When Calisto Tanzi stepped out of his $45m (£25m, €36m) Bombardier Global Express jet in Managua, Nicaragua, in June 2002 and was greeted by Enrique Bolaños, the Nicaraguan president, the founder and chairman of Parmalat appeared to be on top of the world and right at home.
Eighteen months later, Mr Tanzi is in a cell in Milan’s San Vittore prison, which has housed Italy’s most notorious criminals and suspects - notably hundreds of businessmen incarcerated 10 years ago by prosecutors conducting the “Mani Pulite”, or Clean Hands, investigation into corruption in Italy’s political system.
Mr Tanzi’s downfall, however, eclipses that of any predecessor in San Vittore (see below). At last count, at least €10bn ($13bn, £7bn) was estimated to be missing from the balance sheet of Parmalat, the global dairy group that Mr Tanzi started from his father’s ham-curing warehouse 43 years ago.
Behind that figure is a kaleidoscopic range of fantastic financial dealings: myriad opaque subsidiaries from Liechtenstein to the Cayman Islands, including one called Buconero, or “black hole”; false billings in dozens of countries for millions of dollars; and a now infamous fake bank account supposedly containing €3.95bn.
Investigative magistrates and Enrico Bondi, the court-appointed company administrator, have little hope that much, if any, of the missing €10bn is recoverable. Most appears to have been swallowed up by operating losses that the company hid with fake documents over many years.
Corporate Italy’s reputation has suffered huge fresh damage. Carlo De Benedetti, one of Italy’s best-known businessmen, warns: “For sure, the Italian capitalistic system has demonstrated [itself] to be weaker than in other European countries or the US. We are going to pay a high price for this.”
The widespread fraud appears to have been perpetrated by Mr Tanzi and a handful of close aides. But Parmalat’s global web of deceit could not have been constructed without the involvement - whether unwitting or not remains to be determined - of the world’s largest banks, among them Citigroup, Bank of America, JP Morgan Chase, Merrill Lynch and Deutsche Bank. It took place under the gaze of Parmalat auditors Deloitte and Grant Thornton, and of Standard & Poor’s, the bond rating agency.
The US Securities and Exchange Commission, Italian investigative magistrates and regulators around the world are probing the roles that each institution played - again, wittingly or unwittingly - in keeping Parmalat and the Tanzi family afloat. Yesterday, legal sources said the Milan prosecutor was formally investigating two Deloitte auditors for their role in Parmalat’s collapse.
Although each bank and auditor claims to be a victim of Mr Tanzi’s fraud, some of their methods, lapses and hunger for commissions and other fees seem to mirror the errors for which many institutions were heavily fined in the US after the collapse of Enron, the energy trading group.
Indeed, Parmalat has quickly been dubbed Europe’s Enron, even if the two companies are in many ways poles apart. While Enron swelled to a market value of $66bn thanks to its internet-based trading ideas, Parmalat’s milk and biscuits business was never worth much more than €3.2bn. Mr De Benedetti says: “At least Enron created an energy trading system which may have been done the wrong way but which opened up a new world. Tanzi in the end never created anything. He just bought and sold milk with other people’s money.”
The US Securities and Exchange Commission, Italian investigative magistrates and regulators around the world are probing the roles that each institution played - again, wittingly or unwittingly - in keeping Parmalat and the Tanzi family afloat. Yesterday, legal sources said the Milan prosecutor was formally investigating two Deloitte auditors for their role in Parmalat’s collapse.
Although each bank and auditor claims to be a victim of Mr Tanzi’s fraud, some of their methods, lapses and hunger for commissions and other fees seem to mirror the errors for which many institutions were heavily fined in the US after the collapse of Enron, the energy trading group.
Indeed, Parmalat has quickly been dubbed Europe’s Enron, even if the two companies are in many ways poles apart. While Enron swelled to a market value of $66bn thanks to its internet-based trading ideas, Parmalat’s milk and biscuits business was never worth much more than €3.2bn. Mr De Benedetti says: “At least Enron created an energy trading system which may have been done the wrong way but which opened up a new world. Tanzi in the end never created anything. He just bought and sold milk with other people’s money.”
