A year ago, just as Italy was winding down for Christmas, Parmalat, one of the world's largest dairy companies, descended in a few days from revelations of debt and liquidity struggles to accounting mishaps, massive fraud and bankruptcy.

Twelve months on from what became known as "Europe's Enron", there is no peace in sight between Enrico Bondi, the government-appointed administrator trying to resurrect the company, and the dozens of banks that he says contributed to the Italian company's downfall.

Last week Citigroup and Bank of America, among Parmalat's biggest creditors and the banks most under scrutiny, scored a victory when a court in Parma ruled that they were entitled to hundreds of millions of euros as creditors to Parmalat. The ruling went against the wishes of Mr Bondi. Creditor claims will be converted into equity stakes in the company and the court's decision paves the way for these banks to be among the largest shareholders in Parmalat next year.

The battle and rancour between the banks and Mr Bondi could have long-term implications as the company tries to get back on its feet. Mr Bondi will need the backing of the creditors when they vote on his recovery plan early next year. If the plan is approved, the company is still likely to relaunch on the stock market amid a welter of litigation, both in Italy and the US.

While institutional investors will hold 60-70 per cent of the shares, the remainder will be held by several banks, many of which are being targeted by Mr Bondi for damages or the return of fees, commissions and interest related to transactions they struck with Parmalat. The company's new governance bylaws have been constructed to include provisions to manage the potential problems of Parmalat's shareholders suing each other.

This incongruous situation stems from Mr Bondi's allegations that the banks, particularly Citigroup and Bank of America, helped Parmalat prolong its historic fraud over several years by helping it gain access to finance before its collapse under €14bn ($18.8bn, £9.7bn) of debt.They did so, he argues, when they knew or should have known that all was not right at the company.

There is much more to the debate than shares in a milk company that the two US banks would presumably quite happily leave to someone else.

Mr Bondi believes that the banks should pay billions of dollars in restitution because of their alleged conduct, and it is part of his duty to recover as much as he can for the new company. While last week's decision on creditor claims is a blow to Mr Bondi's legal strategy, it does not absolve the financial groups of blame. The Parma judges have taken the view that creditor claims and legal actions should continue on separate tracks.

Mr Bondi's legal actions in Italy target dozens of banks, including a move against 35 Italian institutions, damping criticism that he is giving domestic banks an easy ride. But he has singled out Citigroup and BoA, accusing them of not asking enough questions about their client before doing business and allegedly playing more influential roles in the fraud.

Prosecutors may focus on allegations that the banks could and should have done more to protect themselves and investors. That could also mean heavy financial penalties and reputational damage for the banks.

Defenders of Citigroup and BoA argue that the groups are seen as "deep pockets" by Mr Bondi - non-Italian entities with plenty of money to go after. Their critics say the case raises broad questions about culpability and duty of care that go beyond strict proof of who knew what and when. Banks work on complex deals where financial transparency is some times lost, they say, and that makes the markets dangerous for ordinary investors. "The banks make up these terribly complex schemes," a lawyer involved in one of the Parmalat-related cases says. "They make things appear as they are not."

Citigroup and BoA face investigations by prosecutors in Parma and Milan and by regulators in the US. Mr Bondi has also launched lawsuits against the two in the US seeking to recover $10bn. The suits make different allegations against each bank.

People involved say many of the accusations against BoA stem from the actions of at least three former bank employees, their alleged personal enrichment from their work with Parmalat and alleged slack supervision from more senior staff.

There is no evidence of money flowing to Citigroup employees, but the bank's accusers see evidence of weak internal controls. The lawsuit against Citigroup says: "Citigroup [played] an integral part [in Parmalat's] financial manipulations by knowingly structuring financing . . . with the intentional purpose of disguising Parmalat's debt and artificially increasing its reported cash flow from operations.

"Citigroup continued to arrange for hundreds of millions of dollars in financing for Parmalat long after it had become insolvent, reaping tens of millions of dollars in fees and commissions for itself."

But Citigroup and BoA are adamant that they were the victims of the fraud at Parmalat and deny that their controls were slack.

BoA has said: "The bank is the second largest creditor [after Citigroup] of the Parmalat group and therefore one of the subjects most damaged by the fraud. [Mr Bondi's] theory that the bank continued to extend credit of hundreds of millions of dollars to a company while being aware of the insolvency simply in order to gain commissions, makes no economic sense. Continuing to extend credit demonstrates [the bank's] good faith and its lack of knowledge of the fraud."

