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Parmalat scandal not very clever

By David McHugh
The Associated Press

	MARCO VASINI / AP Prison officers escort Fausto Tonna, Parmalat's former chief financial officer, into the prosecutor's office in Parma, Italy, last week.
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FRANKFURT, Germany — Letterhead forged with scissors, a scanner and fax machines. A computer ordered destroyed with a hammer. Millions in losses hidden not with Enron-style complexity, but behind the simple device of faked orders for 300,000 tons of nonexistent powdered milk.

Subtlety has not been the hallmark of the Parmalat scandal emerging day by day in Italy.

The case has been compared to Enron's collapse because both companies had networks of related entities that helped inflate published earnings.

What sets Europe's biggest accounting scandal apart from Enron and some of the other recent corporate collapses is the crude maneuvers used to flummox auditors, bankers and investors for years.

Italy's eighth-largest company filed for bankruptcy protection after it was revealed an alleged Bank of America account held by a Cayman Islands subsidiary, Bonlat, didn't really contain the $5 billion it had claimed.

Prosecutors estimate the shortfall in the balance sheet could be as large as $14.8 billion and say former Chief Executive Calisto Tanzi has admitted draining $620 million into tourism businesses run by his daughter.

While Parmalat did use a complex web of subsidiaries — some 200, according to former auditors — the letter that auditors Grant Thornton SpA used to confirm the existence of the fake Bonlat account was created using low-tech scissors to cut out a Bank of America logo.

Court documents say former Chief Financial Officer Fausto Tonna has admitted the logo was scanned into a computer and used to produce counterfeit letterhead. Company officials faxed it to the auditors, making billions appear where none existed.

To further hide losses, Bonlat claimed it was owed $767 million from a Cuban firm for orders for 300,000 tons of powdered milk, prosecutors said in court documents. That faked asset dissolved when the importer denied dealing with Bonlat and pointed out the amount would mix far more milk than anyone in Cuba needed.

After investigators began asking questions, former finance official Luciano del Soldato told subordinates to destroy the computer holding Bonlat's financial data with a hammer, documents allege.

Some of Parmalat's dealings were complex. Investigators are trying to trace $630 million invested with Epicurum, an obscure investment fund in the Caymans, and to unravel transactions between the many subsidiaries.

The result of all this was a balance sheet that struck some as odd. But many people — including buyers of Parmalat bonds, $1.5 billion of which were sold to U.S. investors — weren't deterred from dealings with the company.

Parmalat's troubles weren't impossible to see. A Merrill Lynch analyst downgraded the company's stock from "buy" to "sell" on Dec. 5, 2002, more than a year before the scandal broke.

The analyst, London-based Joanna Speed, cited an "inefficient, opaque and complex approach to balance-sheet management" and questioned why Parmalat was issuing complex new instruments to extend its debt maturity rather than using its cash pile to pay down debt. Speed couldn't be reached for comment.

Economist Marco Vitale said Parmalat appeared to have overstated its earnings by $1.1 billion in 2000 alone.

"I did auditing for 20 years, and I am ready to swear before anybody that you cannot see such a huge difference unless you've chosen the philosophy to not see, listen, hear," Vitale said. "If you see a company that has 500 offshore companies, don't you want to ask a few little questions?"

Two auditors from Grant Thornton SpA, the Italian arm of the international audit firm, have been accused of complicity in setting up Bonlat.

Copyright © 2004 The Seattle Times Company