Mr Tanzi bought a lot and, as his reception in Nicaragua and other countries indicates, politicians and others greatly appreciated Parmalat’s efforts. In Latin America Parmalat sponsored or owned numerous football clubs, even providing Nicaragua with the coach for the national team.
Over at least 20 years, and more frequently during the past 10, Mr Tanzi and his associates created fake billings that inflated revenues and allowed Parmalat to obtain larger bank loans than it deserved. The fake revenues and contracts were then collateralised, or sold as assets, thus raising more money. Funds were moved into offshore accounts or used to overpay for acquisitions. The overpayments could have been deliberate, to shift more money than necessary into the accounts of Parmalat executives and political friends, investigators and former company executives say. The overpriced acquisitions in turn justified the issue of more bonds. More than €7bn of bonds appear still to be outstanding, to judge from Mr Tanzi’s admission last month that €2.9bn in bond buy-backs the company once claimed are all fake.
One investigator says: “We have no idea where all the money is but it’s pretty clear he didn’t pocket most of it. He didn’t need to. His family’s expenses were all covered by Parmalat. We’re probably looking mostly at cover-ups for losses accumulated over many years.”
Mr Tanzi was tracked down in Ecuador just before Christmas. “I wanted to go to the Galapagos Islands but you detained me first,” Mr Tanzi joked, in prison and under interrogation, on Christmas Eve.
Investigators are wondering whether he sent money to Ecuador before perhaps moving it offshore. Ettore Giugovaz, one of Mr Tanzi’s closest friends and longest-standing business associates, is an Italian businessman in Ecuador and was with Mr Tanzi there just before Christmas, investigators say. In a brief interview with the Financial Times, Mr Giugovaz denied having contacts with Mr Tanzi or Parmalat in the past 10 years. Documents obtained by the FT, however, indicate that a company he runs, Long Field Holding, is paid $5,000 a month for unspecified “services” to Parmaleche de Costa Rica, Parmalat’s Costa Rican company.
Until a few months ago, Mr Giugovaz had an office in Parmalat’s Milan offices, with a secretary paid by Parmalat who booked trips around the world so that he could pursue deals for Mr Tanzi, two people familiar with the arrangement say. “I don’t know if Giugovaz helped Tanzi very recently, but he’s been doing deals for Tanzi since the 1970s, from Libya to Ecuador,” one person says.
Just as astounding as the financial details is the gullibility of the investment world and the blindness of auditors, ratings agencies and other analysts who watched Parmalat’s balance sheet grow odder and more opaque as the years went by. By the mid-1990s, one former executive at Parmalat notes, the company’s annual report was not even giving sales figures for Italy.
Questions began to be asked last February when Parmalat announced plans for a bond issue. Its shares fell 7 per cent as investors wondered why a company that claimed to have more than €3bn in cash needed yet another issue. Lehman Brothers and a handful of other investment banks were highly critical.
But, according to documents released by Consob, the Italian stock market regulator, the response of Mr Tanzi - guided by Gian Paolo Zini, his close lawyer and adviser - was to go to the regulator in March and ask it to investigate those critical banks.
After the brief February dip, however, Parmalat shares rose steadily throughout the summer, especially after Fausto Tonna, who had been chief financial officer since 1987, stepped down. In his place came Alberto Ferraris, a former Citibank executive who had joined Parmalat in 1997 and who promised to stop issuing bonds.
The share price continued to rise even after Parmalat made two private placements of bonds, one €300m issue in June entirely bought up by Nextra, the asset management arm of Banca Intesa, and another €350m issue in September bought by Deutsche Bank. Nextra sold its entire investment to Morgan Stanley in October.
In early November, however, cracks began to appear. Parmalat, pressed for more clarity on its liquidity by Consob, revealed an odd €496.5m investment in Epicurum, an unknown mutual fund based in the Cayman Islands.
