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For a hard-charging executive like Alberto Ferraris, being named chief financial officer of a €7.6 billion company was a career-making moment — and he wasn't going to let a few nagging doubts stand in his way. Since the company was Parmalat, the Italian dairy-and-food conglomerate the U.S. Securities and Exchange Commission has charged with perpetrating "one of the largest and most brazen corporate financial frauds in history," and since Ferraris now faces charges of market rigging and issuing false information, he may wish he had heeded those doubts. But back in March 2003, he says, he knew the company had some financial problems but had no idea how bad things were about to get.
Parmalat was trying to style itself as the "Coca-Cola of milk," and Ferraris, 46, a former Milan-based corporate banker for Citigroup, had spent six years building its operations in Canada and Australia. But in late February the company stock had nosedived when the firm's irascible CFO, Fausto Tonna, announced an unexpected new bond issue — a fresh increase in corporate debt — that came on the heels of several other big capital-raising moves. Parmalat's founder and lifetime CEO, Calisto Tanzi, called back the bonds the following day and replaced Tonna with Ferraris to calm the waters. Within a few days, the thickset new CFO was defending his company before a roomful of financial analysts in Milan. He painted a rosy picture: sales and earnings were up, debt was under control, and the firm was awash in cash. Satisfied that he'd reassured the financiers, Ferraris hoped the worst was over. "It was my job to patch up relations with the market," he told Time in an interview at his lawyer's Milan office.
Then his doubts started to pile up. First, Ferraris says, he couldn't understand why the company was paying so much to service its debt; the interest payments seemed far higher than warranted for the €5.4 billion in debt on the books. Even more troubling, the company wouldn't give him total access to the corporate accounts. When Ferraris complained to Tonna (who, to his annoyance continued to deal with some of the banks), he says he was told that chief accounting officer Luciano Del Soldato, a 20-year Parmalat veteran, would continue handling the accounts as a consolation prize for not getting the CFO job.
Ferraris reluctantly accepted the division of roles, but wasn't satisfied. So he asked two trusted members of his staff to mount a quiet investigation. After calling around Parmalat's worldwide operations, they came back with shocking news: a total debt estimate of €14 billion, more than double that on the balance sheet. "Until then, I never suspected the accounts were false," says Ferraris.
He knew he had to go to the top. In mid-October he met with Tanzi. Until then, Ferraris says, he had valued Tanzi as "an excellent person, a real entrepreneur" — a charismatic but steady leader who was so proficient at math that he always spotted calculation errors in presentations. "I expected him to say, 'Your numbers are wrong.'" Instead, he recalls, Tanzi just shrugged. "He said, 'Eight billion, 11 billion, 14 billion — it's all the same.'" Stunned, Ferraris urged Tanzi to call a meeting with the company's banks to explain the situation. Tanzi refused, and Ferraris quit. "I was flabbergasted," he says.
A few weeks later, on Dec. 19, 2003, the biggest corporate scam in European history was exposed when Parmalat confirmed that an account it had claimed to have at Bank of America with €3.95 billion in cash simply did not exist. That was merely the first revelation in the scandal that turned Parmalat into Europe's Enron, a morass of fraud and financial failure made all the more dramatic by the fact that the company was Italy's eighth largest and had established itself as a global consumer brand.
In the past year, the story of Parmalat has emerged in fits and starts, as three teams of forensic accountants have combed through the company books and dozens of executives — including Tonna, Tanzi, Ferraris and Del Soldato — have made detailed confessions to magistrates in Parma and Milan. Using their testimonies and thousands of pages of official documents, it's now possible to piece together the key parts of the affair. Here's the inside story of how the Coca-Cola of milk managed to go sour.
A CRUDE FORGERY
For well over a decade, from about 1990 to 2003, investigators say, Parmalat borrowed money from global banks and justified those loans by inflating its revenues through fictitious sales to retailers. In a scheme that authorities charge was devised and executed by Tanzi, top managers, the firm's outside lawyer, Gian Paolo Zini, and two outside auditors, Maurizio Bianchi and Lorenzo Penca, it would then cook its books some more to make the debt vanish, by transferring it to shell companies based in offshore tax havens. (Zini, Bianchi and Penca deny any wrongdoing.) When the hole grew too large to hide, Tanzi, Tonna and the two auditors allegedly came up with Parmalat's most audacious invention: a bogus milk producer in Singapore that supposedly supplied 300,000 tons of nonexistent milk powder to a Cuban importer via Bonlat, a Cayman Islands subsidiary that held the fake Bank of America account. "What struck and surprises me is the simplicity," says Francesco Greco, the senior magistrate in Milan on the case. "It was almost banal."
