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The Parmalat Syndrome 

How U.S. financial firms -- including Bank of America -- allegedly abetted a multibillion-dollar fraud, and how U.S. regulators are letting them get away with it

Wednesday, Jan 12 2005
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The U.S. Securities and Exchange Commission, however, has not conducted any enforcement action against companies involved in the scandal, aside from settling a lawsuit against Parmalat last year by extracting a promise from Parmalat's government overseers that the bankrupt company would stop defrauding investors. Rather than investigating and taking enforcement action against complicit U.S. institutions, the SEC has primarily concerned itself with making sure Italian bankruptcy proceedings don't shortchange U.S.-based creditors while sorting through $34 billion in claims against Parmalat. A U.S. Justice Department spokesman did not return a call requesting comment by press time. The office of Manhattan District Attorney Robert Morgenthau held meetings last year with Italian investigators regarding Parmalat but has taken no public action of its own, a spokeswoman said.

Perhaps U.S. regulators and law enforcers have been blinkered by nationalistic pride. Maybe they believe the early, incomplete versions of the Parmalat scandal depicting exquisitely tailored Italians on the take and find them unworthy of official interest. It could be that American law enforcers are holding their horses so as not to interfere with the Italian probe. More likely, though, is another explanation: The practices detailed by Italian investigators are being overlooked here in America because they have become an ordinary way of doing business in the U.S. financial services industry.

A close look at the corner of the Parmalat fraud emanating from San Francisco -- a series of transactions contrived by Bank of America officials over an eight-year span that began when that institution was based here and involved the apparently unwitting collaboration of Wells Fargo Bank -- points to this second explanation. The U.S.-based transactions that allegedly formed the core of the Parmalat fraud -- Byzantine shams involving offshore shell firms within shell firms, shuffling nonsense financing contracts between similarly encapsulated shells -- have become an accepted part of American financing, notwithstanding the high-profile corporate-fraud law enforcement actions of two years ago.

Bank of America has asked a judge to dismiss the $10 billion Bondi suit, saying the Italian administrator has neither standing nor evidence to bring such an action, according to news accounts. Neither Bank of America nor Wells Fargo representatives responded last week to requests to comment for this column.


The Parmalat investigation is showing that it takes more than a crudely forged bank statement to fool the financial world into believing that you've got $4 billion that doesn't actually exist. In the case of Parmalat, what it took was the carefully nurtured illusion -- backed by the good names of some of the world's largest banks -- that the company's books were sound, and that savvy investors were eager to invest in the Italian food firm.

Numerous banks undertook the task of maintaining this illusion. Bank of America, for its part, is alleged to have persuaded investors to loan money to a company that, the bank knew, was about to fail and then hid the company's financial weakness from investors in an extraordinarily complex way. Wells Fargo was brought in on many of these deals as a trustee for investment funds, a technical task that is separate from the job of actually contriving and marketing the allegedly fraudulent schemes.

But if Italian investigators are correct, BofA engaged in a double-edged deception. As the bank was luring lenders for Parmalat by hiding the firm's nearly bankrupt condition, BofA was also helping Parmalat portray the loan to the markets as an investment of capital. The difference between money loaned to a company and money invested in a company is -- in a drastic simplification -- the difference between debt and equity on a balance sheet. To a credit analyst -- who issues official opinions about whether a company is solvent -- there can be a marked difference between these two types of capital infusion. Taking on too much debt can weaken a company. Taking on equity, however, can send a message that investors are eager to own part of a firm because it's poised to grow.

Italian regulators believe Bank of America cooked up bogus financing deals designed specifically to deceive analysts and investors into confusing debt and equity. And they believe they have a smoking gun that supports their position.

On Dec. 17, 1999, the head of Bank of America's corporate finance team in Milan sent a fax to Parmalat's chief financial officer, explaining how to phrase a press release announcing a series of Cayman Islands transactions so $150 million in loans to a Brazilian Parmalat subsidiary would seem to be $300 million in equity investments.

"Please use a text like the following," Bank of America's Luca Sala told Parmalat's chief financial officer, Fausto Tonna. "'Bank of America has led a group of U.S. investors to invest $150 million in the Brazilian operating subsidiary of the Parmalat Group. The transaction may be increased by a further $150 million expected to take place within the end of the year.'"

The news release on the bogus "stock" offering went even further, putting a price on individual shares that suggested the Brazilian subsidiary was worth $1.35 billion. This may have overstated the real worth of the division by as much as 100 percent, the racketeering allegations filed by Italian regulators suggest.

Responding to the fictitious press release, investors bid up Parmalat's share price by 17 percent in a single day, increasing the Italian company's overall valuation by $300 million, the largest daily gain in its 39-year history.

Shareholders weren't the only ones fooled. To attract the U.S. insurance company investment funds that would finance the deal, Bank of America structured the transaction in an extraordinarily misleading way, Italian regulators allege. According to those regulators, BofA used secret side agreements to disguise the fact that it was putting less of its own money at risk than it seemed, and to hide the extraordinarily high interest rates it would receive on its own money, rates normally associated with junk bonds issued by companies at risk of collapse.


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Matt Smith

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