According to information available only through Parmalat, Epicurum specialised in investing in “leisure and pleasure” industries. The fund, represented in Italy by Mr Zini, never released any statements. None of the well-known people Mr Zini claimed were managing the fund was known in the industry. Although Parmalat and Mr Zini said the fund was meant to be highly liquid, Mr Zini also told the FT in November that it was close to acquiring four privately held companies in Italy and to buying out a publicly traded one.
As doubts grew about the nature of the fund, an e-mail was sent to a few journalists, purporting to be from Epicurum. Although written in English, it was full of grammatical errors and Italian turns of phrase. It also hinted at legal action against anyone who doubted the fund’s legitimacy.
Mr Zini today is in jail for interrogation and considered to be one of the masterminds behind the massive fraud, investigators say.
Despite the oddities surrounding Epicurum, Parmalat’s shares rose in November after the company said it would liquidate its investment there by November 27. A respected analyst at Citigroup put out a “buy” recommendation even after a conference call between Parmalat and analysts on November 14 rang numerous alarm bells, not least Parmalat’s inability to quantify its third-quarter cash flow.
By the end of November, however, Parmalat - not Epicurum - said the fund could not return money immediately. Investors began to worry whether Parmalat could reimburse a €150m bond that matured on December 8. When the maturity date arrived, Parmalat asked for more time and its shares were suspended.
The shares halved when trading resumed on December 1 and Standard & Poor’s, the ratings agency that had given Parmalat debt an investment-grade rating, was forced to downgrade the company by 10 notches in two days, saying it had been repeatedly misled by Parmalat.
The coup de grâce came on December 19. Bank of America told Parmalat’s auditors that Parmalat did not have, nor had ever had, an account at its New York branch with €3.95bn. Documents claiming to be from BoA that the auditor Grant Thornton used to audit the subsidiary’s account were fakes, the bank said. Deloitte, the auditor for Parmalat’s consolidated accounts, had allowed Grant Thornton to audit 49 per cent of Parmalat’s assets, including those of Bonlat, the Cayman Islands subsidiary that had claimed to hold €3.95bn in cash and cash equivalents.
Grant Thornton claims it was misled and Mr Tonna, Parmalat’s chief finance officer, admits he helped fabricate the document, selecting Bank of America’s letterhead on “the spur of the moment”. Still, investigators are puzzled by Grant Thornton’s decision not to verify in detail or send someone to BoA’s New York branch where the account was supposedly open.
Although BoA blew the whistle on Parmalat, the bank itself remains under scrutiny. Four years ago, according to Parmalat, BoA had brought in two unknown investment groups, Food Holdings and Dairy Holdings, to buy 18 per cent of Parmalat’s main Brazilian division. Because the unit was never floated on the Brazilian stock market, the investors exercised an option to sell back their stake for $400m by mid- December 2003. BoA has repeatedly declined to comment on the trans- action and some investigators suspect the two investment groups could be fronts for Mr Tanzi or close associates.
Other banks - notably Citigroup, JP Morgan Chase, Deutsche Bank and Morgan Stanley among non-Italian institutions and Capitalia, Intesa and UniCredito Italiano among Italian lenders - have also been asked to assist investigators because of the bond issues, offshore accounts and acquisitions they helped Parmalat with.
Citigroup, in particular, is being grilled over Buconero, an offshore finance company it set up in 1999 in which it owned 51 per cent and Parmalat, through a subsidiary, 49 per cent. After being rapped on the knuckles for similar structures it set up for Enron, Citigroup issued only a brief statement on its role in Buconero, saying the deal was “appropriate” but that new policies put in place since 1999 meant “this type of transaction [could be done only] if a client agreed to provide greater disclosure”.
US authorities are helping the Italian investigative magistrates who were brought in a week before Christmas. But they are likely to take several months to get a clear picture of how the money disappeared.
“We have 260 subsidiaries, each with several bank accounts, stretching from Lugano to you name it,” says one overworked investigator in his Milan office. Almost before the words are out of his mouth, the phone rings: on the line is an irate Parmalat investor wanting to know how to file a complaint over the internet.
Additional reporting by Richard Lapper and Haig Simonian
