Citigroup (C) And Bank Of America (BAC) Score A Victory In Parmalat Case — At Expense Of Ripped Off Shareholders

Back in January, the Supreme Court placed stringent limitations on scheme liability — the notion that investment banks and accounting firms that inadvertently helped companies commit accounting fraud could face civil liability for investor losses. In Stoneridge Investment Partners LLC vs. Scientific-Atlanta Inc. et al, the Supremes found that Scientific Atlanta, which is now owned by Cisco Systems (CSCO), could not be held responsible for its deals with Charter Communications that helped that company fraudulently improve the results it reported to investors.

Now that ruling is already coming into play, helping the investment banks that were instrumental in the $8 billion Parmalat accounting fraud get off the hook without paying defrauded shareholders a nickel.

U.S. District Judge Lewis Kaplan in Manhattan dismissed a shareholder class-action lawsuit against Citigroup and Bank of America for their role in the Parmalat fraud. Investors had argued that Citigroup and Bank of America helped structure the deals that hid billions in debt but, citing the Scientific-Atlanta case, Kaplan ruled that "Investors must show reliance upon a defendant’s own deceptive conduct. Plaintiffs’ evidence falls well short of this standard.”

This is such a load of pro-business, anti-shareholder crap that it defies belief. The rationale behind these rulings may help the investment banks that participated in off-balance sheet deals with Enron that were clearly designed to manipulate financial results avoid any kind of comeuppance.  Back in January, Gary Weiss summed up the message behind the Scientific-Atlanta ruling this way:

"… A corporate management can engage in the most disgraceful acts involving third parties, but if it didn’t put out a press release announcing its chicanery, it gets off the hook. This ruling is particularly toxic for Enron investors, who were victims of a wide swath of wrongdoing reaching far beyond the company."

It’s unbelievable. Given the billions in fees that companies like Citigroup (C) and Bank of America (BAC) earn for their "work", shouldn’t they have to give some of it back when they help companies defraud shareholders? That seems so obvious.

With the way court rulings have gone of late, investment banks have less of an incentive than ever to crack down on fraud in the companies they work with. That easily negates whatever positive impact Sarbanes-Oxley has had on financial reporting.

Zac Bissonette