The Wall Street Journal
December 24, 2003    Front page

Scope of Scandal at Parmalat
Widens to More Than $8 billion

By Alessandra Galloni in Parma, Italy,
David Reilly in London, Carrick
in Atlanta and
Christopher Emsden in Milan

    The scope of the alleged fraud at Parmalat SpA widened to over 7 billion euros (US$8 billion) as Italian prosecutors found even more money missing at the embattled dairy giant, according to a person close to the investigation. As the company prepares to file for bankruptcy protection, investors—including U.S. insurers—already are counting the costs.
    At the same time, the Parmalat saga is taking some unusual twists—even beyond the vast sums of money involved. Investigators are hunting down a mysterious Cayman Islands fund; they also are seeking to pin down the provenance of a forged letter purporting to verify a multi-billion-dollar bank account in the U.S.
    The rising level of the alleged fraud, which prosecutors believe may have stretched back a decade, puts the scandal in a similar league as the wrongdoing discovered at Enron Corp. and WorldCom Inc. In the Enron case, the Securities and Exchange Commission has accused banks of helping the company improperly pump its earnings by more than $1 billion and hide more than $8 billion in debt. The WorldCom fraud is pegged at $12 billion.
    Parmalat, one of the world's largest dairy operators, now teeters on the brink of collapse. Last night, the company said it expected to file today for bankruptcy protection. The Italian government has vowed to keep the company afloat and yesterday rushed through new bankruptcy rules to aid the cause by speeding up the process under which Parmalat would be protected from creditors. But it remains unclear how much that will help; the European Union has regulations limiting state subsidies for industry.
    The fallout for investors spans the globe. Moody's Investors Service said yesterday that U.S. life insurers had a $1.6 billion exposure to Parmalat-related securities as of Dec. 31, 2002. Among these insurers, Aflac Inc. said recently that it had a $384 million exposure to Parmalat, and from this, it had realized a $257 million loss from the sale of securities related to the company.
    Increasing Parmalat's financial burden is the discovery by prosecutors that the company didn't actually buy back 2.9 billion euros in bonds, as the company had told financial markets earlier this year, people familiar with the probe said. That revelation emerged after a daylong interrogation by Milan prosecutors of Parmalat's former chief financial officer, Fausto Tonna. Prosecutors have placed 20 former and present company officials under formal investigation, including Calisto Tanzi, Parmalat's founder, who stepped down last week as chairman and chief executive. The Securities and Exchange Commission also is investigating possible fraud at the company.
    Parmalat's new management said the company is cooperating with all investigations. Mr. Tonna, meanwhile, declined to comment to reporters who saw him at the Milan courthouse during breaks in his interrogation. When asked last weekend if the company had bought back the 2.9 billion euros in bonds, Mr. Tonna said in a phone interview: "I don't know. Ask the company. The company is responsible for these things."
    Mr. Tonna is widely believed by people in and outside the company to be the architect of its labyrinthine financial structure and was seen as Mr. Tanzi's right-hand man. It wasn't known what role, if any, Mr. Tonna had ascribed to Mr. Tanzi as he began telling prosecutors about the dairy giant's many offshore companies in tax havens such as the Cayman Islands. Prosecutors suspect Parmalat may have used those entities to hide its true financial condition, according to people familiar with the probe.
    These machinations have left Parmalat, which has 36,000 employees and operations in 30 nations, struggling under a debt load of at least 8.9 billion euros. It is no longer known how much cash and equivalents, if any, the company actually has, even though it reported a balance of 4.2 billion euros at the end of September (see related article on page C1).
    The possibility that Parmalat may still be on the hook for redeeming the 2.9 billion euros in bonds follows the company's admission Friday that a bank account worth about 3.9 billion euros that it had claimed to hold was actually fictitious.
    Where the cash might have gone is among the many questions that remain unanswered, even as investigations by Italian authorities gather pace. One thing is clear: Parmalat at some point had lots of cash. Between January 2000 and September 2003, for example, Parmalat raised more than 4 billion euros through bond issues sold to international and Italian investors.
