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Fraud Investigation Into Parmalat Widens; Eight More Arrested

BY Admin  December 31, 2003 at 1:10 PM EST

The move comes on the same day a U.S. Securities and Exchange Commission official met with prosecutors in Milan. The SEC has filed suit against Parmalat for engaging in what it describes as “one of the largest and most brazen corporate financial frauds in history.” The commission is seeking civil penalties and repayment of any ill-gotten gains with interest for the U.S. investors who bought nearly $1.5 billion in Parmalat’s bonds and notes.

Parmalat was declared insolvent after it was revealed Dec. 19 that its Cayman Islands-based Bonalt subsidiary didn’t have the $4.9 billion it had claimed was in a Bank of America account.

Many saw Wednesday’s arrests as a sign that Italy was determined to punish those responsible for the scandal.

“Justice hasn’t usually come down so hard in Italy,” Claudio Morsenchio, a fund manager at Banco Emiliano Romagnolo SpA, told Bloomberg News. “The arrests are a strong signal that the system wants to get to the bottom of this.”

Parmalat founder, Calisto Tanzi, who was arrested Saturday and remains in jail, has admitted to prosecutors that he shifted $620 million from company coffers to money-losing travel businesses controlled by his family.

Tanzi, who built Parmalat into a global company employing 35,000 people, told prosecutors there was a $10 billion hole in Parmalat’s books, largely in the form of fraudulent bank accounts with nonexistent cash.

Judge Guido Salvini on Tuesday ordered Tanzi to remain in prison pending a formal indictment, arguing he might tamper with evidence or flee if freed. Salvini also said it was “improbable” that Tanzi, as he claimed in statements, had no knowledge of any falsification of Parmalat documents.

Salvini also said that Tanzi had diverted and hid about $1 billion of Parmalat’s wealth “in favor of himself and his companies that were extraneous to the group.”

Among the eight arrested Wednesday were Parmalat’s former chief financial officer Fausto Tonna, as well as another top former financial official, Luciano Del Soldato.

Two officials with Grant Thornton, Parmalat’s auditor from 1990 to 1999, were also arrested. Salvini accused the auditor’s branch president Lorenzo Penca, and partner Maurizio Bianchi of falsely certifying Parmalat’s balance sheets and suggesting ways for the company to commit fraud.

Salvini said the auditors omitted revealing the “irregular situation” of two Parmalat offshore companies, Curcastle and Zilpa. And he said the two also thought up the creation of the subsidiary at the center of Parmalat’s bankruptcy.

Grant Thornton, which told Reuters that Penca had resigned, has denied the men had anything to do with any illegal behavior at Parmalat and says they were in fact “victims” of the company’s fraud.

A ninth suspect, the head of Parmalat’s Venezuelan unit Giovanni Bonici, remains at large. His lawyers said that he will turn himself in as soon as possible, Maurizio Raponi, head of the Bologna region finance police, told Bloomberg news.

Parmalat investors have been hard-hit by the scandal. Trading on the company’s now virtually worthless shares has been suspended, while its bonds are worth less than one-fifth their face value. The beleaguered company is now under the direction of turnaround expert Enrico Bondi.