The Parmalat Syndrome

Italian regulators believe Bank of America cooked up bogus financing deals designed specifically to deceive analysts and investors into confusing debt and equity. And they believe they have a smoking gun that supports their position.

On Dec. 17, 1999, the head of Bank of America's corporate finance team in Milan sent a fax to Parmalat's chief financial officer, explaining how to phrase a press release announcing a series of Cayman Islands transactions so $150 million in loans to a Brazilian Parmalat subsidiary would seem to be $300 million in equity investments.

"Please use a text like the following," Bank of America's Luca Sala told Parmalat's chief financial officer, Fausto Tonna. "'Bank of America has led a group of U.S. investors to invest $150 million in the Brazilian operating subsidiary of the Parmalat Group. The transaction may be increased by a further $150 million expected to take place within the end of the year.'"

The news release on the bogus "stock" offering went even further, putting a price on individual shares that suggested the Brazilian subsidiary was worth $1.35 billion. This may have overstated the real worth of the division by as much as 100 percent, the racketeering allegations filed by Italian regulators suggest.

Responding to the fictitious press release, investors bid up Parmalat's share price by 17 percent in a single day, increasing the Italian company's overall valuation by $300 million, the largest daily gain in its 39-year history.

Shareholders weren't the only ones fooled. To attract the U.S. insurance company investment funds that would finance the deal, Bank of America structured the transaction in an extraordinarily misleading way, Italian regulators allege. According to those regulators, BofA used secret side agreements to disguise the fact that it was putting less of its own money at risk than it seemed, and to hide the extraordinarily high interest rates it would receive on its own money, rates normally associated with junk bonds issued by companies at risk of collapse.

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Last month an Italian magistrate issued a final ruling on $34 billion in claims against Parmalat. The ruling stated that Wells Fargo had $617 million in claims accepted, making the bank by proxy Parmalat's largest creditor.

Wells Fargo created and managed several Cayman Island investment trusts that are at the heart of allegations that Bank of America contrived phony financial transactions specifically aimed at bamboozling investors into pouring billions of dollars into Parmalat SpA. Attorneys for creditors represented by Wells Fargo told me the bank would have inquired into the transactions -- as part of what's called "due diligence" -- before agreeing to become involved. And Italian court filings say Bank of America (and by inference Wells Fargo) had access to publicly available information showing Parmalat was far less healthy than the prospectus advertising the transaction claimed.

Just the same, there's no evidence showing Wells Fargo played an active part in devising the allegedly fraudulent transactions detailed in court filings. And the New York class-action lawsuit that levels fraud allegations at financial giants such as Citigroup and Bank of America makes no mention of Wells Fargo. "Our lawyers have found no evidence that Wells Fargo has done anything that would be actionable up to this point," a Parmalat spokesman told me last week.

So it appears that although Bank of America worked closely with Wells Fargo in setting up opaque and complex financial structures that aimed, lawsuits allege, to defraud investors, Wells Fargo is probably not complicit in these transactions' allegedly fraudulent intent.

And to me, that's the rub of the Parmalat scandal. The apparently prosaic nature of Wells Fargo's involvement in the alleged Bank of America fraud helps illustrate the perfectly ordinary flimflam that appears to permeate finance as it's now practiced in America. And the everyday nature of Wells Fargo's participation in the matter posits a credible explanation as to why U.S. officials haven't expressed public alarm about Parmalat SpA.

It's possible to imagine that, when Bank of America's financial alchemists recruited Wells Fargo's Ogden, Utah, branch as a trustee for insanely complicated investment vehicles doing a shadow dance in the bank-secrecy haven called the Cayman Islands, the Wells Fargo officials did what financiers everywhere seem to be doing these days. They let their eyes glaze over. They let their ears hear something like "Blah, blah, blah, structured finance, blah, blah, blah, for tax purposes, blah, blah, blah, everybody does it this way, blah, blah, blah."

And they let their hands sign on the dotted line.

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I've described just one of many transactions -- structured by U.S. bankers, overseen by U.S. accountants, and requested by Parmalat executives and lawyers -- that combined to create a company whose debt was ultimately understated by $10 billion and whose total net assets were overstated by $16.4 billion.

And it appears that most of the people involved were merely doing their everyday jobs.