Would a system of private enforcement create sufficient incentives to limit the recurrence of a future Parmalat?

The financial scandals such as the Parmalat case that was, mainly a result of fraudulent conducts evidenced the fragility of the gatekeepers and showed deficiencies in the legal institutional framework between regulation and enforcement mechanisms, especially in Europe and US. Thus, in the US there was a reform in legislation leading to the creation of the Sarbanes-Oxley Act in order to supervise and monitor the conducts of the external auditors that didnt take any action in time to prevent this kind of situations. On the other hand in the EU there were discussions concerning legislative reforms, but also respecting the private enforcement which is mostly seen as a way to protect individual interests instead of public interests. Besides that there are certain procedural characteristics that put into question the efficiency of the private enforcement system, such as the time and the lack of legal actions comparing with US civil actions (class actions, pleading rules and discovery rules), since most of the biggest cases are subject of public prosecutors actions, and in the case of Parmalat subject to an insolvency proceeding where collective actions can be gathered and the liquidator can sue gatekeepers and claim for compensation for the companys creditors losses. Other difficulty that the private enforcement needs to deal with is the collective interest approach that can only be protected by consumer associations that dont have powers to recover damages; they can only obtain cease or desist orders, which mostly of the actions that protects the public interest are based on a public enforcement mechanism instead of a private enforcement. The occurrence of Parmalat scandal created mass civil actions in US and in Italy. It was in US Courts by a public agency (SEC) and class-action lawyers (actions brought by SEC against Parmalat; Parmalats Commissioner against Grant Thornton and Deloitte Touche Tohmatsu; asset managers against two banks, the auditor and the former management) that gave the initiation of discussions of a possible introduction of class actions in Italy. One of the underlined reasons for that is because the US civil procedure offers to plaintiffs extensive weaponry of legal arms and not for forum-shopping reasons, which means that there werent substantive rules in US that could bring more advantages for the party that brought an action, but the fact that the private enforcement procedure was more efficient than in EU, which lead to the initiation of civil actions in the US, and in Italy what happened was that the investors joined as civil claimants the criminal trial. Enron situation. That shows the lack of a private enforcement that protects the public interest, and highlights the differences between class actions and individual procedures: the pleading and discovery rules are completely different because in US there are broader rules of discovery and are based on notice pleading rules, and most of European countries (including Italy) have broader rules of discovery but in a very limited way since it requires to have an authorization by the Court to have access to the information, also is based on fact pleading rules, in consequence the independence of civil actions used for injured victims to claim damages will create situations of double actions, contrary to the

effect of a private enforcement with class actions that can gather all the victims interests in the same claim. This type of actions is very useful in cases where there are a huge number of civil claims, such as the Parmalat case that requires an efficient system of enforceability, especially an improvement in the private enforcement and not so much an increase of regulation. The other possible way is to have an efficient public enforcement, but the practice has showed that is not possible due to three reasons1: the public enforcer dont have access to all sorts of information that the private parties posses as it what happened with Parmalat; it lacks of financial resources and agency costs such as the public enforcer could be less strict with wrongdoers if it has any kind of benefit. Other example to defend that a private enforcement system can incentive to limit financial scandals, is through an explanation of the gatekeepers role and the private enforcement system in the Parmalat case. In Parmalat the gatekeepers werent able to prevent the scandal; all of their actions are guided by two characteristics: their reputation and their civil liability. Reputation because the auditors have to defend in the market their names as consultant companies and in the eventuality of lost of reputation there are social consequences for the auditor. The auditors are liable by contract but also by tort, which means that the auditors are responsible towards all economic agents that they interact (such as shareholders, investors, creditors, the company audited, employers). Within this legal and social scenario the private enforcement system didnt manage to accomplish an efficient result due to the few settled cases involving auditing companies. The reputational cost for a firm is not deterrent enough for a small group of persons that get 3000 million in the process The reputational theory cannot be applied to the Italian case, as the smaller circles were more concern about contacts and internal issues, not external reputation. They had a personal relationship with the controlling shareholder so the main issue was not to get angry with him

These are clear examples of a weak private enforcement mechanism, which can be improved or to have a more deterrent effect in order to give more negative consequences in case of fraud or wrongdoing conducts. A more efficient and empowered private enforcement mechanism gives incentives to limit cases as Parmalat but it doesnt eliminate possible future cases. Thus, the enforcement mechanism should be used as a tool by corporate governance system with the objective to create confidence in the market and to protect collective interests, so it can have a preventive and punitive effect at the same time.

According with the legal scholar professor Steven Shavell

Additional argume: Enron: class actions not deterrent of anything Negative consequences iof pr. Enf. In US many insurances D&O, risk costs, Chapter 10 of After Enron.

. Differences between pr. Enf. In US/EU discovery, long proceedings in court, success fees, American Rule of costs; civil law overall does NOT match. Dont create incentive for private enforcement in EU.

-public enforcement ADVANTAGES DISADVANTAGES