The Parmalat Syndrome

How U.S. financial firms -- including Bank of America -- allegedly abetted a multibillion-dollar fraud, and how U.S. regulators are letting them get away...

There is a huge unfolding American corporate scandal that U.S. officials don't seem to consider an American corporate scandal, a scandal so massive it compares with WorldCom, Global Crossing, and other high-profile corporate frauds in terms of scope, complexity, and amount of money involved. Some of America's great financial institutions are said to have been behind the scam. And if racketeering allegations contained in civil, criminal, and bankruptcy filings in the United States, Europe, and elsewhere are true, court judgments against U.S. banks, U.S. lawyers, and U.S. accountants could run to the tens of billions of dollars — perhaps even enough to weaken pillars of the global banking system.

But you wouldn't know the import of the scandal from the apparent lack of interest by U.S. regulators and politicians. Unlike with Enron and other white-collar scandals of recent years, there have been no major U.S. public hearings or indictments regarding the decade of fraud and looting that led to the bankruptcy of the Parma, Italy-based global food conglomerate Parmalat SpA. American officials seem content to idly look on as Italian regulators conduct a global investigation into the Parmalat fraud. This inquiry and the prosecution of criminal and civil complaints against U.S. companies have been stymied by a lack of coordination and assistance from regulators outside Italy, particularly in the Cayman Islands, an offshore haven where U.S. banks put together financing deals that Italian officials say served to defraud investors, according to people familiar with the probe.

The roar of U.S. government silence in regard to Parmalat reinforces the impression that the firm's disintegration was a foreign affair. But like so much about Parmalat, this impression is false. This huge bankruptcy scandal — in which a multinational conglomerate collapsed upon the revelation that $4 billion worth of claimed company bank deposits simply didn't exist — was, at its core, an American job.

Recent criminal-, civil-, and bankruptcy-court filings in the United States, Italy, the Cayman Islands, and elsewhere allege a vast conspiracy in which U.S. bankers (with the help of allegedly corrupt U.S. accounting firms and lawyers) concocted a financial house of mirrors designed to confuse credit analysts and bewitch investors into pouring billions of dollars into what turned out to be a looting trough.

If many of the alleged villains in the Parmalat debacle are U.S.-based, so are the victims. The list of investors allegedly defrauded by Parmalat-linked bankers prominently includes the California Public Employees Retirement System (CalPERS), which had an investment fund that owned Parmalat stock. (How much is not specified in the court filings I've seen.)

“Much of the core infrastructure of the scheme was built in the United States by American-based bankers, auditors, and lawyers. In a very real way, the U.S. acted as the nerve center for the Parmalat fraud that ultimately resulted in the falsification of the company's financial statements,” says an amended complaint recently filed in U.S. District Court in New York on behalf of investors in the company.

Enrico Bondi, appointed by the Italian government to oversee Parmalat as it attempts to emerge from bankruptcy, has filed lawsuits in U.S. courts seeking tens of billions of dollars in damages from banks — including Citigroup and Bank of America — and accounting firms such as Deloitte & Touche and Grant Thornton. Each complaint details distinct book-cooking tasks allegedly undertaken by the U.S. firms.

According to a racketeering lawsuit the Italian overseer recently filed in North Carolina, for example, “Bank of America began engaging in a series of systematic, interrelated transactions whose only economic purpose was to enrich Bank of America at the ultimate expense of Parmalat, by making it appear that Parmalat was a thriving, profitable company with a good credit rating and the ability to grow and obtain additional financing.”

Evidence described in this lawsuit makes a convincing case that Bank of America — headquartered in San Francisco when the alleged fraud began in 1997 — knew Parmalat was a financial black hole as BofA officials induced investors to loan the food firm huge sums of money in a very complicated way. What's not entirely clear is why U.S. prosecutors and regulators are not, apparently, pursuing these charges of massive, organized, U.S.-based fraud.

Many readers will remember Parmalat from a series of vaguely satisfying news stories from a little more than a year ago, stories in which an Italian farm family turned an Italian dairy goods firm into a global food enterprise, then stole from it wholesale. Parmalat imploded at Christmas 2003 in a scandal that seemed bigger, cruder, and more criminal than a long string of American corporate frauds.

Parmalat collapsed almost instantly when a memo detailing $4 billion supposedly held in a Parmalat account at Bank of America turned out to be false. The memo was part of a failed effort to raise money for a loan payment.

Executives at the Italian company forged the memo using scissors, paste, and a copy machine.

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. [page]

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.

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.


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.

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.

The Bank of America transactions were run through a nonprofit entity set up by the Cayman Islands law firm Maples & Calder, which is the same nonprofit entity that harbored the shell firms that ultimately brought down Enron. For you to have an idea of how widespread these kinds of secretive, highly complex transactions are, though, you need to know that this is the same nonprofit entity used by bankers working on behalf of the San Francisco Municipal Railway two years ago, when they converted our city's light-rail trains into offshore tax shelters.

Indeed, the number of complex and opaque bond financing and private stock placement deals conducted in offshore banking havens has exploded during the past 10 years. It's said that some $500 billion of such transactions is currently routed through the Caymans alone. But nobody knows for sure, because there's no way to really find out.

Yet put “Cayman Islands” and “regulator” into Google, and you'll come up without many relevant responses, because there's no effective regulation of banking there. Meanwhile, there's no serious effort by the United States to coordinate financial law enforcement between European and other regulators save a bland SEC effort to standardize accounting terminology. There's not likely to be one anytime soon. And the offshore wizards know this. “When asked whether the role of the offshore administrator has changed in the wake of Enron, Parmalat, and other corporate scandals,” a Maples & Calder partner said in a recent speech, “I typically respond that it has not.”

If Parmalat hadn't failed to make its December 2003 loan payment, and therefore hadn't found it necessary to gin up a phony $4 billion bank statement, it might still be ripping off investors today, without any institution in place to stop it.

From a certain perspective, there's a bright side to this global regulatory failure.

The myriad, allegedly fraudulent transactions that fueled Parmalat's worldwide growth from the mid-1990s to late 2003 involved hundreds of perpetrators, collaborators, and victims in dozens of banks, accounting firms, and law firms. These purported scams were carried out steadily over nearly a decade, incorporating people, bank accounts, and shell firms around the world.

Perhaps the blind eye American regulators have turned on the U.S. nerve center that aided the Parmalat fraud is a perverse kind of jobs program. A jobs program for the Bush era.

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