent. Parmalat Capital Finance, a Parmalat group company, purportedly loaned Bonlat $7 billion but all or part of that sum was not actually loaned to Bonlat and certain Parmalat insiders removed approximately $5.176 billion in debt from Parmalat's consolidated financial statement through transactions with Bonlat.

In addition, Parmalat's bank debt was understated by $500 million as a result of $500 million of bonds issued by Parmalat Capital Finance that were offset by non-existent securities purportedly held by Bonlat. $985 million of Parmalat's bank debt was transferred to Bonlat through inter-company transfers and reclassified as inter-company debt. In addition, $298 million of Parmalat bank debt from lines of credit was transferred to Bonlat through inter-company transfers, thereby reducing the amount of bank debt reported in Parmalat's consolidated balance sheet. Bonlat was also used to book fictitious sales of millions of dollars of trademark and other intellectual property.

Parmalat fabricated a false bank account at Bank of America to create assets that did not exist. At the end of 2002, Bonlat's records showed a balance in excess of $4 billion in this account. From 1999 through 2002, the false bank account and its purported balance were documented in letters seemingly issued by Bank of America. The letters were forged by an employee in Parmalat's finance department. Bondi admitted that he found no evidence that Citi participated in the forgery.

B. Parmalat-Citi Relationship.

The Parmalat-Citi banking relationship commenced in 1994 and continued until Parmalat's collapse in December 2003. Citi regarded Parmalat as a "platinum client" that generated significant revenue and served as the corporate banker for many transactions in addition to the five transactions at issue in this case. Citi was not, however, the only banker used by Parmalat between 1994 and 2003.*fn7

Citi entrusted a parent account manager (PAM) to oversee the parties' relationship. The PAM served as a liaison between the bank and the corporate client and concentrated on origination of new business and management of existing business. Alberto Ferraris acted as Parmalat's PAM from 1994 until he became CEO of Parmalat Canada in 1997. He became CFO of Parmalat in March 2003, when Tonna resigned. Filippo Sabatini replaced Ferraris in July 1997, and served as PAM until March 2000; Paola Botta oversaw the relationship from April 2000 to December 2003. The PAM was part of a group within Citi known as the Global Relationship Bank (GRB). It consisted of several groups in several locations serving Citi's largest multinational clients. The GRB contained persons with specialized knowledge about specific business sectors and products. The GRB also contained persons, known as transactors, who were responsible for coordinating various types of transactions.

Among the teams at Citi with whom the PAM facilitated communication on behalf of its corporate clients, such as Parmalat, was the institutional recovery management group. This group was responsible for reducing the bank's credit exposure in its dealings with troubled companies. Other teams included a group of public equity research analysts, a structured corporate finance group, and the global loan portfolio management group. The latter group was responsible for monitoring credit and had the authority to approve or reduce client credit.

Bondi alleged that Citi was not a victim but a knowing participant in the fraud. He focused his allegations on five transactions: the Parmalat Canada transaction, the Geslat transaction, the securitization program, the leaseback transaction, and the derivatives transaction. In doing so, he concedes that there is no evidence of looting or diversion of funds from these transactions by Tanzi, Tonna or other insiders. Bondi alleges, however, that the structure of these transactions, particularly the Parmalat Canada and the Geslat transactions, contributed to Parmalat's deepening insolvency and cloaked debt levels by characterizing loaned funds as equity rather than debt. Bondi also conceded that Parmalat Canada was one of Parmalat's most profitable subsidiaries.

1. Parmalat Canada.

Parmalat acquired three Canadian companies between 1997 and 1998: Beatrice Foods, Inc. (Beatrice) in April 1997; Ault Foods (Ault) in July 1997; and Astro Dairy Products (Astro) in November 1998 (collectively Parmalat Canada). Citi arranged financing for the transactions, and acted as financial advisor in the Beatrice acquisition through its subsidiary, Citinvest S.p.A. Citinvest was retained to provide financial advisory services regarding the structure, negotiation, strategy and tactics for the transaction. Other professionals were also retained by Parmalat for these three acquisitions, including legal counsel, Coopers & Lybrand to perform a due diligence review of Beatrice, and Grant Thornton, an independent auditing firm retained by Parmalat, to issue an opinion on how to report the Beatrice transaction in its financial statements.

To finance the Beatrice acquisition, Citi arranged a syndicated loan and made an equity investment in Parmalat Canada equivalent to 24.9% of non-voting shares. A stock certificate documented Citi's shares in Parmalat Canada. Citi's equity investment was subject to a "put" agreement, which generally provides a buyer the right, but not the obligation, to sell a designated asset at a specified price, but the seller of the put option has the obligation to buy the asset at the specified price, if the option is exercised. Citi made additional equity investments when Parmalat acquired Ault and Astro but its holdings in Parmalat Canada always remained at 24.9%. The original put agreement was amended eight times. When the initial public offering originally contemplated for Parmalat Canada did not occur, Citi exercised its put option in January 2002, and realized $182 million (Canadian).

