PARMALAT CASE

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PARMALAT CASE

• The Parmalat group, a world leader in the dairy
  food business, collapsed and entered bankruptcy
  protection in December 2003 after acknowledging
  that billions of euros were missing from its
  accounts.
• Its collapse had been labelled as European
  Enron and has led to a profound questioning of
  the soundness of accounting and financial
  reporting standards as well as that of the
  Italian corporate governance system.

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PARMALAT CASE

• The Parmalat case epitomizes the most important
  problem traditionally associated with continental
  European governance structures, namely a
  controlling shareholder that exploits the company
  rather than monitoring its managers.
• Parmalats management structure was openly
  deficient, unlike Enrons, which apparently was
  well designed.
• Despite this deficiency, Parmalat enjoyed an
  investment grade credit-rating, and was able to
  borrow increasing amounts of capital from
  investors.

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PARMALAT CASE Parmalats collapse

• It had been suggested (Financial Times, 22
  December 2003 18) that part of the problem was
  that Parmalat was a family-owned business and its
  operations were opaque, even though it had had a
  listing on the Milan stock exchange since 1987.
• Parmalat financial problems can be traced back a
  number of years before 2003, yet the group had
  apparently managed to convince banks, investors,
  financial regulators and the public that it was a
  healthy company.

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PARMALAT CASE Parmalats collapse

• However, as events unfolded in the months
  following the December 2003 collapse, it emerged
  that concerns were being expressed several months
  before the collapse.
• One of the features of the Parmalat Group was
  its complicated organizational structure,
  including over 170 subsidiaries.
• Substantial funds were moved between these
  subsidiaries, some of which were registered in
  the Cayman Islands, a tax heaven, thus increasing
  the difficulty of monitoring cash flows and
  assets.

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PARMALAT CASE Parmalats collapse

• Early on in the investigation, prosecutors were
  helped by a Parmalat employee who had disobeyed
  instructions to destroy sensitive documents and
  had handed over a computer and disks to
  investigators.
• As the investigation got under way, it was found
  that Parmalat had established a network of
  subsidiaries through which it had been able to
  channel substantial amounts of financial
  resources. It proved difficult for the
  administrator to establish the full extent of
  these offshore transactions.

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PARMALAT CASE Parmalats collapse

• By August 2004, Enrico Bondi had decided to
  extend his legal actions against some of the
  banks who had assisted Parmalat in issuing bonds
  and loans. It was revealed that the administrator
  was pursuing Deutsche Bank, USB and Citygroup for
  substantial compensation.
• Enrico Bondi and Italian prosecutors believed
  that Deutsche Bank, Bank of America, Citygroup,
  USB and some other financial institutions had
  been aware of Parmalats weak financial position
  before it finally collapsed in December 2003.

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PARMALAT CASE The Fraud

• All Parmalats financial statements had been
  falsified for a long time, although it is still
  not clear from exactly when. Both the poor
  performance of the core business and the
  exceptional amount of cash siphoned off by the
  Tanzi family over the years, when combined with
  the terrible results of the tourism business and
  the other activities of the Tanzi family (e.g.,
  the football business), had created a mountain of
  debt that went out of control.

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PARMALAT CASE The Fraud

• Parmalat hid losses, overstated assets or
  recorded non-existent assets, understated its
  debt, and diverted company cash to Tanzi family
  members.
• In order to hit losses, Parmalat had used various
  wholly-owned entities, amongst which, the most
  significant was Bonlat, the Cayman Islands
  subsidiary of the Group existing during its final
  five years, and the holder of the Bank of
  Americas false account. Typically, uncollectible
  receivables were transferred from the operating
  companies to nominee entities, where their real
  value was hidden.

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PARMALAT CASE The Fraud

• Fictitious trades and financial transactions were
  organized to offset losses of operating
  subsidiaries and to inflate assets and incomes.
• Securitization schemes based on false trade
  receivables and duplicate invoices were
  recurrently used to finance the group.
• Parmalat understated its debt through different
  fraudulent schemes it recorded non-existent
  repurchases of bonds, it sold receivables falsely
  described as non-recourse, in order to remove the
  liabilities from the records.

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PARMALAT CASE Parmalat Boards of Director

• The Milan Stock Exchanges listing rules require
  listed companies to illustrate their corporate
  governance system.
• Those companies that have decided not to follow
  the Corporate Governance Codes recommendations,
  issued by Borsa Italiana in 1999 and emended in
  2002, have to justify this choice.
• The Code recommends the appointment of
  independent directors, a concept which is loosely
  defined and frequently misunderstood in practice.
  

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PARMALAT CASE Parmalat Boards of Director

• In its first report, dated 2001, Parmalat
  declared that four of its thirteen directors were
  independent, but did not mention the relevant
  names. It gave the names in 2002.
• As far as 2003 is concerned, amongst Parmalats
  thirteen directors, eight were executives they
  were Calisto Tanzi (CEO) and his son Stefano, his
  brother Giovanni, his nephew Paola Visconti, the
  companys CFO Fausto Tonna and the top managers
  Luciano Del Soldato, Alberto Ferraris, and
  Francesco Giuffredi.

