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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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Last month an Italian magistrate issued a final ruling on $34 billion in claims against Parmalat. The ruling stated that Wells Fargo had $617 million in claims accepted, making the bank by proxy Parmalat's largest creditor.

Wells Fargo created and managed several Cayman Island investment trusts that are at the heart of allegations that Bank of America contrived phony financial transactions specifically aimed at bamboozling investors into pouring billions of dollars into Parmalat SpA. Attorneys for creditors represented by Wells Fargo told me the bank would have inquired into the transactions -- as part of what's called "due diligence" -- before agreeing to become involved. And Italian court filings say Bank of America (and by inference Wells Fargo) had access to publicly available information showing Parmalat was far less healthy than the prospectus advertising the transaction claimed.

Just the same, there's no evidence showing Wells Fargo played an active part in devising the allegedly fraudulent transactions detailed in court filings. And the New York class-action lawsuit that levels fraud allegations at financial giants such as Citigroup and Bank of America makes no mention of Wells Fargo. "Our lawyers have found no evidence that Wells Fargo has done anything that would be actionable up to this point," a Parmalat spokesman told me last week.

So it appears that although Bank of America worked closely with Wells Fargo in setting up opaque and complex financial structures that aimed, lawsuits allege, to defraud investors, Wells Fargo is probably not complicit in these transactions' allegedly fraudulent intent.

And to me, that's the rub of the Parmalat scandal. The apparently prosaic nature of Wells Fargo's involvement in the alleged Bank of America fraud helps illustrate the perfectly ordinary flimflam that appears to permeate finance as it's now practiced in America. And the everyday nature of Wells Fargo's participation in the matter posits a credible explanation as to why U.S. officials haven't expressed public alarm about Parmalat SpA.

It's possible to imagine that, when Bank of America's financial alchemists recruited Wells Fargo's Ogden, Utah, branch as a trustee for insanely complicated investment vehicles doing a shadow dance in the bank-secrecy haven called the Cayman Islands, the Wells Fargo officials did what financiers everywhere seem to be doing these days. They let their eyes glaze over. They let their ears hear something like "Blah, blah, blah, structured finance, blah, blah, blah, for tax purposes, blah, blah, blah, everybody does it this way, blah, blah, blah."

And they let their hands sign on the dotted line.


I've described just one of many transactions -- structured by U.S. bankers, overseen by U.S. accountants, and requested by Parmalat executives and lawyers -- that combined to create a company whose debt was ultimately understated by $10 billion and whose total net assets were overstated by $16.4 billion.

And it appears that most of the people involved were merely doing their everyday jobs.

The Bank of America transactions were run through a nonprofit entity set up by the Cayman Islands law firm Maples & Calder, which is the same nonprofit entity that harbored the shell firms that ultimately brought down Enron. For you to have an idea of how widespread these kinds of secretive, highly complex transactions are, though, you need to know that this is the same nonprofit entity used by bankers working on behalf of the San Francisco Municipal Railway two years ago, when they converted our city's light-rail trains into offshore tax shelters.

Indeed, the number of complex and opaque bond financing and private stock placement deals conducted in offshore banking havens has exploded during the past 10 years. It's said that some $500 billion of such transactions is currently routed through the Caymans alone. But nobody knows for sure, because there's no way to really find out.

Yet put "Cayman Islands" and "regulator" into Google, and you'll come up without many relevant responses, because there's no effective regulation of banking there. Meanwhile, there's no serious effort by the United States to coordinate financial law enforcement between European and other regulators save a bland SEC effort to standardize accounting terminology. There's not likely to be one anytime soon. And the offshore wizards know this. "When asked whether the role of the offshore administrator has changed in the wake of Enron, Parmalat, and other corporate scandals," a Maples & Calder partner said in a recent speech, "I typically respond that it has not."

If Parmalat hadn't failed to make its December 2003 loan payment, and therefore hadn't found it necessary to gin up a phony $4 billion bank statement, it might still be ripping off investors today, without any institution in place to stop it.

From a certain perspective, there's a bright side to this global regulatory failure.

The myriad, allegedly fraudulent transactions that fueled Parmalat's worldwide growth from the mid-1990s to late 2003 involved hundreds of perpetrators, collaborators, and victims in dozens of banks, accounting firms, and law firms. These purported scams were carried out steadily over nearly a decade, incorporating people, bank accounts, and shell firms around the world.

Perhaps the blind eye American regulators have turned on the U.S. nerve center that aided the Parmalat fraud is a perverse kind of jobs program. A jobs program for the Bush era.

About The Author

Matt Smith

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