Parmalat

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Parmalat

• Dr. Clive Vlieland-Boddy

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(No Transcript)
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Studies on Corporate Failures

• Studies have shown that a majority of those
  corporate failures were traceable to the
  predominance of one individual or several working
  in concert in the board.
• Invariably fraudulent practices were found.
• Failure of checks and balances mechanism.

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Stakeholder Pressures Greed!

• In any large business under global capitalism
  there is an enormous pressure to perform in the
  global market.
• To bring favorable returns that meet investors
  expectations.
• Not surprisingly Parmalats fraudulent activities
  really took off when its stock went public in
  1990.

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Each Partys Responsibility

• Directors - Issues of compliance profitability
• Shareholders - Questions on companys performance
• External auditors
• Independence
• Change of auditors
• Who audits the auditors?

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What Went Wrong?

• Spectacular corporate accounting scandals and
  failures include
• Parmalat - fraudulently offered US100 million
  worth of unsecured notes to U.S. investors in
  2003, at the same time inflated its assets by
  at least US5 billion
  

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Parmalat

• Parmalat, the Italian dairy and food giant,
  engaged in a tangled scheme involving dozens of
  offshore front companies to invent assets to
  offset perhaps as much as US11 billion (14.8
  billion) in liabilities over more than a decade,
  Italian investigators said.

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Parmalat

• Italian dairy-foods giant Parmalat has
  prosecutors scrambling to find out what happened
  to 8.5 billion to 12 billion in vanished
  assets. Some 38 of Parmalat's assets were
  supposedly held in a 4.9 billion Bank of America
  (BAC) account of a Parmalat subsidiary in the
  Cayman Islands.
• Business Week

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Parmalat

• But Bank of America reported that no such
  account existed. In the ensuing investigation,
  Italian prosecutors say they've discovered that
  managers simply invented assets to offset as much
  as 16.2 billion in liabilities and falsified
  accounts over a 15-year period, forcing the 9.2
  billion company into bankruptcy on 27 Dec 2003.
• Business Week

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SPVs

•  Parmalat started creating finance companies in
  the Antilles, essentially to dump liabilities
  that it then offset, at least on paper, with
  assets it simply invented.
• Then closed down the Antilles-based companies,
  replacing them with Bonlat, which was registered
  in the Cayman Islands.
• Parmalat, in information for investors, describes
  Bonlat as a "treasury centre". But people close
  to the investigations called it a "garbage can",
  where Parmalat parked all kinds of liabilities
  accrued at its various subsidiaries around the
  world.

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BOA Deposit!

• On its balance sheet, Parmalat declared Bonlat to
  be in possession of assets that included the
  6.95 billion supposedly held by Bank of America.
  
• In fact, Bonlat's assets appeared to have been
  non-existent, appearing only on paper.

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Auditors!

• The spokeswoman for Grant Thornton in London, Nan
  Williams, noted that the firm was partly
  responsible for the current investigation because
  last December it wrote to Bank of America seeking
  confirmation of the Bonlat account at the bank.
• In March, Parmalat sent Grant Thornton documents
  on Bank of America letterheads confirming the
  accounts.
• Bank of America subsequently declared the letters
  forgeries.

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Parmalats Response

• Mr Tonna, who was chief financial officer for 16
  years before he resigned in February, was a
  principal architect of Parmalat's tangled
  financial structure. He was also a director of
  Bonlat Financing.
• Mr Tonna, when asked by the magistrates why the
  Parmalat executives chose Bank of America
  letterheads for the forgery, was said to have
  replied "It was the first bank that came into
  our heads."

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• The Collapse of Parmalat

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Parmalats position in 2003

• Leading Italian food group
• Parent company listed
• 51 owned by the Tanzi family
• Truly international business
• 32 countries, 36 operating companies, 132
  locations
• Fifth Italian bond issuer ( 7.0 bn, a part of
  which publicly rated)

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Types of fraud

• Numerous SPVs were set up to generate fake
  profits for Parmalat and subsidiaries.
• Parmalats finance director, Fausto Tonna, has
  told interrogators that he participated in a cut
  and paste forgery, in which a document with Bank
  of America letterhead was scanned and then added
  to a document verifying a deposit account with
  that bank holding over 4.98 billion. The
  document was then passed through a fax machine
  several times in order to appear authentic.

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Cooking the Books!

•  In one particularly flagrant case of cooking
  the books, the Cayman Islands subsidiary Bonlat
  claimed to have sold enough powdered milk in one
  year to Cuba to produce 55 gallons of milk for
  each and every citizen of the small island
  nation.

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The Cracks Appear!

• During the conversation, in preparation for the
  opening of their books to a transition team from
  Blackstone, the Tanzis let slip that the cash on
  hand was somewhat less than the 3 billion listed
  in the companys annual report.
• They admitted that, in fact, there were hardly
  any liquid assets, and the company was 10
  billion in debt.
• Just a small difference!

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2003 the first cracks

• Balance-sheet 2002 3.5 bn liquidity
• February a new bond issuance (300 ml) is turned
  down for lack of sufficient information
• CFO resigns but remains on board
• November Supervising authorities ask
  clarifications about liquidity
• Deloitte casts doubts over financial statements

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Victims in the Scandal

• First, there are the 36,000 employees whose jobs
  were in danger.
• Second, there were the producers of raw
  materials. Reports stated that dairy farmers in
  both Brazil and Australia were awaiting payment
  for milk already delivered.
• Third, there are investors both large and small.
  In addition to the now worthless stock, there are
  1.5 billion in bonds outstanding.

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• The Rescue of Parmalat

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A good candidate for rescue

• 32,000 employees
• More people and firms dependent on Parmalats
  continuing operations
• Business in equilibrium
• There was a viable business.
• Liquidation was simply not an option

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• Italian Law after Parmalat

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The new composition procedures

• Decree-Law 14 March 2005
• Plan by the debtor to avoid the bankruptcy
  procedure through a composition with the
  creditors
• High degree of flexibility, classes of creditors
• No constraints on financial restructuring
  proposals by the debtor
• Debt for equity swap possible pursuant to a
  majority vote

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Parmalat case What it does NOT tell

• Parmalat needed pruning and turnaround
• Business was profitable (albeit much less than
  told)
• Therefore no tragic choice (creditors vs.
  employees/suppliers) has been necessary
• Alitalia (more than 20.000 employees and
  significant operating losses) would be a much
  more problematic case

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however, Parmalat was an easy case The
business was profitable

• Financial statements 2002-2003 revised by PWC
  (press release 26 January 2004)

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ISS Findings Amongst Others

• Parmalat lacked board independence. At the time
  of the last public filings, the board comprised
  nine insiders, one affiliated outsider, and just
  three independent directors. The company was
  family-owned and went public in 1990. Its
  structure is fairly typical of the Italian market
  as a whole.

Institutional Shareholder Services
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Bye for now!
Im ready forsome leisure time.