Vicarious Liability Claims To Proceed To Trial: When Can an International Accounting Organization be Held Liable for the Acts of a Member Firm?

February 2009

In a recently issued decision, a federal trial court applied traditional rules of vicarious liability and concluded that issues of fact existed as to whether an international accounting organization might be held liable for the acts of one of its members.  Accordingly, a case that could have significant effects on the structure and management of accounting organizations, and potential liability, will now proceed to trial.


In re Parmalat Securities Litigation


The Parmalat case arises out of a massive accounting fraud allegedly perpetrated by the Italian dairy conglomerate involving $16 billion in understated debt and $10 billion in overstated assets.  This particular decision, issued January 27, 2009, resolved the motions for summary judgment brought by the accountant-defendants, consisting of Deloitte Touche Tohmatsu, Deloitte & Touche LLP and James Copeland.


Deloitte Touche Tohmatsu ("DTT") is a Swiss "verein," to which all the "Deloitte" firms worldwide belong.  DTT is charged with being the "principal" of the Italian member firm.  Deloitte & Touche LLP is the U.S. member of the "Deloitte" network, and is being charged as the "alter-ego" of DTT due to its alleged dominance of that organization.  The claims against the accountant-defendants all rest on the premise that they are liable for the alleged fraud of Deloitte Italy, one of Parmalat's former auditors and a member of the verein.


The Parmalat court acknowledged that by the language of last year's Supreme Court decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., liability under the federal securities laws would seem to be limited to only primary actors.  The court quoted the Stoneridge decision that, "[r]eliance by the plaintiff upon the defendant's deceptive acts is an essential element of the Section 10(b) private cause of action" and "[t]he conduct of a secondary actor must satisfy each of the elements or preconditions for liability."  Nonetheless, the court declined to adopt this seemingly clear pronouncement and instead imposed state common law theories of principal-agent liability.


The court reasoned that the common law principle of respondeat superior – i.e., that a principal is liable for the acts of its agent within the scope of the agent's authority – is centuries old.  According to this court, it would take a more specific holding by an appellate court for this judge to recognize that centuries-old law was not applicable to federal securities violations.  The court further justified its ruling by explaining that a broad reading of the Stoneridge decision would prevent plaintiffs from having large corporate defendants with deep pockets available to pay for plaintiffs' losses.


The Court Applies New York Common Law in Discussing Whether Principal-Agent Relationship Existed Such that Deloitte Touche Tohmatsu Should be Liable for the Acts of Deloitte Italy (one of its Member Firms)


After rejecting application of the Stoneridge holding, the Parmalat court applied New York state rules of principal-agent liability.  The court noted that under New York law, where a principal and agent agree that the agent will act for the principal, and the principal exercises a degree of control over the agent, the principal will be liable for the acts of the agent within the scope of the agent's duties to the principal.  Terms such as "degree of control" and "scope of the agent's duties" are examined on a case-by-case basis and are often strongly contested.


In this case, the court noted that each of the members of DTT agreed in the governing document, the Articles of Verein, to "support and adhere to the purposes and policies of the Verein" and to "be bound by the requirements contained in resolutions and protocols … including … those regarding professional standards and methodologies."  The organization also dictated the specific methodologies to be applied in conducting audits and the particular software and documentation procedures to be used by the member firms.


In addition, the organization required the member firms to:


  • sign agreements that required the member firms to comply with the organization's quality standards, specifications, directions and procedures;
  • use the Deloitte name;
  • cede control over the acceptance or rejection of engagements to DTT;
  • not sue other member firms;
  • accept client work referred from another member firm;
  • facilitate the transfer of employees among member firms (under certain circumstances);
  • permit the organization's attorneys to review work papers for threatened or actual lawsuits;
  • purchase specified levels of insurance; and
  • refer disputes between member firms to the organization for resolution, including, in this instance, a question concerning how to properly report certain Parmalat transactions.


In the context of this particular decision, the court did not determine that the organization would be liable for the fraudulent actions of Deloitte Italy, but rather that there was sufficient evidence that it could be found liable.


Control Person Liability Under the Federal Securities Laws


The court then discussed whether there was sufficient evidence to satisfy the federal securities laws with respect to control person liability.  Securities and Exchange Act section 20(a) provides that every person or entity who, directly or indirectly, controls any person or entity who is liable for securities fraud is liable to the same extent as the controlled person.  Citing much of the same evidence discussed above and its own prior rulings, the court declined to dismiss the claims against the accountant-defendants.


Finally, the court dismissed out of hand the language in the Private Securities Litigation Reform Act that limits a defendant's liability to only his or her own proportionate share of the damages (provided the defendant did not intentionally violate federal securities laws).


Impact of Parmalat Decision


As a result of the Parmalat decision, the door of vicarious liability for non-primary actors in securities fraud cases has been pushed further ajar.  Of significance to accounting organizations, the scope of control over the member firms must be examined to determine if it could lead to vicarious liability under the standards used by the Parmalat court.  To be clear, there is no bright line as to when the requirements imposed upon member firms become sufficient to impose vicarious liability, but the facts in this case should provide guidance as to what would be considered by a reviewing court should the organization find itself a defendant as a result of a claim against a member firm.


For further information concerning the foregoing, please contact Thomas R. Manisero at or Peter J. Larkin at who are members of the Accountants Professional Liability Practice Team at Wilson Elser.

View more Insights