The Parmalat Syndrome

This early, superficial account of the Parmalat collapse offered a nice contranarrative to the U.S. corporate scandals of the previous three years. It pleasingly shifted the spotlight on global financial corruption away from American blue-chip corporations to Italy, land of the Mafia and clownishly corrupt politicians. In the year since the Parmalat failure, however, Italian prosecutors and administrators have uncovered an apparent fraud every bit as subtle, sophisticated, and damaging as the corporate scandals that have dominated American media of late. And it was conducted, for the most part, right in the USA.

Parmalat's bankers and accountants, many U.S.-based, committed fraud when they worked out deceitful financing schemes that allowed Parmalat executives to hide the fact that the company was beyond the point of financial collapse, Italian government regulators contend. Without the help of American bankers, the Italian executives at Parmalat couldn't have covered up a multibillion-dollar hole in the company's finances, and they couldn't have continued to loot the company year after year, Italian government lawsuits and other filings say.

The U.S. Securities and Exchange Commission, however, has not conducted any enforcement action against companies involved in the scandal, aside from settling a lawsuit against Parmalat last year by extracting a promise from Parmalat's government overseers that the bankrupt company would stop defrauding investors. Rather than investigating and taking enforcement action against complicit U.S. institutions, the SEC has primarily concerned itself with making sure Italian bankruptcy proceedings don't shortchange U.S.-based creditors while sorting through $34 billion in claims against Parmalat. A U.S. Justice Department spokesman did not return a call requesting comment by press time. The office of Manhattan District Attorney Robert Morgenthau held meetings last year with Italian investigators regarding Parmalat but has taken no public action of its own, a spokeswoman said.

Perhaps U.S. regulators and law enforcers have been blinkered by nationalistic pride. Maybe they believe the early, incomplete versions of the Parmalat scandal depicting exquisitely tailored Italians on the take and find them unworthy of official interest. It could be that American law enforcers are holding their horses so as not to interfere with the Italian probe. More likely, though, is another explanation: The practices detailed by Italian investigators are being overlooked here in America because they have become an ordinary way of doing business in the U.S. financial services industry.

A close look at the corner of the Parmalat fraud emanating from San Francisco -- a series of transactions contrived by Bank of America officials over an eight-year span that began when that institution was based here and involved the apparently unwitting collaboration of Wells Fargo Bank -- points to this second explanation. The U.S.-based transactions that allegedly formed the core of the Parmalat fraud -- Byzantine shams involving offshore shell firms within shell firms, shuffling nonsense financing contracts between similarly encapsulated shells -- have become an accepted part of American financing, notwithstanding the high-profile corporate-fraud law enforcement actions of two years ago.

Bank of America has asked a judge to dismiss the $10 billion Bondi suit, saying the Italian administrator has neither standing nor evidence to bring such an action, according to news accounts. Neither Bank of America nor Wells Fargo representatives responded last week to requests to comment for this column.

---

The Parmalat investigation is showing that it takes more than a crudely forged bank statement to fool the financial world into believing that you've got $4 billion that doesn't actually exist. In the case of Parmalat, what it took was the carefully nurtured illusion -- backed by the good names of some of the world's largest banks -- that the company's books were sound, and that savvy investors were eager to invest in the Italian food firm.

Numerous banks undertook the task of maintaining this illusion. Bank of America, for its part, is alleged to have persuaded investors to loan money to a company that, the bank knew, was about to fail and then hid the company's financial weakness from investors in an extraordinarily complex way. Wells Fargo was brought in on many of these deals as a trustee for investment funds, a technical task that is separate from the job of actually contriving and marketing the allegedly fraudulent schemes.

But if Italian investigators are correct, BofA engaged in a double-edged deception. As the bank was luring lenders for Parmalat by hiding the firm's nearly bankrupt condition, BofA was also helping Parmalat portray the loan to the markets as an investment of capital. The difference between money loaned to a company and money invested in a company is -- in a drastic simplification -- the difference between debt and equity on a balance sheet. To a credit analyst -- who issues official opinions about whether a company is solvent -- there can be a marked difference between these two types of capital infusion. Taking on too much debt can weaken a company. Taking on equity, however, can send a message that investors are eager to own part of a firm because it's poised to grow.