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Italy: Police Arrest Parmalat Fraud Suspects

by John TagliabueNew York Times
January 1st, 2003

The Italian police detained seven executives and advisers of Parmalat on Wednesday and were seeking an eighth, significantly widening the investigation of events that led to the company's collapse under about $11 billion of liabilities.

Police in Bologna, near Parmalat's headquarters outside Parma in north-central Italy, were holding two former chief financial officers, Fausto Tonna and Luciano del Soldato, as well as a company lawyer and two of its auditors from the firm Grant Thornton. The police were also seeking the head of Parmalat's operations in Venezuela, Giovanni Bonici, though his lawyers said he was out of the country but would turn himself in to the authorities upon his return.

The police are holding the men at the request of magistrates who are investigating the circumstances of the failure of Parmalat, which sought protection from creditors earlier this month.

Earlier on Wednesday, a representative of the United States Securities and Exchange Commission met with the magistrates as well as with the new chairman of Parmalat, Enrico Bondi, to discuss efforts to salvage some of the company's assets, which include dairy products, fruit juices and baked goods, and to devise a strategy for discovering what individuals or institutions might have made themselves culpable of defrauding investors by masking the company's true state.

The move appeared to push the investigation to a new level. The magistrates had focused until now on the investigation of the founder and former chairman, Calisto Tanzi, who was arrested on Saturday and has been undergoing questioning by the magistrates.

Among those detained by the police are a lawyer and close associate of Mr. Tanzi, Gian Paolo Zini; the chairman of the Italian unit of the auditors Grant Thornton, Lorenzo Penca; and one of the accounting firm's partners, Maurizio Bianchi. Mr. Penca announced that he had resigned as chairman before turning himself in to the police.

"We've closed a chapter," Col. Maurizio Raponi of the police, told reporters after announcing the detentions. "Our new work will be seeking out the missing funds."

An officer in Colonel Raponi's office said by phone that the men were accused of association to commit crime, a charge that the magistrates have favored because it gives teeth to their efforts after recent Italian legislation on financial regulation mitigated the penalties for most financial misdeeds.

Italian investigators suspect that Mr. Tanzi may have siphoned as much as 800 million euros ($1 billion) from Parmalat operations, mainly to finance other family businesses. The S.E.C. has filed a complaint against Parmalat, accusing the company and Mr. Tanzi of selling about $1.5 billion of securities to American investors while engaging in fraud.

People close to the company said the investigation was increasingly focused on financial institutions. One institution, Bank of America, became involved in the case earlier this month after it declared that documents appearing to certify an account it supposedly held of a Parmalat subsidiary in the Cayman Islands with the equivalent of $4.2 billion in it were forgeries.

A person close to Parmalat said the bank was also of interest because it had issued prospectuses and attracted investors for Parmalat securities issued in the United States. A Bank of America spokeswoman said the bank was cooperating fully with all the investigating authorities.

Citigroup has also drawn attention for a loan it extended to Parmalat that was structured as an investment in a Parmalat subsidiary.

Virtually all of the men ordered held today were involved -- in varying degrees -- in activities the magistrates think might have gone to defraud investors by misleading them about the true state of Parmalat's finances.

In questioning by magistrates in recent days, company executives, including Mr. Tanzi, have told of efforts, largely initiated by Mr. Tonna and Mr. Del Soldato and put in place with the help of Mr. Zini, to invent assets at far-flung Parmalat subsidiaries in order to offset huge amounts of company liabilities.

Mr. Zini, for example, who is a partner in Zini & Associates in Milan and New York, has been closely linked -- through the testimony of company executives and also through documentary evidence -- with the creation of a Cayman Islands investment fund called Epicurum, in which Parmalat supposedly invested about 500 million euros. Parmalat's inability to retrieve that money in the last couple of weeks helped bring about its failure.

In late August, when Parmalat was unable to provide Grant Thornton with a value for the investment in Epicurum, Parmalat's principal auditor, Deloitte & Touche, qualified the company's third-quarter results. In turn, the Italian stock market regulator, Consob, opened an inquiry.

In a similar case, Parmalat was unable to provide Grant Thornton documentation for an account, supposedly held at Bank of America, that contained $4.2 billion. Two of the Parmalat executives detained, Gianfranco Bocchi and Claudio Pessina, are said by magistrates to have used scanners and photocopiers to forge documents on Bank of America letterhead.

As the extent of Parmalat's financial problems became increasingly apparent, Mr. Bocchi was among the company executives who destroyed financial records, including computer disks and other files.

Mr. Del Soldato, in his testimony to investigators, told how he had been instructed directly by Mr. Tanzi to falsify the accounts of Parmalat's Cayman Islands subsidiary, Bonlat, according to court documents. He said that it was Mr. Tonna who finally set up the system.

Mr. Del Soldato also told how he had ordered Mr. Bocchi to devise -- on a Parmalat computer -- the forged Bank of America documents that testified to the supposed Bonlat account. Mr. Bocchi, for his part, told the magistrates that Mr. Del Soldato had ordered another Parmalat accountant to destroy the computer with a hammer. He said that he had prevented this and had turned the computer over to investigators.

The Grant Thornton auditors, Mr. Penca and Mr. Bianchi, were named earlier by magistrates as being under investigation, creating considerable embarrassment for Grant Thornton, which said it was never notified of the fact.

On Monday, the umbrella entity for the group said it was initiating an inquiry into the activities of the Italian unit within the limitations imposed by the partnership. In a statement Tuesday issued before its executives were detained, the firm said that "initial inquiries" had established that the Italian affiliate was "completely and extensively cooperating with the Italian authorities."

The statement went on to say that Grant Thornton "has consistently denied any participation in any fraud related to the Parmalat companies."

Considerable suspicion has been aroused over the role of Grant Thornton because the firm was Parmalat's principal auditor through most of the 1990's, when many of the financing schemes to mask Parmalat's financial troubles were first devised.

The firm audited two subsidiaries in the Netherlands Antilles, Zilpa and Curcastle, that investigators have said were devised so that invented assets could offset Parmalat liabilities. In 1999, when Parmalat was required by new Italian regulations to rotate its auditors, Parmalat switched from Grant Thornton to Deloitte & Touche, but not before it shifted most of the liabilities from Curcastle and Zilpa to Bonlat Financing, which continued to be audited by Grant Thornton.

People close to the investigation have said that Mr. Tonna described to magistrates how he and Mr. Bocchi regularly forged documents testifying to assets that did not exist. He also told investigators during questioning that the idea for the creation of Bonlat came in part from Grant Thornton.

To keep Parmalat running, Mr. Bondi is expected to meet early in the new year with banks to seek new loans, a person close to the company said. This week, Parmalat hired a consultant to seek a buyer for its Archway Cookies unit in the United States, The Associated Press reported, citing a company statement.

But Mr. Bondi will have to tread carefully not to upset Parmalat bondholders.

Representatives for bondholders said this week that they are now on a par with bank debt in terms of who gets paid when in the bankruptcy process. They are concerned that any bank that extends Parmalat more money will renegotiate the terms of the loan, and back it with Parmalat assets, which would make bondholders subordinate.

Parmalat's failure has galvanized efforts by the Italian government to overhaul the regulatory system, though critics say the effort could fall victim to infighting between the government and the Bank of Italy, the central bank, which now has considerable oversight authority.

"I am convinced that either we turn the page, either we're able to give an answer, or if we continue to say, there's no hurry, then this will have an effect on the behavior of investors," said Gianluigi Magri, an under secretary in the economics ministry, which has prepared a draft bill.





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