Bondi argues the Citi equity investment was disguised debt and the disclosures were inadequate because the right to exercise the put option was unconditional. He also argues that Citi intentionally structured the transaction in this manner to understate Parmalat's debt and to avoid risk to it.

Citi presented evidence that its pre-transaction evaluations indicated that the put option would provide Citi with a credit risk profile substantially comparable to a loan. The record reveals that Grant Thornton eventually rendered an opinion that the Citi investment could be reported as equity, although initially, internal Citi documents considered the debt or equity characterization as a debatable issue. KPMG, another accounting firm, also rendered an opinion that it was not necessary to report the initial put agreement as debt in the financial statements. Ultimately, Parmalat disclosed the Parmalat Canada transactions in the notes to its 1997 consolidated statements and phrased subsequent disclosures from 1998 through 2001 in similar terms.

The 1997 consolidated statements described the Citi participation in the Parmalat Canada transaction as follows: "The acquisition was carried out by Parmalat Canada, Inc., a company set up for this purpose, owned 75.1% by the Parmalat Group and 24.9% in shares without voting rights, by a subsidiary of Citicorp." A note described the put agreement as follows:

In the event certain conditions should occur, as contractually provided, including the failure of the company to be listed at latest by the first months of 2007, the Parmalat Group has a potential liability to purchase the 24.9% of Parmalat Canada Inc. now held by Citicorp, at a price which, up until April 1999, will be equal to 140.7 million Canadian Dollars, and subsequently to be calculated based on the consolidated operating results of Parmalat Canada Inc.

Grant Thornton certified the accuracy of Parmalat's 1997 and 1998 financial statements; Deloitte & Touche certified Parmalat's financial statements for 1999, 2000 and 2001.

2. Geslat Transaction.

Citi entered into two transactions with a Parmalat subsidiary, Gestione Centrali del Latte Srl (Geslat) in 1995 and 1999. The transaction used an investment instrument unique to the Italian Civil Code known as an Associazione in Partecipazione (AiP). The AiP structure, called Sirius by Citi, was a financial product that Citi sold to other European companies such as Gucci, Barilla and France Telecom. In its simplest terms, by taking advantage of certain tax laws, the AiP structure purported to provide medium-term (five-to-ten-year) financing at a substantially cheaper cost than more traditional fund-raising options. In both transactions, Citi subsidiaries, such as Citibank International Plc., provided funds to Geslat pursuant to AiP agreements. Geslat used the funds to make inter-company loans to other Parmalat subsidiaries.

Citi also entered into a put agreement with Parmalat that gave Citi the option to sell its participation in Geslat to Parmalat at a fixed rate of return on or after a specified date. Citi also entered into an insurance and indemnity agreement with an unrelated entity for a surety bond to guarantee payments to Citi if it exercised its put option. Citi exercised its put option on February 22, 1999, the first date allowed by the 1995 put agreement.

Citi entered a similar agreement with Geslat in 1999 through another subsidiary, defendant Buconero. The 1999 agreement was amended in 2001 to increase Citi's investment from €60 to €117.3 million. Contemporaneously, Vialattea, another Citi subsidiary and parent of Buconero, purchased a stake in Geslat for €205,000, later increased to €2.7 million. As with the 1995 agreement, the 1999 transaction provided Parmalat with lower than market rate financing. The 1999 agreement, however, was governed by United States rather than United Kingdom tax laws and did not include a put agreement as in 1995. Instead, the parties used a business plan and transaction operating agreement, which Bondi's forensic accounting expert opined functioned like a put agreement.

Bondi contends the net effect of the 1995 and 1999 AiP transactions was to inappropriately remove €120 million in debt from Parmalat financial statements. He concedes, however, that the 1995 and 1999 Geslat transactions were discussed in a letter to shareholders at the beginning of Geslat's financial statements from 1995 through 2002. He contends, however, that the disclosure was immaterial because investors reviewing the Parmalat financial statements would not know to consult the Geslat financial statements. It is undisputed that the transactions were highly profitable to Citi due to fees paid to Citi and other sureties obtained to reduce Citi's risk of loss.

3. Securitization Transaction.

Citi provided securitization services to Parmalat through two transactions: one in 1995, the other in 2000 that continued through 2003. Citi used two "special purpose vehicles," Eureka and Archimede Securitization Srl (Archimede). Eureka raised funds in the marketplace which it forwarded to Archimede to purchase receivables from Parmalat. The 2000 program purchased receivables from Parmalat's Italian, Canadian and United States subsidiaries.

