The SEC has called it ‘one of the largest and most brazen corporate financial frauds in history’. Certainly, in terms of corporate crime, Parmalat is a worthy companion to Enron, Adelphia, WorldCom and a number of others in the rogues’ gallery of corporate villains. To the sheer scale of the missing funds, add the apparent suicide of Alessandro Bassi, an accountant who reported directly to ex-CFOs Fausto Tonna and Luciano Del Soldato, and you have all the makings of a John Grisham thriller. But although Tonna and Del Soldato, along with Parmalat’s founder and ex-CEO Calisto Tanzi and his longtime lawyer Giampaolo Zini, have been ‘helping investigators with their enquiries’ for some time now, none of Parmalat’s stolen treasure has been located.
Beware false profits
It is now apparent that much about the company was smoke and mirrors. Inspecting Parmalat’s available 2002 and 2003 results, PricewaterhouseCoopers – which took over the auditing duties for Parmalat and all its subsidiaries from Deloitte Touche and Grant Thornton – discovered numerous false transactions, false bills and falsely reported profits. At the end of January, after ‘adjustments for non-documented transactions and unregistered liabilities’, PricewaterhouseCoopers said Parmalat’s gross debt was somewhere between Ä14.5 bn ($18 bn) and Ä14.8 bn ($18.4 bn). Net debt was roughly the same, said the accountants, because the company’s liquid assets as of September 2003 were ‘negligible’.
According to Pietro Fassino, leader of Italy’s Democrats of the Left party, the scandal was made possible because ‘nobody did his or her job right.’ Parmalat knowingly produced fraudulent financial statements; the auditors connived in the scam by signing off those accounts; the banks continued to place the company’s bonds (and take their commissions); the ratings agencies reassured investors by maintaining the company’s investment-grade rating until its collapse was a foregone conclusion; and the supervisory organs failed to follow up on question marks over the company’s stability and its prolific bond issuance.
One problem is the lack of co-ordination between Bank of Italy, which supervises corporate debt issues, and Consob, the exchanges’ watchdog that tracks the financial stability of quoted companies. The bank’s central database registers the exposure of Italy’s national banks to corporate debt but Lamberto Cardia, the recently installed president of Consob, notes that his organization does not have access to the bank’s database. However, it appears that although Consob did request information on the company’s debts directly from Parmalat on a number of occasions before the collapse, it did not approach Bank of Italy for the information. Even if it had done so, the bank’s database doesn’t provide a true picture of total corporate debt in Italy because it doesn’t track issues placed with non-domestic banks.
A shake-up of the supervisory bodies is clearly needed if confidence in Italy’s financial markets is to be restored. With as many as 800,000 retail investors affected by a series of meltdowns, Italy’s politicians are being forced into action. Among the proposals is the suggested reform of disclosure rules on debt issues by the foreign subsidiaries of Italian companies. However, it’s far from certain that finance minister Giulio Tremonti’s idea for a ‘super authority’ – which would have sweeping powers extending across financial markets and the banking sector – will be acceptable to everyone. The proposal will face stiff opposition even from within government ranks.
‘The competent authorities are already there,’ says Maurizio Saia, an MP with Alleanza Nazionale, a minority partner of Silvio Berlusconi’s Forza Italia in the ruling Freedom Alliance. ‘The only thing they are lacking is the teeth to do the job properly. If the companies won’t cooperate, both Consob and Bank of Italy must have the authority – and the powers of sanction – to force them to do so.’
MPs from all parties have expressed concern about the potential undermining of Bank of Italy’s independence if Tremonti’s reforms go through, adding that a super authority with a head appointed by the government would likely be subject to political pressure. And since taking over the top job at Consob, Cardia has also protested that the agency lacks powers of investigation and sanction, as well as resources. It now seems Cardia’s objections have hit a nerve – according to government sources, the new authority will grow out of a Consob with expanded powers and a larger budget.