So far, 29 people have been charged in Milan; more are expected to be charged in coming weeks by magistrates in Parma. Parmalat's losses are now officially put at €12 billion and its investors have lost another €14 billion — though the company's 33,000 employees have emerged relatively unscathed, as the firm continues to operate while in bankruptcy. Most of the money that moved in, around and out of the company has since been traced, although the final destination of some of it is still unknown. Tanzi has admitted transferring some €500 million to family firms, but investigators tell Time that up to €1.3 billion may have gone this route.
But one huge mystery remains: how could such a crude forgery have continued for so long, and on such a massive scale? For years, Parmalat dealt with the world's largest banks, its most sophisticated investors and its most reputable auditors. How did they miss the signals that the company was cheating? It's not an academic question: if Parmalat had gone bust in 1995, when it could no longer fill all its funding needs in Italy, it would have been a mid-sized Italian failure with debts of about €560 million. Instead, Parmalat took its warped finances global. By the time of the collapse eight years later, it owed its investors €14 billion. Bank of America alone, beginning in 1997, arranged $1.7 billion in financing through bonds and private placements for U.S. investors, and received more than $30 million in fees and commissions. Citigroup systematically packaged and resold the firm's receivables, even installing its own software at Parmalat headquarters to help track them; between 1999 and 2003, it earned $35 million. Grant Thornton and Deloitte & Touche signed off on its increasingly surreal accounts and booked millions of dollars in fees for doing so. In the company's final weeks, Deutsche Bank took on the assignment of helping it work with Standard & Poor's, which kept its "investment grade" rating on the firm until 10 days before the collapse. And analysts worldwide encouraged investors to keep buying its stocks and bonds. According to one study, 75% of the analysts covering Parmalat had a "buy" or "neutral" rating on the stock three months before it collapsed.
Were these financial stalwarts victims of Parmalat's deceptions? Or, as the failed company's bankruptcy administrator Enrico Bondi alleges, were they more like well-paid enablers, looking the other way while helping Parmalat hobble toward ruin? That question will come to a head this week as Giuseppe Coscioni, the Parma judge overseeing the bankruptcy, must decide whether foreign banks claiming they are owed hundreds of millions will be included in the list of creditors. "The risk for Parmalat is that if the international banks are cut out as creditors, they could make life very tough for the company when it emerges from bankruptcy next year," says one person close to the U.S. banks.
FUNDING THE "BLACK HOLE"
Alberto Ferraris wasn't the only one who thought highly of Calisto Tanzi. Until Parmalat collapsed, the 66-year-old founder was an almost legendary figure in Italy, viewed as a classic entrepreneur who built a world-class company from scratch. Soon after founding Parmalat as a dairy company in 1961, he was quick to embrace a new pasteurization technology that allowed milk to stay fresh for months without refrigeration. Parmalat's distinctive cartons soon became a fixture in stores across Italy, and ultimately conquered Europe and much of the world. Tanzi also discovered the power of sports marketing, and plastered the Parmalat name on events from World Cup skiing to Formula One racing. A pious Catholic, Tanzi was a generous benefactor who sponsored the restoration of Parma's 11th century basilica and funded its professional soccer team. And he seemed modest about his achievements. He didn't smoke, drank little and drove his own Lexus.
Behind his company's facade of success, however, a hole kept growing. Parmalat's finances were in poor shape by the late 1980s as a result of a disastrous foray into
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The core of the fraud was a system of double billing to Italian supermarkets and other retail customers. Simply put, by billing twice for the same shipment of merchandise, Parmalat could create the impression that its accounts receivable were much larger than they really were. One of the Parmalat executives who operated the scheme, Claudio Pessina, told Milan magistrates that as many as 300 people at Parmalat knew of it. But if anybody thought there was something wrong, they didn't say so publicly.