Securitization programs use receivables to raise cash or for use as collateral. The sale of receivables is generally considered an off-balance sheet transaction. Once sold, the receivables are removed from the balance sheet in a process known as de-recognition. The cash received replaces the asset and no liability is created in the process; therefore, the process occurs "off" the balance sheet.

Under the 1995 and 2000 securitization programs, Parmalat identified trade receivables for securitization and entered information about them in Citi's proprietary software known as Enigma. Once screened as eligible, Citi forwarded an advance funding of these receivables to Parmalat. Eureka and Archimede did not collect customer payments; Parmalat served as collection agent.

Bondi asserted that the securitization program obscured the full measure of financing vehicles used by Parmalat and also allowed Parmalat to cover up other accounting falsifications.*fn8

He also alleged that the Citi securitization program was designed and operated from its inception as a fraudulent program. Bondi emphasized that in a true securitization program, the seller relinquishes control of the receivable but the Citi securitization program permitted Parmalat to retain control of the receivables. Citi presented evidence that the Parmalat 1995 disclosure of the 1995 securitization program complied with Italian GAAP, assuming Parmalat complied with the rules governing the program.

4. Leaseback Transaction.

In 2003, Citi provided Parmalat advisory services in connection with a sale/leaseback transaction between GE Capital Public Finance, Inc. (GE) and Farmland Dairies, L.L.C. (Farmland), a former Parmalat subsidiary. Initially, Bondi identified the Farmland transaction as another off-balance sheet transaction that served to obscure debt levels. At trial, however, Bondi's accounting expert, Bala Dharan, acknowledged that the transaction actually was an on-balance sheet transaction and perfectly legitimate. He offered no opinion whether the transaction had been formulated to facilitate looting.

5. Derivative Transactions.

Citi executed several derivative transactions for Parmalat. A derivative is an obligation or benefit that depends for its value on some future performance of an underlying asset. International companies, such as Parmalat, used derivative transactions, particularly foreign exchange transactions, to manage risk. Dharan concluded that Parmalat had used three categories of derivative transactions to speculate and borrow money. He also opined that Citi designed the transactions to operate as short-term loans, without the obligations to report the transactions as such. On the other hand, Dharan acknowledged that there was no requirement that Parmalat disclose the risk it sought to hedge and that a company could hedge less than 100% of either its assets or net equity.

C. Indicia of Citi Knowledge and Involvement in Corporate Insider Fraud.

In addition to the five highlighted transactions between Parmalat and Citi, Bondi contended that Citi's knowledge of and involvement in structuring various corporate transactions allowed it to acquire extensive information. In time, this information provided many "red flags" or warnings of the on- going larceny or looting of corporate assets by corporate insiders. By its willingness to lend money to Parmalat, Bondi contends Citi was complicit in the thefts.

In support of these allegations, Bondi relied on the report of his banking and corporate finance expert, Richard George, who opined that Parmalat had evinced many "classic warning signs" of fraud and mismanagement, of which Citi was fully aware. In George's view, those warning signs included the low-profile management style of Parmalat's principals, and the difficult and domineering personality of Tonna, whom George felt was grossly underqualified citing Tonna's high school degree and employment exclusively at Parmalat.

To further support his allegation that Citi knew about the fraud at Parmalat, Bondi relied on statements and handwritten notations found within various Citi documents. For example, Bondi cited an e-mail in late October 1995, from Jack Wood, a Citi employee, to Sergio Ungaro, a Citi manager who became the functional head of Citi's GRB in Milan in 1996. In that e-mail, Wood advised Ungaro that he had recently received "negative feedback on the Parmalat name" from another bank. Those concerns apparently related to Parmalat's "limited funding flexibility . . . , nervousness in [a] meeting, and [the] secretiveness/lack of openness of management." Wood believed that the feedback was a "caution light," and asked, "[h]ow well do we really know Parmalat and what they're up to? Is there reason to look more closely at the name . . . or is our info fuller and more recent to conclude we're ok?"

Bondi also relied on handwritten comments in two documents, although the author(s) of those notations is unclear: 1) an August 2, 1995 credit memorandum; and 2) a draft letter, dated December 11, 1998, from Citi to Parmalat proposing terms of a note issue. The August 2, 1995 credit memorandum contained a statement that Parmalat had experienced a "sharp increase in cash and securities" in 1994. In the margins was a handwritten phrase: "window dressing?"

The December 11, 1998 draft proposal letter contained a chart comparing Citi's deals with other Italian companies. The chart included a transaction sponsored by Enron, and indicated that the proposed transaction with Parmalat could yield premiums that were comparable to the Enron transaction and were significantly higher than others on the chart. Someone had circled several of the numbers in the chart, and beside them wrote: "wow!!! do not want to show." Bondi argued ...


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