    One piece of the puzzle is the fate of Parmalat's 500 million euros investment in a Cayman Islands hedge fund. The disclosure of this investment in November, and Parmalat's repeated failure to retrieve it, set the stage for the current crisis. Prosecutors came to believe yesterday that the investment is now valued at only 1 million euros, according to a person familiar with the probe.
    Another unresolved mystery surrounds the purported correspondence between a Parmalat subsidiary, Cayman Islands-based Bonlat Financing Corp., and its auditor Grant Thornton, concerning the 3.9 billion euros account said to be held at Bank of America that doesn't exist. Investigators in the U.S. and Italy are trying to determine how the name of Agnes Belgrave, a Bank of America employee, came up in an international intrigue associated with this fake bank account.
    Bank of America's lawyers yesterday were dispatched to meet with Italian prosecutors and to provide details of the bank's knowledge of the alleged fraud involving the bogus account, was included in Parmalat's overall cash balance. A spokeswoman for Bank of America said that the Charlotte, N.C., banking giant is continuing to cooperate with regulators in the U.S. and Italy.
    The correspondence began with the rather mundane process of an auditor trying to confirm that a client's assets actually existed. A year ago, on Dec. 20, 2002, Bonlat gave Grant Thornton permission to verify Bonlat's account with Bank of America. According to people familiar with this correspondence, Bonlat's letter seeking verification was addressed to one of Bank of America's offices in New York, and given to Grant Thornton to send. Grant Thornton believes the letter was then sent to that address, according to a person familiar with the correspondence.
    The letter bore the signature of Mr. Tonna, who was a Bonlat director at the time, a person familiar with the matter said. Mr. Tonna said in the phone interview over the weekend that he can't remember if he signed the letter, saying, "I may or may not have."
    Now, Italian prosecutors believe the letter may never actually have been sent, according to people close to the investigation. That slip-up may have happened because Grant Thornton received the letter back from Bonlat while Grant Thornton auditors were in Parmalat's Collecchio office, going through the company's books, people familiar with the matter say. It's possible that the auditors may have left the letter for Parmalat itself to mail, they add.
    Responding to claims that Grant Thornton might not have actually sent the letter, a spokeswoman for the firm said: "The allegation goes against all of Grant Thornton's standard procedures and policies. The standard procedure is that this kind of document must always be sent by the auditor." Last night, the firm also put out a statement saying it believes it was a "victim of a fraud committed by others." Grant Thornton reiterated that it "acted correctly" in relation to the audit of Bonlat and other Parmalat subsidiaries.
    Three months later, Grant Thornton received a reply, dated March 6, 2003, from what it believed to be Bank of America. The letter, which the bank says is fraudulent and a copy of which was seen by The Wall Street Journal, listed bank accounts for Bonlat Financing Corp., giving account no. 6550-2-52252 and a number, 6550-2-85419, for securities deposits. Three balances were listed: $336,812,328.64 (a demand deposit); 2,811,000,000.00 euros (a securities deposit); and $849,000,000.00 (a securities deposit).
    The letter confirming Bonlat's supposed account bore the address of a real Bank of America office in New York City, as well as the name and signature of Ms. Belgrave.
    But now, people familiar with the situation say the bank account doesn't exist, and Ms. Belgrave says she didn't sign the letter. Bank of America says it never received Grant Thornton's verification request.
    Ms. Belgrave does, in fact, work for Bank of America at the Manhattan office address used in the March 6 letter. She is employed in a division called operations support on the fourth floor of a Manhattan office building.
    Reached by phone at a home in New York, Ms. Belgrave said she isn't familiar with Parmalat and doesn't know how her name came to appear on the document concerning the Bonlat account. Meanwhile, Italian Agriculture Minister Gianni Alemanno said the government would today appoint the company's new CEO, Enrico Bondi, as commissioner in charge of saving the company. This position was created along with the new bankruptcy rules yesterday. The Italian industry minister said one aim of the rules is to keep Parmalat "in Italian hands."

—Mitchell Pacelle in New York and
                Siliva Ascarelli in London
                contributed to this article.