From Hometown Success to Global Scandal
Parmalat's Tangle of Financial Fraud Is Being Called Europe's Enron

By Peter S. Goodman
Washington Post Foreign Service
Saturday, January 10, 2004; Page A01

PARMA, Italy -- The agricultural wealth that nurtured this central Italian town, with its stone mansions and its gilded opera house, was for centuries produced largely by small merchants, their ambitions extending no further than the next river valley.

Parmalat Finanziaria SpA defied the mold. From its roots as a village salami and dairy operation, it expanded across the country and around the globe, until its long-life milk boxes occupied shelves from the United States to China. As it swelled into an empire with 36,000 workers in 30 countries and sales of more than $9 billion per year, its brand became synonymous with a modern-day Italian ambition.

Now, Parmalat is a nameplate for something else -- one of the largest corporate scandals in history, an alleged fraud that has gained the nickname "Europe's Enron."

More than $8 billion is missing, and prosecutors here and in Milan are tracing a tangle of deals stretching to the Cayman Islands. Parmalat's founder, Calisto Tanzi, sits in a Milan jail cell awaiting charges that he looted his creation into insolvency. Last week, the U.S. Securities and Exchange Commission sued Parmalat, asserting that the company bilked American investors. This week, investigators in Germany and Brazil joined the fray.

Each day seems to bring startling revelations -- a financing scheme called Black Hole, allegations of forged letters showing billions of dollars in phony assets, the destruction of evidence. Global banks scrape to recoup pennies on their Parmalat bonds, now rated as junk. The company's court-appointed commissioner struggles to determine what Parmalat really owns and where its billions went, both unknown. Factory workers and dairy farmers around the world fret that they could get stiffed.

Parmalat may seem an unlikely candidate for shenanigans. Enron Corp. and WorldCom Inc., whose bankruptcies shook confidence in markets worldwide, were archetypes of the "new economy," their esoteric businesses creating ample opportunity for creative bookkeeping. Parmalat sells milk and cookies.

Yet over the decades this publicly traded firm -- 51 percent owned by the Tanzi family -- grew into a labyrinth of more than 130 holding companies and subsidiaries. Many were empty shells designed as conduits to siphon off cash, say prosecutors. Some of the money was diverted into Tanzi family businesses. Some "landed in private pockets," said a source involved in the probe.

Parmalat's implosion presents the spectacle of another hollow fortress expanding to huge proportions while the institutions charged with preventing fraud seemingly failed to act or, worse, were complicit.

In the years that prosecutors say Parmalat was feeding investors fictional earnings reports, its books were audited by the U.S.-based accounting firm Grant Thornton, and over the past five by the American giant Deloitte Touche Tohmatsu. Its expansion was financed in part by Citigroup Inc., whose investment bankers had helped sustain WorldCom. The credit rating firm Standard & Poor's certified its bonds as investment grade, dropping them to junk status only in mid-December. Not until this week -- with Tanzi and six other principals in jail -- did the Italian stock market regulator demand a restatement of Parmalat's earnings.

As the story emerges, one key question tantalizes those seeking to unravel it: Was Parmalat a legitimate business that stumbled into debt, then indulged in bogus bookkeeping in a desperate bid to dig out? Or have the Tanzis simply helped themselves to the coffers?

Tanzi has said that he took some $600 million out of Parmalat, though he maintains this was part of an unexplained plan to save the firm. He has said the fraud began only in recent years, as currency crises in Latin America hammered Parmalat's earnings.

"The company was like his own son or daughter. He spent 40 years of his life building it, and he was trying to save the jobs," said his daughter, Laura Tanzi, standing inside the security gate at his Parma home, where a tree-lined driveway leads up to a villa with a terra-cotta roof. "He had sufficient funds to live on. He didn't have to steal."

Tanzi accumulated the trappings of an industrialist -- a corporate jet, a limousine -- but that seemed normal for a man traveling the world to tend to his investments. "He was moderate, not ostentatious," said Giuseppe Romanini, the mayor of Collecchio, the village in which Parmalat and Tanzi both began. "Certainly not a pirate or a shark. The very fact that the company kept its offices in Collecchio, the small town where he was born, made the point."

But according to prosecutors, Parmalat's longtime finance director, Fausto Tonna, has said under interrogation that the fraud began in 1992 as a way to cover up the absence of funds diverted into a travel company controlled by Tanzi's family. A source involved in the probe said Tanzi and his associates hoped to keep the scam going for as long as possible, siphoning off as much as they could, before negotiating a bailout that would set the books right.

"It spiraled and spiraled and spiraled, driven always by the hope of the white knight," the source said. "But the white knight never comes."

The company at the center of one of Europe's largest heists was sprung from the salami business that Tanzi inherited upon the death of his father in 1961. He expanded aggressively, buying companies around the world. Still, Parmalat remained a family operation, its governing board stocked with Tanzi's kin.

Parmalat's buying binge entailed taking on vast amounts of debt. By 1989, it was on the verge of selling itself to Kraft Foods Inc. Then, the Italian financier Gianmario Roveraro stepped in with a bailout package. The Tanzi family gave up 49 percent of the company's shares, which were sold to investors to raise cash.