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PARMALAT CASE Parmalat Boards of Director

• It is clear that during Parmalats history
  non-executive directors had never supervised
  managers.
• The complexities of the groups structure and
  finance required a great amount of work and
  financial understanding, and the non-executive
  directors were not prepared to dig into
  Parmalats intricate business. They probably
  relied on Tanzi.

13
PARMALAT CASE The Failure of the Gatekeepers

• As with Enron, the Parmalat case demonstrates a
  clear case of gatekeeper failure. Within the
  Parmalat group the most important reputational
  intermediaries that acted as gatekeepers were the
  board of statutory auditors, the external
  auditing firm, and the internal control
  committee.
• In the Enron case, not only did senior management
  take advantage of US accounting standards
  limitations to manage its earnings and balance
  sheet, but also its financial statements did not
  conform to existing US GAAP..

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PARMALAT CASE The Failure of the Gatekeepers

• This differentiates the Parmalat case from its
  American counterpart. Few accounting issues were
  found at Parmalat. There is little evidence that
  Parmalats financial statements violated the
  letter of the adopted accounting standards,
  although they clearly violated the overall
  spirit, since the overriding true and fair
  view objective was not pursued.

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PARMALAT CASE Political reactions to the
Parmalat scandal

• The Parmalat scandal is the subject of political
  debate concerning the distribution of power
  amongst Italian supervisors.
• The Bank of Italy was attacked for not having
  screened Parmalats issues on the bond market
  under Article 129 of the Consolidated Banking
  Law. It was also criticized for failing to
  discover the true nature of the information
  provided by Parmalat regarding its debt, given
  that the Bank of Italy manages the so-called
  Centrale Rischi, a data bank that classifies
  bank debts.

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PARMALAT CASE Political reactions to the
Parmalat scandal

• The Italian Parliament created a joint committee
  for the analysis of the Parmalat collapse and the
  drafting of a new law concerning capital markets,
  a sort of Italian Sarbanes-Oxley Act.

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PARMALAT CASE Political response

• The political response to the Parmalat scandal
  was overshadowed when another scandal hit Italy
  the BPI affair, concerning an alleged concert
  action orchestrated by Banca Popolare Italiana
  (BPI) in order to gain control of Banca
  AntonVeneta, defeating a bid by ABN Amro.
• This scandal was eventually to bring down the
  Bank of Italys Governor, Antonio Fazio, who was
  accused of favouring BPI and, in particular, its
  chief executive, Giampiero Fiorani.

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PARMALAT CASE Political response

• The B.P.I. scandal had allegedly launched (with a
  cohort of conspirators) large insider trading
  operations when its own bank undertook large
  capital markets transactions. The Italian
  Parliament under pressure again and close to the
  end of its term, enacted a new law (28 December
  2005, No. 262) that can be seen as an equivalent
  of the Sarbanes-Oxley Act.

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EVALUATING REGULATORY RESPONSES THE US AND THE
UK

• It is interesting to consider various reforms,
  both actual and proposed, that have been
  prescribed in the Anglo-American context. At the
  core of this discussion must necessarily be the
  Sarbanes-Oxley Act.
• It is necessary to understand the three
  regulatory mechanisms that are at the core of the
  post-Enron reform debate
• Strengthening shareholder rights
• The reform of accounting regulation
• Increasing the role played by non-executive (or
  outside) directors.

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REFORMING EU COMPANY LAW AND SECURITIES
REGULATION

• In addition to difficulties generated by the
  issues that have proved controversial in the US,
  the European reform agenda faces several unique
  challenges.
• The most fundamental stems from the fact that the
  EU encompasses a diversity of systems of
  corporate governance.
• There is a divide between the UKs outsider
  share ownership and the insider share ownership
  of continental Europe, with a corresponding
  difference in the emphasis of regulation between
  rendering management accountable and keeping
  blockholders under control.

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REFORMING EU COMPANY LAW AND SECURITIES REGULATION

• In the spring of 2002, even before any problems
  had surfaced at Parmalat, the European Commission
  asked their High-Level Company Law Expert Group
  to prepare a report elaborating any necessary EU
  legislation in the field of corporate governance.
• A particularly important issue for the High-Level
  Group concerned the role and structure of the
  board of directors, the relevant proposals for
  which have now been incorporated into a
  Commission Recommendation.

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REFORMING EU COMPANY LAW AND SECURITIES REGULATION

• The Expert Group/Action Plans philosophy of
  focusing legislative energies on core issues for
  which consensus might be achieved, and the
  greater use of non-binding recommendations, can
  be seen as part of an emerging trend.
• European policymakers are becoming both more
  sensitive to the different capabilities of
  various regulatory techniques both to overcome
  political obstacles and to achieve regulatory
  goals.
• In Europe, the scandals have provided the impetus
  for surmounting political obstacles to the reform
  of corporate and securities law at the EU level.