It's being called Europe's Enron, and the fraud that felled the Italian dairy titan Parmalat Finanziaria SpA has tagged many of the same banks.
Once again, Citigroup Inc. is being accused of engineering a complex deal, this time with Parmalat's offshore affiliate to hide the company's financial condition. What's more, many financial firms are likely to suffer big losses if Parmalat defaults on its $11.3 billion of outstanding bank and bond debt. And everyone is blaming the accountants - except, of course, Parmalat's former auditor, Grant Thornton, which claims Parmalat duped it.
In a bizarre twist, a forged document on Bank of America Corp. letterhead is at the heart of the mess.
Here is the story so far, the roles being played by U.S. financial institutions, and a look at the legal and regulatory fallout.
Early last month Parmalat, which employs 36,000 people in 30 countries, missed a debt payment, and Standard & Poor's Corp. cut its rating to junk. On Dec. 15, Parmalat's founder, Calisto Tanzi, resigned as the chairman and CEO. He was arrested Dec. 27, three days after Parmalat filed for bankruptcy protection. On Dec. 31, seven more people were arrested, including two Grant Thornton auditors.
It is alleged that over 10-plus years, Parmalat drilled a $10 billion hole in its balance sheet. It's still unclear where the money went, but the meltdown is spurring investigations of, and lawsuits against, executives, accountants, and bankers.
The first class action, filed Jan. 5, calls Parmalat "the most shocking corporate financial fraud in history."
Milberg Weiss Bershad Hynes & Lerach LLP filed the suit on behalf of the Southern Alaska Carpenters Pension Fund in the U.S. District Court for the Southern District of New York. It names Mr. Tanzi and other executives; Grant Thornton; Parmalat's current auditor, Deloitte & Touche; Citigroup; and the law firm Zini & Associates.
According to the suit, the defendants overstated Parmalat's assets by $8 billion, understated liabilities by more than $3.6 billion, and booked nonexistent sales to boost earnings.
In a civil suit filed late last month, the Securities and Exchange Commission alleges that Mr. Tanzi and his son, Stefano, raised $1.5 billion from U.S. bondholders while engaging in fraud. The SEC reportedly is also considering whether the investment banking firms - including B of A, J.P. Morgan Chase & Co., Deutsche Bank AG, Morgan Stanley, and Merrill Lynch & Co. - that sold the bonds to institutional investors knew, or should have known, about Parmalat's problems.
For example, Parmalat reportedly had tons of cash on hand, so why did it need to issue $5 billion of bonds over the last several years? And shouldn't the underwriters have questioned why Grant Thornton was kept on as the auditor of some Parmalat subsidiaries after 1999 when Italian law required the company to rotate its lead audit firm?
Among U.S. financial companies, Citi and B of A are getting hammered the hardest.
Citi is being singled out for a structured-finance transaction - unfortunately for Citi called Buconero, the Italian term for "black hole" - it conducted in 1999 with Bonlat Financing Corp., a Parmalat affiliate in the Cayman Islands. Parmalat booked the $137 million deal, renewed in 2001, as equity, but some now claim it should have been recorded as debt.
The class action calls the deal a "manipulative device and contrivance designed to artificially inflate Parmalat's financial statements on an ongoing basis."
Citi claims the transaction was "appropriate" but adds, "Today we would only do this type of transaction if a client agreed to provide greater disclosure."
It also faces the embarrassing fact that in mid-November its London analysts upgraded Parmalat's stock to "buy," saying it "remains an attractive restructuring story." The analysts downgraded it back to "hold" last month.
Citi lawyers met with investigators in Milan this week. The banking company reportedly is angling to lead the creditors committee, which Enrico Bondi, the bankruptcy commissioner, is expected to appoint next week.
B of A is being slammed for plugging Parmalat to investors just five months before its implosion by staging a four-day road show for Parmalat executives.
But the Charlotte bank has another, unusual role in the mess.
Bonlat claimed to Grant Thornton that it had three accounts at B of A, and authorized the auditors to verify the accounts. Reportedly, Grant Thornton prepared a request, but it is unclear whether the auditor sent it or allowed the Parmalat unit to mail it.
Regardless, three months later a reply surfaced confirming the accounts.
A letter dated March 6 and written on Bank of America stationery lists three accounts: a $336 million demand deposit, a $849 million securities deposit, and another securities deposit worth $3.54 billion.
The letter bears the signature of Agnes Belgrave, who works at the B of A office in New York that supposedly received the request. But she says she never signed the reply, and B of A says that it never received the request and that the accounts never existed.
While the SEC has already heaped the Parmalat fiasco onto its already overflowing plate, the U.S. banking agencies, at least for now, have no plans to issue new rules or guidelines.
But the regulators could do what they did in the Enron case: sanction specific institutions for specific misdeeds. It all depends on how much Parmalat's bankers knew - or should have known.
The Enron debacle ended up costing both Citi and J.P. Morgan Chase fat fines and an embarrassing enforcement order. The Federal Reserve Board fined the companies a total of $305 million in July and ordered them to beef up their risk management procedures, particularly with regard to complex financing deals.
Compiled by Barbara A. Rehm, with reporting by Geeta Sundaramoorthy