As Parmalat expanded globally in the '90s, so did its network of bankers and financial advisers. Ferraris was one of them. Before joining Parmalat in 1997 as an executive in Canada and Australia, he worked for seven years at Citigroup in Milan — and made regular sales calls on Tonna. "There was big competition" for Parmalat business, Ferraris says. At the time, U.S., British and other European investment banks were piling into Italy trying to grab local business, and Tonna played hard to get. "You needed to come up with a product that really interested them," Ferraris recalls. For Citigroup, Ferraris scored what were seen as two coups: an early version of the securitization program — by which the company's receivables were packaged as debt instruments and sold to investors — and a retainer to advise Parmalat in the acquisition of Beatrice Foods in Canada, a transaction valued at $310 million.
Ferraris also laid the groundwork for a complex financing scheme through a Delaware company called Buconero, the Italian for "black hole," which Citigroup set up for Parmalat in 1999. Buconero loaned a total of $137 million to a Swiss subsidiary of Parmalat that then distributed the money to other Parmalat companies. Buconero received a guaranteed return of almost 6%, plus a total of about $7 million in fees for Citigroup. In his lawsuit against Citigroup, which seeks a whopping $10 billion in damages, bankruptcy administrator Bondi alleges that Buconero was used to dress up debt as an equity infusion, and says the bank must have known about Parmalat's true financial situation. Citigroup denies it, saying Parmalat was making use of a perfectly legal type of low-cost financing scheme employed by many other Italian companies. What's clear is that by the time it collapsed, Parmalat had established dozens of arrangements involving offshore companies — and banks earned huge commissions for helping it do so. An official accounting by Bondi shows that €6.5 billion — almost half of Parmalat's total debt — went to pay interest, commissions and Of that, €2.8 billion went to the banks alone.
By 1995, Tonna and others have told magistrates, the company was losing more than $300 million annually in Latin America alone. Parmalat decided to move some of its debt off the company's consolidated financial statements. It did so through three shell companies based in the Caribbean. These firms pretended to sell Parmalat products, and Parmalat would send them fake invoices and charge costs and fees to make the "sales" look legitimate. Then Parmalat would write out a credit note for the amount the subsidiaries supposedly owed it, and take that to banks to raise money. To make the debt disappear, Parmalat transferred the liabilities to off-book subsidi-aries, also based in offshore havens. Bondi, the bankruptcy commissioner, says the system was a lethal brew. "In an attempt to hide its state of insolvency," he said in a report, Parmalat "entangled itself in gran-diose financial operations that were ever more costly."
"OFFENSIVE AND RIDICULOUS"
By the end of the '90s, the first red flags began popping up. In late 1999, Esteban Pedro Villar, a partner in the Buenos Aires offices of accountants Deloitte & Touche, filed an internal "early warning report" expressing serious concerns about Parmalat's Latin American operations. He peppered the company with so many questions that cfo Tonna lost his temper. The requests for information are "offensive and ridiculous," Tonna thundered in a June 9, 2000, fax to Adolfo Mamoli, the Deloitte partner in Milan, and terminated Deloitte's Parmalat business in Argentina. Deloitte — which had taken over as Parmalat's worldwide auditor only the previous year — quickly backed off. The accounts were certified and Mamoli sent a terse e-mail to his colleague Villar. "For the future," he wrote, before contacting Parmalat on any issue, "you should contact me in advance to discuss possible solutions."
Other Deloitte partners also had serious concerns. In an audit report dated March 28, 2003, Deloitte's Maltese office questioned a $7 billion intercompany transfer that is now known to have been fictitious. The Deloitte auditor in Brazil, Wanderley Olivetti, raised such a stink to the Milan office about Parmalat's Brazilian accounts that the matter went all the way up to Jim Copeland, then Deloitte's chief executive in New York City. "Sorry to trouble you this morning in a moment while you are clearly busy with other matters," Milan partner Mamoli wrote in a memo to Copeland, "but ... a major issue has now emerged." Olivetti's objections were waved off and he was eventually taken off the Parmalat account. Deloitte insists that it behaved properly; it points out that the investigation of Parmalat began only after Deloitte Italy, in October 2003, drew attention to irregularities in Parmalat's financial dealings. And it says auditors are often shifted from accounts for any number of reasons, although it's not known who was responsible for Olivetti's move.
In December 2002, a full year before the company collapsed, Joanna Speed, Merrill Lynch's food industry analyst in London, became the first big bank analyst to issue a "sell" recommendation on Parmalat stock; she found the accounts incomprehensible.