The arguments will probably take years to resolve and lawyers have barely started to look through documents not in the public domain or stored at Parmalat offices. After all, US regulators took two and a half years to bring a case against Ken Lay, the former Enron chairman.

Although Mr Bondi's team believes it has a strong case that will grow stronger with more investigation, people involved in the case admit there may be no smoking gun. Guilt, innocence and hundreds of millions of dollars in financial settlements may rest on pieces of evidence that are not decisive on their own but have weight collectively.

One much-discussed area is Bank of Italy's database of loans made to Italian companies by banks licensed to operate in the country. Mr Bondi's lawsuits against BoA and Citigroup say the banks should have picked up discrepancies between the central bank's data and the company's own figures for its outstanding debt.

"Bank of America had access through Italy's national bank and sources such as Bloomberg [financial data terminals] to all of Parmalat's reported outstanding debt. A comparison between this number and the much lower number carried on Parmalat's books made it clear [that] liabilities were understated," it says.

The possibility of debt discrepancies was raised in press reports months before the company's collapse. Parmalat issued detailed denials of alleged problems in July 2003.

BoA says the accusations are "baseless". "Certain transactions are differently registered in the books and records of a company than in the information provided to [the central bank's risk register] by banks . . . these two sources of information are not substantially comparable."

Another problem raised by the Bondi team concerns transactions involving Citigroup and Parmalat's operations in Canada. The Bondi lawsuit against Citigroup says the bank "structured [money lent to buy Canadian businesses] to appear as an equity investment" by Citigroup.

Mr Bondi says that Citigroup should have been concerned when details of the deal were wrongly characterised by the company in its public statements. Citigroup counters: "Nothing about this transaction was disguised - both Citigroup and Parmalat disclosed that Citigroup could sell its shares under certain conditions."

Parmalat's public pronouncements have created an issue for BoA too. The Bondi team says one private placement deal by the bank in Brazil was touted in a Parmalat press release in December 1999 and interpreted by the markets as giving a larger, and unjustifiably high, value to the company than was previously thought. Parmalat's shares rose 17 per cent on the news, although BoA's defenders say the shares fell back within two weeks.

The lawsuit says: "The deal, the [Parmalat] release said, valued [the Brazilian] subsidiary at about $1.35bn, or more than two-thirds of Parmalat's total market value at the time. Based on this news, that leading US investors were putting significant amounts of money into a Parmalat subsidiary, investors pushed Parmalat stock up."

There is no doubt, at least not in hindsight, that Parmalat was mismanaged. Many Milanese bankers say, with shrugged shoulders and raised eyebrows, that they knew something was wrong and stayed away from the company. "We were often not satisfied with their answers about why they were raising money when they said they had so much cash in the bank," says one Italian banker. "So we refused to do business with them."

Several large financial groups are conspicuous by their absence from the dozens of names embroiled in Parmalat's decline, although that might just mean they were unsuccessful at pitching for business. Italy's Mediobanca did not lend the company a euro. Goldman Sachs did no advisory work. Lazard's relationship ended some time before Parmalat ran into trouble.

Some Italian business people say that afund-appointed member of Parmalat's board of auditors did not stand for re-election in 2001 after asking questions about the company's liquidity. Parmalat itself was disarmingly honest. Its own corporate governance report for 2003 explained that it did not conform to Italy's voluntary governance guidelines, which recommend that all the people on its internal control committee - the equivalent of an audit committee - are non-executive, with a majority of independent directors.

Fausto Tonna, the former chief financial officer who was on the control committee, is among those at the heart of criminal investigations.

Corporate Italy has generally improved its governance disclosures since Parmalat's problems came to light but politicians have been sluggish in toughening up market regulation. In any case, Parmalat's case shows that disclosure does not guarantee probity.

The question for prosecutors remains whether the banks were diligent enough in their dealings with Parmalat. The banks say that Parmalat executives lied to them repeatedly and that they relied on independently audited financial statements. The work of Deloitte and Grant Thornton, the audit firms involved, is also being targeted by Italian prosecutors. No allegations of wrongdoing by auditors have been upheld in court.

The banks say their procedures were of an acceptable standard. People close to Citigroup say it made checks on a large programme for securitising Parmalat receivables which turned out to be based on several fraudulent invoices. But they admit that it is not possible in such cases to check the authenticity of all the documents.

