Parmalat

1. Parmalat Dr. Clive Vlieland-Boddy

3. Studies on Corporate Failures • Studies have shown that a majority of those corporate failures were traceable to the predominance of one individual or several working in concert in the board. • Invariably fraudulent practices were found. • Failure of checks and balances mechanism.

4. Stakeholder Pressures & Greed! • In any large business under global capitalism there is an enormous pressure to “perform” in the global market. • To bring favorable returns that meet investors’ expectations. • Not surprisingly Parmalat’s fraudulent activities really “took off” when its stock went public in 1990.

5. Each Party’s Responsibility • Directors - Issues of compliance & profitability • Shareholders - Questions on company’s performance • External auditors • Independence • Change of auditors • Who audits the auditors?

6. What Went Wrong? Spectacular corporate accounting scandals and failures include: • Parmalat - fraudulently offered US$100 million worth of unsecured notes to U.S. investors in 2003, at the same time inflated its assets by at least US$5 billion

7. Parmalat Parmalat, the Italian dairy and food giant, engaged in a tangled scheme involving dozens of offshore front companies to invent assets to offset perhaps as much as $US11 billion ($14.8 billion) in liabilities over more than a decade, Italian investigators said.

8. Parmalat ”Italian dairy-foods giant Parmalat has prosecutors scrambling to find out what happened to $8.5 billion to $12 billion in vanished assets. Some 38% of Parmalat's assets were supposedly held in a $4.9 billion Bank of America (BAC) account of a Parmalat subsidiary in the Cayman Islands.” Business Week

9. Parmalat ”But Bank of America reported that no such account existed. In the ensuing investigation, Italian prosecutors say they've discovered that managers simply invented assets to offset as much as $16.2 billion in liabilities and falsified accounts over a 15-year period, forcing the $9.2 billion company into bankruptcy on 27 Dec 2003”. Business Week

10. SPV’s •  Parmalat started creating finance companies in the Antilles, essentially to dump liabilities that it then offset, at least on paper, with assets it simply invented. • Then closed down the Antilles-based companies, replacing them with Bonlat, which was registered in the Cayman Islands. • Parmalat, in information for investors, describes Bonlat as a "treasury centre". But people close to the investigations called it a "garbage can", where Parmalat parked all kinds of liabilities accrued at its various subsidiaries around the world.

11. BOA – Deposit! • On its balance sheet, Parmalat declared Bonlat to be in possession of assets that included the $6.95 billion supposedly held by Bank of America. • In fact, Bonlat's assets appeared to have been non-existent, appearing only on paper.

12. Auditors! • The spokeswoman for Grant Thornton in London, Nan Williams, noted that the firm was partly responsible for the current investigation because last December it wrote to Bank of America seeking confirmation of the Bonlat account at the bank. • In March, Parmalat sent Grant Thornton documents on Bank of America letterheads confirming the accounts. • Bank of America subsequently declared the letters forgeries.

13. Parmalat’s Response • Mr Tonna, who was chief financial officer for 16 years before he resigned in February, was a principal architect of Parmalat's tangled financial structure. He was also a director of Bonlat Financing. • Mr Tonna, when asked by the magistrates why the Parmalat executives chose Bank of America letterheads for the forgery, was said to have replied: "It was the first bank that came into our heads."

14. The Collapse of Parmalat

15. Parmalat’s position in 2003 Leading Italian food group Parent company listed 51% owned by the Tanzi family Truly international business 32 countries, 36 operating companies, 132 locations Fifth Italian bond issuer (€ 7.0 bn, a part of which publicly rated) 15

16. Types of fraud • Numerous SPV’s were set up to generate fake profits for Parmalat and subsidiaries. • Parmalat’s finance director, Fausto Tonna, has told interrogators that he participated in a “cut and paste” forgery, in which a document with Bank of America letterhead was scanned and then added to a document verifying a deposit account with that bank holding over $4.98 billion. The document was then passed through a fax machine several times in order to appear authentic.

17. Cooking the Books! •  In one particularly flagrant case of “cooking the books,” the Cayman Islands subsidiary Bonlat claimed to have sold enough powdered milk in one year to Cuba to produce 55 gallons of milk for each and every citizen of the small island nation.

18. The Cracks Appear! • During the conversation, in preparation for the opening of their books to a transition team from Blackstone, the Tanzis let slip that the cash on hand was somewhat less than the €3 billion listed in the company’s annual report. • They admitted that, in fact, there were hardly any liquid assets, and the company was €10 billion in debt. • Just a small difference!

19. 2003: the first cracks Balance-sheet 2002: € 3.5 bn liquidity February: a new bond issuance (300 ml) is turned down for lack of sufficient information CFO resigns but remains on board November: Supervising authorities ask clarifications about liquidity Deloitte casts doubts over financial statements 19

20. Victims in the Scandal • First, there are the 36,000 employees whose jobs were in danger. • Second, there were the producers of raw materials. Reports stated that dairy farmers in both Brazil and Australia were awaiting payment for milk already delivered. • Third, there are investors both large and small. In addition to the now worthless stock, there are $1.5 billion in bonds outstanding.

21. The Rescue of Parmalat

22. A good candidate for rescue 32,000 employees More people and firms dependent on Parmalat’s continuing operations Business in equilibrium There was a viable business. Liquidation was simply not an option

23. Italian Law after Parmalat

24. The new composition procedures: Decree-Law 14 March 2005 Plan by the debtor to avoid the bankruptcy procedure through a composition with the creditors High degree of flexibility, classes of creditors No constraints on financial restructuring proposals by the debtor Debt for equity swap possible pursuant to a majority vote

25. Parmalat case: What it does NOT tell Parmalat needed “pruning” and turnaround Business was profitable (albeit much less than told) Therefore: no “tragic choice” (creditors vs. employees/suppliers) has been necessary Alitalia (more than 20.000 employees and significant operating losses) would be a much more problematic case…

26. … however, Parmalat was an “easy” case: The business was profitable Financial statements 2002-2003 revised by PWC (press release 26 January 2004):

27. ISS Findings: Amongst Others Parmalat lacked board independence. At the time of the last public filings, the board comprised nine insiders, one affiliated outsider, and just three independent directors. The company was family-owned and went public in 1990. Its structure is fairly typical of the Italian market as a whole. Institutional Shareholder Services

28. Bye for now! Please ensure you Prepare for next session I’m ready forsome leisure time.