Between 1995 and 2003, Parmalat tapped the bond market 35 times, amassing more than $5 billion in fresh liabilities. By last September, the company was reporting debts of roughly $7 billion. Still, it also claimed to have $5 billion in cash. Sales seemed robust.

Antonio Mattioli, regional secretary of the CGIL, Italy's biggest labor union, said that by the late 1990s his colleagues wanted to know why a company that supposedly had lots of cash kept borrowing more. "Our fear was that dangerous financial choices were being made and the consequences would then be dumped on the workers," Mattioli said.

But when Mattioli confronted Tonna in the fall of 2002, the finance director brushed him off, he said. Mattioli figured a public challenge would be dismissed as a ploy to extract higher wages. He dropped it. Meanwhile, the company agreed to ditch a plan to shut eight Italian factories.

By that time Parmalat's fraud was already well advanced, say prosecutors. According to transcripts of interrogations seen by The Washington Post, in the 1990s, Parmalat created finance companies in the Dutch Antilles, stocking them with phony assets through forged records to cover the cash diverted to Tanzi's other businesses.

Until 1999, Parmalat's operations were audited by Grant Thornton. Then a new law forced companies to rotate their auditors. Parmalat replaced Grant Thornton with Deloitte and shut down the Antilles companies. But the fraud did not cease, prosecutors say. Parmalat shifted its phony operations to a new Cayman Islands-based entity called Bonlat Financing Corp. Its auditor: Grant Thornton.

"Bonlat was a dumping ground," Luciano Del Soldato, who replaced Tonna as the company's finance director, told prosecutors, according to the summaries.

Grant Thornton has called itself a victim in the scandal. But a Parmalat accountant, Gianfranco Bocchi, told prosecutors the idea to establish Bonlat came from Grant Thornton, whose local partner, Maurizio Bianchi, even suggested refinements. "Our need to reduce Parmalat's debt by dumping it on companies like Bonlat was done with unsophisticated methods, so much so that Bianchi told us that if this was what we needed to do, then we should use a better system," Bocchi said.

Last week, police arrested Bocchi and Bianchi, along with Lorenzo Penca, chairman of Grant Thornton's Italian unit. On Thursday, Grant Thornton International announced that it had "lost confidence" in its Milan affiliate and had severed ties.

According to transcripts, Bocchi wrote fake sales contracts for Bonlat and did the handiwork on the largest single piece of the fraud -- a bank account showing a balance of some $4.9 billion that Parmalat has since acknowledged does not exist.

Bocchi told prosecutors that he scanned the Bank of America logo into his computer, printed it onto letterhead and ran the document through a fax machine to mask its imperfections, according to the transcript.

Last February, as concerns about Parmalat's debts mounted, the company had to cancel a new bond offering of more than $400 million. Parmalat's stock tumbled. Tonna resigned. In mid-November, Deloitte said it was "unable to confirm" a $135 million transaction listed in Parmalat's earnings.

Yet, five days later, Citigroup's Smith Barney research unit in London issued a buy recommendation on the company's stock, touting "attractive fundamentals." Reached by phone, the lead author of the report, Andy Smith, said Citigroup had instructed him not to speak to the media.

Parmalat soon announced it could not recoup a $617 million investment in what it said was a Cayman Islands-based fund called Epicurum. Tonna later told prosecutors it was really just a shell to account for funds already diverted, according to the transcripts.

Then, Parmalat disclosed the existence of a vehicle it set up with Citigroup in 1999 -- Buconero, which means "black hole" in Italian. A source close to Citigroup said the name was "regrettably" chosen "because of the team's interest in astronomy." Though it was really a $140 million credit line, Parmalat classified it as an investment, allowing it to limit its disclosed debt, according to a source familiar with the probe.

Prosecutors are considering placing Deloitte and Citigroup officials under investigation, the source said.

By early December, Parmalat's leaders were moving in earnest to conceal their fraud, according to transcripts. Bocchi told prosecutors he ripped up documents under direction from Del Soldato, though he persuaded a colleague not to follow an order to smash a computer with a hammer.

Meanwhile, Standard & Poor's had placed Parmalat's bonds on a watch list for a downgrade, but maintained its investment-grade rating, based on written assurances from Del Soldato. "When the [chief financial officer] of a major company says the cash is there and it's freely available, it's a very strong statement," said S&P analyst Hugues de La Presle.

Parmalat's creditors didn't buy the assurances, demanding that Tanzi step down. On Dec. 15, he relinquished control of the company to Enrico Bondi, a specialist in rescuing troubled firms.

Days later, as Bondi and his team pored through records in Collecchio, in the headquarters that was Tanzi's childhood home, Bank of America said it could not verify the existence of the $4.9 billion account. Then, they discovered that some $3.6 billion in bonds Parmalat claimed to have repurchased had not really been bought.

The books of this once-corporate icon now had an $8.5 billion hole.

Special correspondent A.H. Maines contributed to this report.