Losing money on its productive activities, the company shifted more and more to the high-flying world of derivatives and other speculative enterprises. Parmalat’s founder and now former CEO Calisto Tanzi engaged the firm in several exotic enterprises, such as a tourism agency called Parmatour, and the purchase of the local soccer club Parma. Huge sums were poured into these two enterprises, which have been a loss from the very beginning. It has been reported that Parmatour, now closed, has a loss of at least EU 2 billion, an incredibly high figure for a tourist agency.
The losses of the Parma soccer club are not yet fully known. Here, Parma insiders are pointing at what they call the “Medellin Cartel” connection—i. e. , the purchase of overpriced Colombian soccer players, and other extravagances. While accumulating losses, and with debts to the banks, Parmalat started to build a network of offshore mail-box companies, which were used to conceal losses, through a mirror-game which made them appear as assets or liquidity, while the company started to issue bonds in order to collect money. The security for such bonds was provided by the alleged liquidity represented by the offshore schemes.
The New York-based Zini lawfirm named by Robbins has played a role. Through Zini, firms owned by Parmalat have been sold to certain American citizens with Italian surnames, only to be purchased again by Parmalat later. The whole operation was fake. The money for the sale in the first place came from other entities owned by Parmalat, and it served only to create “liquidity” in the books. 2. Investigate and discuss the role that international banks and auditors might have played in Parmalat’s collapse. Solution Clearly, international banks and auditors failed to do the due diligence, hereby indirectly contributing to the failure of Parmalat. The largest bond placers have been Bank of America, Citicorp, and J. P. Morgan. These banks, like their European and Italian partners, rated Parmalat bonds as sound financial paper, when they knew, or should have known, that they were worth nothing. While Bank of America has participated as a partner in some of Parmalat’s acquisitions, Citicorp is alleged to have built up the fraudulent accounting system. What strikes one is not only the dimension of the scheme, but the arrogance of its authors.
For instance, one of the offshore mail-box firms used to channel the liquidity coming from the bond sales was called Buconero, which means “black hole”! Appropriately, the first class-action suit in the United States on the Parmalat case, filed by the South Alaskan Miners’ Pension Fund, is against Parmalat, its auditors, Bank of America, and Citicorp—and focusses on Buconero. “The Parmalat fraud has been mainly implemented in New York, with the active role of the Zini legal firm and of Citibank,” said San Diego lawyer Darren Robbins, a partner in the firm Milberg Weiss Bershad Hynes & Lerach, which is leading the class-action suit. We believe that Citigroup, by creating instruments like the sadly famous ‘Buconero,’ has played a fundamental role in helping Parmalat to fake their balance sheets and hide their real financial situation. ” Former CEO Tanzi declared to prosecutors in Parma that the fraudulent bonds system “was fully the banks’ idea. ” Parmalat’s former financial manager, Fausto Tonna, counterfeited Parmalat’s balance sheets in order to provide security for the bonds, but “it was the banks which proposed it to Tonna,” Tanzi declared.
Tanzi’s version has been so far confirmed by Luciano Spilingardi, head of Cassa di Risparmio di Parma and member of the Parmalat board. Bond issues were ordered by the banks, Spilingardi said to prosecutors, according to leaks published in the daily La Repubblica. “I remember,” Spilingardi says, “that one of the last issues, of 150 million euros, was presented to the board meeting as an explicit request by a foreign bank, which was ready to subscribe the entire bond. If I remember correctly, it was Deutsche Bank. Spilingardi says that he expressed “perplexity” about the proposal, because a previous bond issue of EU 600 million had failed, in the Spring of 2003, causing a 10% fall of Parmalat stocks in one day. But the request was accepted, and the last Parmalat bond, issued in summer 2003, made its way to the Cayman Islands black hole. At the moment of Parmalat’s default, in December 2003, the financial manager of Parmalat was no longer Tonna, who had left after the failed bond issue in the spring. He has been replaced by Alberto Ferraris, who comes from Citibank.
In June 2003, before the last bond issue “ordered” by Deutsche Bank, Parmalat’s board gained a new member: Luca Sala, a top manager coming from Bank of America. On Dec. 9, as rumors spread that Parmalat’s claimed liquidity was not there, Standard & Poor’s finally downgraded Parmalat bonds to junk status, and in the next few days, Parmalat stocks fell 40%. On Dec. 12, the Parmalat management somehow found the money to pay the bond, but on Dec. 19 came the end: Bank of America announced that an account with allegedly $3. 9 billion in liquidity, claimed by Parmalat at BoA, did not exist.
In one shot, the bankruptcy was revealed, and Parmalat stocks fell an additional 66%. Later, Tonna would confess that he had faked BoA documents, using a scanner, scissors, and glue, to “invent” such a $3. 9 billion account, a version which is still the official one. 3. Study and Discuss Italy’s corporate governance regime and its role in the failure of Parmalat. Solution Italy has a weak corporate governance regime that does not provide a strong protection of outside shareholders. The majority of public firms are dominated by large controlling shareholders who are often the founding families.
The lack of independent board of directors also contributed to the implosion of Parmalat. Q. What would you do if you were a manager? According to me, when businesses behave unethically, they act in ways that have a harmful effect on others and in ways that are morally unacceptable to the larger community. This is very serious because corporate power and impact are increasing as corporations become larger. In Parmalat case senior managers have engaged in improper bookkeeping, making company look more financially profitable than they actually are. As a consequence the stockholder value of the company increases, and anyone with stock profits irectly. Among those profiting will be those making the decisions to manipulate the accounts—and so there is a conflict of interest. However, the fallout from the downfall of Parmalat affected stockholders, employees, and society at large negatively, with innocent people losing their retirement reserves and/or savings, and employees losing their jobs. Behaving ethically is clearly key to the long-term sustainability of any business. Focusing on the social and environmental as well as the economic impact of a company provides the basis for sound stakeholder relationships that can sustain a business into the future.