In a surprising decision, the Court of Milan ruled on 9 November 2018 that statements issued by global custodian banks do not constitute valid evidence of purchases of shares in an Italian listed company. The court’s decision is unprecedented and departs from existing case law in Italy and other European countries.
The question was raised in the Saipem securities litigation in which Deminor advises 64 institutional investors seeking damages from Saipem for the late dissemination of a profit warning and misleading financial statements. Saipem has already been sanctioned by Consob for this late profit warning and for the violation of international accounting standards. Saipem challenged Consob’s decision but lost the case after appealing it twice, one of these appeals reaching the Corte di Cassazione, Italy’s highest civil court. The public prosecutor of Milan has also indicted Saipem and certain former Saipem managers for market manipulation and false accounting. Saipem shares have lost more than 80% of their value since the first elements of wrongdoing were revealed to the market.
Requirements for investors
According to the Court of Milan, investors are required to provide statements, not only from their global custodian bank, but from each intermediary bank in the investment chain down to the local Italian bank holding the shares with the local Italian central securities depositary (the ‘Monte Titoli’ in Italy).
The court came to this conclusion by assessing the formalities required to participate in shareholder meetings for an Italian listed company. For shareholders to participate in a shareholders’ meeting, a local bank member of Monte Titoli needs to confirm the number of shares held on a specific date, which entitles the shareholder to cast a vote. Note that such a confirmation of holding does not contain any evidence of the purchase transactions carried out during a certain period (for example the ‘class period’) nor does it indicate the prices of those transactions, so in se it cannot be evidence of losses suffered on those purchases during a defined period of time.
The Court of Milan’s judgment, we believe, is based on a flawed interpretation of legal principles.
The Saipem investors participating in the action are not seeking to exercise their rights as shareholders of the company. They are claiming damages from the company on the basis of a tort committed by the company. Furthermore, the court’s ruling is hard to reconcile with the Italian rules of civil procedure and evidence.
Aside from these legal considerations, it would be near impossible for investors to get a statement confirming transaction history from each bank in the investment chain in practical terms. This is because custodian banks make use of omnibus accounts (combining various client positions in one account) and compensate purchase and sale transactions at different levels of the investment chain, a practice which is explicitly permitted under EU law. If the Milan court decision were to be confirmed on appeal, it would make it practically impossible for investors holding accounts with foreign global custodian banks to claim damages from an Italian listed company.
The banks that issued custodian statements in the Saipem litigation are reputable institutions regulated in their respective home countries and active on global financial markets. There is no compelling reason for written statements issued by such institutions, who have no interest in the litigation, to be considered as insufficient evidence of the transactions carried out by their clients.
For these reasons, Deminor is convinced the Court of Appeal or the highest civil court in Italy (Corte di Cassazione) will reverse the decision and is therefore proposing that our clients file an appeal.
