ON THE MARCH:Parmalat consumers and investors protest in front of Rome's Bankitalia headquarters.
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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.