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Yves Blechner Dai Nguyen Jide Olateju

Yves Blechner Dai Nguyen Jide Olateju. February 9, 2004. The Fraud…. Fraudulently offered $100MM of unsecured Senior Guaranteed Notes to US Investors by: - overstating assets by approx. $4.9B - understating liabilities by approx. $16B

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Yves Blechner Dai Nguyen Jide Olateju

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  1. Yves Blechner Dai Nguyen Jide Olateju February 9, 2004

  2. The Fraud… • Fraudulently offered $100MM of unsecured Senior Guaranteed Notes to US Investors by: - overstating assets by approx. $4.9B - understating liabilities by approx. $16B • Falsely stated to prospective investors that it used excess cash balances (which did not exist) to repurchase bonds worth approx. $3.6B • Forged confirmation of assets worth $4.9B in accounts at Bank of America • Materially misstated its financial condition in a private placement memorandum in August 2003: “Liquidity is high with significant cash and marketable securities balances…” • Artificially inflated the value of its ADR’s by the materially false statements described above

  3. …The Fraud… • On January 18, 2002, Parmalat’s Brazilian unit issues a “convertible bond” worth EUR 500 MM at an interest rate of 10.45% - accounted for as $523.8 MM in funds for capital increase - rolled into a singe entry of $764 MM that includes minority interest, fund for capital increase and shareholders’ equity -> due to consolidation, this appears simply as shareholders’ equity on the parent level (Parmalat) • On the same day: - Parmalat Finance Corp. BV issues a EUR 300 MM eurobond issue, coupon = 5.875% -> Analysts believe these funds were used to buy the Brazilian unit’s bonds

  4. …The Fraud • Fraudulent activities started arguably in early 1990’s (still under investigation), and increased since 2000 due to financial problems • PriceWaterhouseCoopers called in to audit Parmalat’s books as of September 30, 2003, and discovered: • Reported revenue = $6.77 billion. Actual revenue = $5.04. • Reported EBITDA = $820MM. Actual EBITDA = $152MM. • Reported net debt = $2.29 billion. Actual net debt = $18.0 billion. • Where did the money go? • At least EUR800 MM channeled to the Tanzi’s tourism business (run by Calisto Tanzi’s daughter Francesca) • Significant capital pumped into AC Parma

  5. Detection…Signs of Sour Milk • Parmalat’s inability to liquidate its investment of about $617MM in Epicurum, a fund investing in “leisure and pleasure” industries in November 2003. • Parmalat failed to make payment on a $190MM bond maturing in early December 2003. • Tanzi, Tanzi’s son and Parmalat’s finance director admitted to the true financial condition of the company at a private meeting with the Blackstone Group to discuss a possible LBO of Parmalat. • Parmalat acknowledged in a press release on December 19, 2003 that the company’s assets in its 2002 financial statements were overstated due to a fraudulent bank account that did not actually contain $4.85 billion.

  6. Investigation…A Dairy Dose of Fraud • PriceWaterhouseCoopers was brought in to perform an audit of Parmalat’s true financial condition. • Interrogations of relevant Parmalat employees, in addition to others outside of the company, including the company’s lawyers and auditors, have been conducted and are on-going. • Italian prosecutors are widening their investigation to include several banks to probe what the banks knew of Parmalat’s finances. • On the U.S. side, no bank has been accused of wrongdoing in connection with its Parmalat business, and thus far, the SEC’s investigation has found no indication of impropriety by the banks. • On-going investigations are being conducted by officials in the U.S., Italy, Brazil and other nations.

  7. Resolution…In Progress • Italian turnaround expert Enrico Bondi hired to run Parmalat as S&P cuts bond ratings to Junk Status • Calisto Tanzi resigns as Chairman & CEO • Parmalat files for bankruptcy on 12/24/03. Declared insolvent three days later. • SEC has filed securities fraud charges against Parmalat. and is seeking a permanent injunction against the company from future violations of securities laws and a substantial civil monetary penalty. (Corp. Accountability)

  8. Resolution…In Progress • The SEC filed a civil suit against Calisto Tanzi and his son, Stefano, on allegations that they raised $1.5 billion from U.S. investors while engaged in fraud • Ten people have been arrested. No indictments have been issued • Two Grant Thornton officials help for helping perpetrating systemic fraud at Parmalat and supplying false information to the market • No bank accused yet of wrongdoing in connection with its Parmalat business.

  9. Prevention • Large (Big 3) Independent auditors with global presence • More stringent due diligence by creditors and bond issuers • Better alignment of regulatory responsibility (from the Central Bank to Consob) • Open and transparent corporation with Independent Board of Directors and not a family empire

  10. Yves Blechner Dai Nguyen Jide Olateju February 9, 2004

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