Testing times
It’s difficult to predict what will happen next for Parmalat. Since late December it has been nigh impossible to contact Irene Cervellera, Parmalat’s hard-pressed head of IR. Instead, all enquiries are diverted to R Holloway & Associates, a corporate communications consultant brought in by the government-appointed administrator, Enrico Bondi. ‘There’s not a lot we can say,’ admit those close to Bondi. ‘The new management is sifting through data from over 130 subsidiaries in 30 countries, and trying to make some sense of it.’
Antonio Pinto, a Naples-based lawyer acting for Confconsumatori, one of many consumer associations acting on behalf of mainly retail bondholders, is satisfied with the company’s communications since the scandal broke. ‘Those responsible for the company’s communications are trying to provide maximum transparency, although the situation is very delicate,’ he notes. ‘Presently, they are limited by what they can tell the public. But I would like to see the current auditors, PricewaterhouseCoopers, given the authorization to communicate directly with the public.’
Alessandro Pedone, director of savings services at Aduc, another consumer association acting for bondholders, wants to see how much money is actually available before launching any potentially expensive legal actions. PricewaterhouseCoopers coordinates its public releases with Antonio Marzano, the minister for productive activities, but can provide only the broadest of information until the verification process has been completed. Given the complex structure of Parmalat and its subsidiaries, this may take some time.
Meanwhile irate investors and worried employees demonstrate outside Parmalat’s head offices in Parma as well as in Rome and Milan. ‘We’re crying over spilt milk’, read the placards. Unsurprisingly, the end can’t come soon enough for one harassed employee, who says, ‘At least when this is all over I won’t have to hear any more bad dairy products puns.’
Payback time for investors?
The SEC thinks bond underwriters should pay Parmalat holders, reports Adrian Holliday
The Enron fiasco taught the SEC to go after outside parties that play an active role in massive corporate fraud and now the SEC is encouraging Italian regulators to do the same. At a meeting organized by the European Policy Centre (EPC) in Brussels on January 26, SEC chairman William Donaldson urged Italian regulators to go after the banks that enabled Parmalat’s financial fraud to happen. ‘We took action not just against Enron people but also against some of Enron’s bankers because we felt they knew exactly what was going on,’ Donaldson reportedly told meeting attendees in response to a question about the SEC’s Enron probe.
The commission successfully charged auditor Arthur Andersen and banks including JP Morgan, Citigroup and Merrill Lynch for the role they played in the Enron scandal. Italian regulators are now questioning Italian banks and Grant Thornton, the company’s auditor until 1999, as well as the most recent auditor of Parmalat’s subsidiaries. Whether the regulators charge Parmalat’s bankers and auditors remains to be seen, as investigators are still unraveling the dairy giant’s elaborate scheme.
The SEC has been hot on the trail of ‘Italy’s Enron’ since the story broke on December 19, 2003. The commission filed a civil suit against the company on December 29, 2003 for defrauding US investors, and is continuing to investigate the role of debt underwriters that sold Parmalat bonds to investors. From 1997 to 2002, US investors bought about $1.5 bn of Parmalat bonds. The question they’re asking is whether US underwriters did enough due diligence before selling those bonds. According to the SEC, Bank of America might have organized private placements of around $500 mn of Parmalat’s bonds over the last six years.
‘Under the 1933 Securities Act, underwriters are given a defense for reasonable investigation,’ says Saul Cohen, a lawyer with Proskauer Rose. ‘If they have concluded a reasonable investigation and checked everything, then they can use this to defend a civil action. Beyond that I’ve never seen a case involving criminal charges or failure to do due diligence.’
Underwriters typically go through a thorough process before signing to sell bonds, explains Brian Lane, former head of the SEC’s corporate finance division and now a lawyer with Gibson Dunn & Crutcher. ‘Underwriters must do a reasonable diligence to protect themselves from liability,’ he says. ‘What is reasonable depends on the nature of the company and the transaction. Private placements usually get less diligence than public offerings because all investors in a private placement are typically sophisticated. In a public offering underwriters usually hire outside lawyers to do due diligence for them – for example, to review material agreements, interview management, obtain comfort from the auditors and work closely with a company’s legal counsel.’
Although the SEC has previously brought cases against firms on due diligence breaches, these have been against municipal underwriters, comments Cohen.