Despite such misgivings, however, business continued as usual. Six months before the collapse, Kenneth Lewis, the chief executive of Bank of America, flew to Parma to pay a call on Tanzi. Ferraris recalls that the June 2003 meeting with Lewis was cordial. If the American had any concerns, he didn't raise them. "It was a marketing call," Ferraris recalls. "Lewis was saying, 'We'd love to do more business with you guys.'" The bank describes the visit as "a courtesy call" and says there were no substantive discussions about Parmalat's financial position.
Traveling in the Gulfstream corporate jet with Lewis was Luca Sala, a managing director of Bank of America in Milan who worked closely on some of the bank's transactions for Parmalat. Less than a month later, the bank fired him for allegedly fiddling his expenses, so he immediately took a new job — with Parmalat. Ferraris says he needed Sala's help to understand a complex $400 million in financing provided by big institutional investors in the U.S.
Sala, 40, has since confessed to magistrates that he received more than €20 million in commissions from Parmalat for helping to arrange some financing transactions. The money was paid into a Swiss bank account Sala
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By mid-2003, such peculiar transactions had become too much for some big investors. When Bank of America was preparing a U.S. "road show" in July 2003 to present Parmalat's plans for a new issue, several institutional investors complained that the company had promised just three months earlier that it wouldn't be issuing new debt. Bank of America passed that information on to Sala, now working at Parmalat. "Many investors were puzzled," the message warned. Sala has been charged with market manipulation, along with two other former Milan-based Bank of America execs. One of them, Antonio Luzi, recounted to magistrates how Sala had given him a total of $900,000 on three separate occasions for helping him set up the Brazilian refinancing. Luzi met him at a prearranged spot in the Swiss town of Lugano, handed him an empty briefcase, and waited. About an hour later, Sala returned with the case filled with cash.
By now Parmalat's true debts were too big to hide. The beginning of the end came in 1999, when Parmalat executives transferred the activities of the three shell companies to Bonlat, the Cayman Islands firm at the center of the fake Cuban milk scheme. By 2002, Bonlat's fictitious assets had grown so enormous — up to $8 billion — that the company had to invent a Cayman Islands-based investment fund called Epicurum to take over some of its fictitious credits. Epicurum soon attracted the attention of auditors and Italy's stock market regulator in November 2003. Within a month, the whole scam imploded.
A LEGAL MORASS
Today there are multiple legal skirmishes between what is left of Parmalat and its onetime financial partners. Magistrate Francesco Greco's criminal probe has already widened beyond individuals: last month, he broadened his investigation to include Citigroup, UBS, Deutsche Bank, Morgan Stanley and Italian fund-management firm Nextra Investment Management; Bank of America and the two auditors, Deloitte and Grant Thornton, were put under investigation earlier in the year. Bondi has filed civil suits in Italy and the U.S. against many of the same firms, alleging that they knew about and helped to camouflage Parmalat's shaky financial situation and thus contributed to its collapse.
The auditors and banks vehemently reject the allegations. They say they were tricked — and are the biggest victims of the firm's collapse. Bank of America has already written off $425 million, while Citigroup puts its total Parmalat exposure at $540 million. The two banks are leading a counterattack against Bondi in bankruptcy court, arguing that there is no legitimate reason why their claims as creditors should be cut out. Even the U.S. government has jumped in. Scott Kilner, minister counselor for economic affairs at the U.S. embassy in Rome, says his office has been following the Parmalat scandal closely. "We want to be sure that in this case, like in others, U.S. companies are receiving fair and equal treatment," he said.
As for Parmalat's own management, while many executives have acknowledged to magistrates that they played a role in the fraud, most point the finger at Tanzi as the mastermind. Tanzi, however, blames others, particularly Tonna. If found guilty, both men could face jail sentences of five years or more. While some of the Parmalat executives were jailed during the initial investigation, all have since been released pending trial.
Ferraris is in trouble primarily because of that presentation he made to investors in Milan. Magistrates in that city have charged him with disseminating false information. Ferraris also worked on several financing deals in Parmalat's last few months, including with UBS, Morgan Stanley and Nextra, which are under criminal investigation.
As he awaits trial, Ferraris says he still can't come to terms with the whole affair. Asked what he thinks about Tanzi, he says, "I have a problem. I believed so much in Tanzi as an entrepreneur that I have a hard time seeing him as anything else. For 13 years I think he's a genius, and then I find out he's a crook. If I'd known, I'd have stayed in Australia."
- PETER GUMBEL | Milan
- The inside story of the Italian dairy-and-food conglomerate charged with perpetrating the biggest corporate fraud in European history