Investors got a shock in 2003 when Italian food giant Parmalat filed for bankruptcy, after discovering an Enron-style hole in its accounts.
Parmalat started life in Parma in 1961, when the 22-year-old Calisto Tanzi expanded his family meat and cheese shop into a pasteurisation business. Over the next few decades Parmalat expanded into a variety of different food businesses, culminating with a listing on the Milan stock exchange in 1990 -- a listing that was intended to raise cash to clear debts from its expansion, and which led to the Tanzi family selling 49% of the company.
Flotation and expansion
Parmalat's liquidity problems didn't end there, and soon after flotation it embarked on an aggressive expansion policy, funded largely by further debt. In 1997 Parmalat bought Beatrice Foods, an American giant in the food industry, and made further forays into such diverse locations as Australia, Mexico and China.
This massive expansion led to debts spiraling as high as €6bn, but investors were happy to keep dipping their hands into their pockets to fund each of Parmalat's bond issues, safe in the knowledge that the company was sitting on a large cash pile and would be easily able to keep paying the interest on the bonds.
Divide and obfuscate
During this period, in addition to these acquisitions, a number of subsidiary companies were also spun off, with, as was subsequently discovered, accounting obfuscation being the main intention. Various subsidiaries were able to make opaque contributions to Parmalat's income and asset statements that would have been harder to hide in the parent company itself, and which bolstered the impression of a successful and cash-rich company.
The edifice started to crumble in 2003, when Parmalat had difficulties raising the cash to make a €150m bond payment. According to its accounts, its wad of cash was still sitting in the bank, and there should have been no problem meeting this obligation, so bankers and investors started to sit up and take notice. Parmalat was forced into a extraordinary admission -- €3.9b that its accounts said it had on deposit with the Bank of America didn't exist.
Forgery
Auditors had asked for confirmation of this money, and had been given a Bank of America letter confirming that all was above board. But subsequent checking with the Bank of America showed it to be a fake, put together by the rather crude technique of "cut and paste" forgery -- someone had simply photocopied and pasted the contents onto a Bank of America letterhead, and then passed it through a fax machine a couple of times to make it appear authentic.
It's hard to imagine how such serious accounting fraud could have gone undetected for so long, especially as Italian law requires that a company change its external auditor at regular intervals. In Parmalat's case, Deloitte & Touche took over the role from Grant Thornton in 1999, but the fraud was able to continue using more and more spun-off shell companies. The new companies were audited quite legally by Grant Thornton, and they created false debts owed to the parent company and faked accounts to fund them, helping make Parmalat's main accounts look respectable.
Some of the forged accounts were really rather audacious, with Bonlat, a Cayman Islands subsidiary of Parmalat, claiming to have sold enough powdered milk to Cuba in one year to make 55 gallons for every individual on the island.
Arrest and Trial
The Parmalat share price plummeted once these revelations were aired, and liquidation quickly followed, with Calisto Tanzi being arrested and charged with accounting fraud and money laundering. He confessed his crimes and admitted having diverted funds from Parmalat to prop up his other family interests, including the travel agency Parmatour and Parma football club.
Tanzi was handed a 10-year prison term, but seven other defendants were acquitted, with eight more having settled out of court in 2008.
Though Parmalat has emerged from the ashes of bankruptcy and is today very much back in the dairy business, its defrauded investors never saw their money again.
Previous Scam Articles:
