Yves Blechner

Dai Nguyen
February 9, 2004 Jide Olateju
The Fraud…

• Fraudulently offered $100MM of unsecured Senior

Guaranteed Notes to US Investors by:
- overstating assets by approx. $4.9B
- understating liabilities by approx. $16B
• Falsely stated to prospective investors that it used
excess cash balances (which did not exist) to repurchase
bonds worth approx. $3.6B
• Forged confirmation of assets worth $4.9B in accounts at
Bank of America
• Materially misstated its financial condition in a private
placement memorandum in August 2003: “Liquidity is
high with significant cash and marketable securities
balances…”
• Artificially inflated the value of its ADR’s by the
materially false statements described above
…The Fraud…

• On January 18, 2002, Parmalat’s Brazilian unit issues a

“convertible bond” worth EUR 500 MM at an interest rate
of 10.45%
- accounted for as $523.8 MM in funds for capital increase
- rolled into a singe entry of $764 MM that includes minority
interest, fund for capital increase and shareholders’ equity
-> due to consolidation, this appears simply as shareholders’
equity on the parent level (Parmalat)
• On the same day:
- Parmalat Finance Corp. BV issues a EUR 300 MM eurobond
issue, coupon = 5.875%
-> Analysts believe these funds were used to buy the Brazilian
unit’s bonds
…The Fraud

• Fraudulent activities started arguably in early 1990’s

(still under investigation), and increased since 2000 due
to financial problems
• PriceWaterhouseCoopers called in to audit Parmalat’s
books as of September 30, 2003, and discovered:
– Reported revenue = $6.77 billion. Actual revenue = $5.04.
– Reported EBITDA = $820MM. Actual EBITDA = $152MM.
– Reported net debt = $2.29 billion. Actual net debt = $18.0
billion.
• Where did the money go?
– At least EUR800 MM channeled to the Tanzi’s tourism
business (run by Calisto Tanzi’s daughter Francesca)
– Significant capital pumped into AC Parma
Detection…Signs of Sour Milk

• Parmalat’s inability to liquidate its investment of about

$617MM in Epicurum, a fund investing in “leisure and
pleasure” industries in November 2003.
• Parmalat failed to make payment on a $190MM bond
maturing in early December 2003.
• Tanzi, Tanzi’s son and Parmalat’s finance director
admitted to the true financial condition of the company
at a private meeting with the Blackstone Group to
discuss a possible LBO of Parmalat.
• Parmalat acknowledged in a press release on December
19, 2003 that the company’s assets in its 2002 financial
statements were overstated due to a fraudulent bank
account that did not actually contain $4.85 billion.
Investigation…A Dairy Dose of Fraud

• PriceWaterhouseCoopers was brought in to perform an

audit of Parmalat’s true financial condition.
• Interrogations of relevant Parmalat employees, in
addition to others outside of the company, including the
company’s lawyers and auditors, have been conducted
and are on-going.
• Italian prosecutors are widening their investigation to
include several banks to probe what the banks knew of
Parmalat’s finances.
• On the U.S. side, no bank has been accused of
wrongdoing in connection with its Parmalat business,
and thus far, the SEC’s investigation has found no
indication of impropriety by the banks.
• On-going investigations are being conducted by officials
in the U.S., Italy, Brazil and other nations.
Resolution…In Progress

• Italian turnaround expert Enrico Bondi hired to run

Parmalat as S&P cuts bond ratings to Junk Status
• Calisto Tanzi resigns as Chairman & CEO
• Parmalat files for bankruptcy on 12/24/03. Declared
insolvent three days later.
• SEC has filed securities fraud charges against
Parmalat. and is seeking a permanent injunction
against the company from future violations of
securities laws and a substantial civil monetary
penalty. (Corp. Accountability)
Resolution…In Progress

• The SEC filed a civil suit against Calisto Tanzi and

his son, Stefano, on allegations that they raised
$1.5 billion from U.S. investors while engaged in
fraud
• Ten people have been arrested. No indictments
have been issued
• Two Grant Thornton officials help for helping
perpetrating systemic fraud at Parmalat and
supplying false information to the market
• No bank accused yet of wrongdoing in connection
with its Parmalat business.
Prevention

• Large (Big 3) Independent auditors with global

presence
• More stringent due diligence by creditors and bond
issuers
• Better alignment of regulatory responsibility (from
the Central Bank to Consob)
• Open and transparent corporation with
Independent Board of Directors and not a family
empire
 Yves Blechner
Dai Nguyen
February 9, 2004 Jide Olateju