Lead Plaintiff's Opposition to CSFB MSJ 11/13/06 - The ENRON Fraud

illegitimate deals and the like, which deprive the transactions of economic substance or risk or
cause them to be non-GAAP compliant. Each actor, no matter how manipulative, deceptive or
contrived its conduct may be, will be shielded because it always will be the issuer that later
formally misaccounts for the bogus deal. Thus, the rule cannot be that the issuer who ultimately
misaccounts for a transaction provides immunity to sophisticated banks who engage in the fraud
with scienter, using manipulation, deception or contrivances with the primary purpose and effect
of deceiving investors under Rule 10b-5(a) or (c).
In the 7/20/06 Order, the Court relied extensively on the scheme liability analysis
employed by Judge Kaplan in Parmalat I. See, e.g., Enron, 439 F. Supp. 2d at 721-24. At the
same time, though, this Court made clear its understanding that the SEC’s position “appears to
be in accord with Judge Kaplan’s analysis in Parmalat.” Id. at 715.
In Parmalat I, the plaintiffs alleged that defendant Citigroup violated Rule 10b-5(a) and
(c) when it securitized certain of Parmalat’s invoices that were known to the bank to be
worthless. 376 F. Supp. 2d at 481-82. The plaintiffs also claimed that defendant Banca
Nazionale del Lavoro (“BNL”) violated Rule 10b-5(a) and (c) by factoring Parmalat’s invoices
which BNL knew to be without value. In the scheme, BNL paid Parmalat cash for the
assignment of the bad invoices. But unlike a legitimate factoring, where “one party purchases at
a discount, receivables from the party that issued them and then attempts to collect the face
amount of the invoices” (id. at 488), “Parmalat had guaranteed to BNL . . . and the other banks,
payment of the full face value of the invoices” (id.). As such, the so-called “factoring” and
“securitization” arrangements were simply loans to Parmalat; the invoices “played no economic
role in the transaction; they were simply a device or excuse that permitted Parmalat to record
the revenue and to conceal the liability on the guarantees.” Id.
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