People familiar with BoA's legal arguments say that when it acted as a private placement agent on the Brazil deal it was selling only to sophisticated investors. They argue that such work normally implies lower levels of diligence than transactions involving retail investors. In such circumstances, there is a standard checklist of questions, customised for the client. However, the final offering memorandum, one lawyer following the case says, "usually states that the bank cannot offer any definite guarantees. It warns investors that they are on their own."

There is no comfort in that for ordinary Parmalat investors. Aggrieved Italians who show up outside every court hearing in Milan say they feel they were at the bottom of the heap and think they were cheated.


• Enrico Bondi, Parmalat’s administrator, has brought damages lawsuits in the US against Bank of America, Citigroup and auditors Grant Thornton and Deloitte

• He has launched legal actions in Italy seeking fees, commissions and interest and the unwinding of transactions from UBS, CSFB, Deutsche Bank, 10 other non-Italian banks and 35 Italian banks

• Milan prosecutors have asked for charges of misleading the market to be brought against Bank of America and the auditors. They are proceeding with investigations against Citigroup, Morgan Stanley, Deutsche Bank, UBS and Nextra

• Aggrieved investors have filed a potential class-action claim in the US

• Prosecutors in Parma and the US’s Securities and Exchange Commission are also investigating potential wrongdoing


Nov 7 2003 Italy’s market regulator asks Parmalat to clarify debt issues

Dec 9 Bondi called in as a consultant as Parmalat misses a deadline to repay a €150m bond. Days later Calisto Tanzi resigns as chief executive and Bondi is appointed administrator

Dec 19 Parmalat confirms that a €4bn account it claimed to have with Bank of America did not exist. The next day, Italian prosecutors launch a fraud investigation

Dec 24 Parmalat files for bankruptcy protection. Three days later Tanzi is arrested

Dec 29 US regulators launch an investigation and Parmalat shares are suspended

July 292004 Bondi launches a lawsuit against Citigroup

Oct 6 Nextra, the asset management arm of Italy’s Banca Intesa, settles with Bondi, paying €160m without admitting guilt

Dec 16 The Parma court allows the large banks’ creditor claims, against Bondi’s wishes

2005 Creditors are expected to vote on a restructuring plan in January or February. Subsequent approval by the court would lead to the appointment of new management and a stock market listing

Regulatory overhaul shows slow progress

By Tony Barber

The Italian government’s plans for a comprehensive overhaul of financial market regulation are not exactly in ruins, but they are more modest than was envisaged.

Less than a month after the Parmalat scandal erupted in December 2003, Giulio Tremonti, then Italy’s finance minister, announced reforms intended to give the country a super-regulator akin to the UK’s Financial Services Authority or Germany’s BaFin. This would have swept away the system that splits Italian regulation between five bodies - Consob, the stock market regulator; Isvap, responsible for insurance; Covip, responsible for pension funds; an anti-trust authority; and the Bank of Italy, the central bank.

Resistance from some of these institutions and their political patrons forced Mr Tremonti to water down his plan. But the fundamental problem was that his campaign degenerated into a personal battle with Antonio Fazio, governor of the Bank of Italy. Mr Tremonti wanted to clip the bank’s supervisory powers and restrict the governor to a fixed term of office rather than let him serve for life, as now. Mr Fazio was having none of it.

The curtains fell on the bolder aspects of Mr Tremonti’s reforms when he had to resign in July because of quarrels in the centre-right coalition led by Silvio Berlusconi, prime minister. Domenico Siniscalco, the new finance minister, took immediate steps to improve the government’s relationship with the Bank of Italy. The bank is expected to retain control over banking supervision, and the idea of a fixed term for the governor is being quietly dropped.

However, the bill to modernise financial market regulation has been stuck in parliament all year and debate will not resume until January. A definitive vote is further away than ever. “As with Don Quixote, it’s been a battle against windmills. We have now reached a bipartisan agreement - namely, to do nothing,” joked one member of parliament.

That judgment is somewhat unfair. This month parliament’s lower house did manage to approve a European Union directive against market abuse, and attached measures to strengthen Consob and toughen penalties for financial crime.

Consob will have more investigative powers, including the right to tap phone lines, confiscate documents and use a Bank of Italy database showing banks’ financial exposure to companies. Market manipulation can be punished with a prison term of one to six years plus a fine of up to €5m ($6.7m, £3.4m), according to the bill.

But there has been less progress on proposals to toughen a law against false accounting, which Mr Berlusconi’s government passed soon after coming to power in 2001. Members of parliament are awaiting a ruling from the European Court of Justice on whether the law is compatible with EU legislation. The court indicated this year that it would come down against the Italian law.

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