In this issue:

SEC Sues Parmalat in 'Brazen Financial Fraud'

Parmalat Probe Turns to Auditors, U.S. Banks

Gruesome Details Emerge in Italian 'Enron' Scandal

Tremonti: Parmalat Threatens 'Risk of General Insolvency'

Russians Dump Dollar for Euro

Housing Bubble Accounts for Half of Britain, Inc.


From Volume 3, Issue Number 1 of Electronic Intelligence Weekly, Published Jan. 6, 2004

World Economic News

SEC Sues Parmalat in 'Brazen Financial Fraud'

The U.S. Securities and Exchange Commission filed a civil suit against Parmalat, the Italian dairy and food giant recently declared insolvent, accusing it of selling more than $1.5 billion worth of bonds and other securities while carrying out "one of the largest and most brazen corporate financial frauds in history."

Executives peddled the company's bonds, and even tried to sell the firm, based on financial statements that were admitted to inflate company assets, the SEC charged. During 1998-2002, top Parmalat officials actively promoted the bonds in the U.S. through "numerous road shows," and at meetings for U.S. investors in Italy. Plus, in 1996 it sponsored a private offering of its American stock, held on deposit at Citibank.

During this past autumn, according to the complaint, Parmalat fraudulently offered $100 million of unsecured notes to U.S. investors, as its financial statements claimed cash holdings in an offshore subsidiary and the buy-back of $3.6 billion of corporate debt. The complaint said that, in fact, the cash did not exist and the debt was still outstanding.

Moreover, Parmalat executives met in December with executives of a New York-based private equity firm to discuss a possible leveraged buyout. During the meeting, Parmalat admitted its audited balance sheet was false, that it did not have large amounts of cash, and had not repurchased $3.6 billion of outstanding bonds.

Note that one-fourth of Parmalat sales come from U.S. operations, which include 20 food plants and dairies. They owns five dairies in the New York area, and are the biggest milk supplier for metro New York City. They are also the third-largest cookie-maker in the U.S. (Archway and Mother's brands).

Parmalat Probe Turns to Auditors, U.S. Banks

On Dec. 31, Parmalat prosecutors arrested nine persons, among which were two managers of the Italian offices of Grant Thornton, one of the auditors which certified Parmalat's balance sheets. At the same time, they let it be known that investigations now involve also the role of Bank of America in setting up Parmalat's fraudulent "accounting structure." These moves are partially based on the interrogation of Parmalat's former financial manager, Fausto Tonna, who is among the people arrested. Tonna declared that Parmalat president Calisto Tanzi, as well as the auditors, all knew about Parmalat fraudulent accounting procedures.

Gruesome Details Emerge in Italian 'Enron' Scandal

The gruesome details of the massive Parmalat fraud, now termed the "Italian Enron" affair, are emerging, as seven more executives were arrested Dec. 31. Two financial officers and two outside auditors from Grant Thornton were among the seven, while a warrant was issued for the head of its Venezuela operation, Giovanni Bonici. Court documents claim that Fausto Tonna, Calisto Tanzi's right-hand man, and Gian Paolo Zini, an outside attorney, were central to systematically forging documents, four times a year, preparing the false books, and destroying evidence when they were caught.

Accounting giant Grant Thornton claimed last week that it was a victim of the forgeries, but Parmalat accountant Gianfranco Bocchi, also arrested Dec. 31, said in the documents that, "They were the ones who showed Tonna and me what to do." Also, when the Italian nine-year limit on the use of a single accounting firm ran out in 1999, Parmalat set up a new Cayman Islands subsidiary, Bonlat—which hired Grant Thornton—and switched the phoney operations to the new entity. Grant Thornton Italian chairman Lorenzo Penca and his partner were among those arrested.

Tanzi told prosecutors that the falsifications began with the collapse of the Argentine and Brazilian currencies, which wiped out their earnings there. Prosecutors say the fraud goes further back, as much as 15 years.

Tremonti: Parmalat Threatens 'Risk of General Insolvency'

Italian Finance Minister Giulio Tremonti warned the government there is "the risk of general corporate insolvency," if Parmalat's bankruptcy sparks a run on corporate bonds, Corriere della Sera reported Dec. 24. Speaking to a government session on Dec. 23, Tremonti reportedly told his colleagues: "Do you have an idea of what would happen if the market demands liquidation of money invested in corporate bonds? Therefore, we must quickly review current legislation protecting investors." About 100,000 Italian investors (families) are hit by the Parmalat insolvency. Tremonti called it a virus that can infect the whole system.

Prime Minister Silvio Berlusconi reported receiving phone calls "from business friends who expressed their fears. They financed themselves through bonds, but after what happened, they are afraid that investors will not renew them." Berlusconi also referred to a more general crisis, saying that "U.S. pension funds are in a lot of troubles."

Russians Dump Dollar for Euro

The Central Bank of Russia announced that cash exchanges during October 2003 reached a level not seen since the 1998 crisis: Russian citizens exchanged over $5.5 billion of foreign currency, Vedomosti reported Dec. 15. In October, the amount of foreign currency taken from individual accounts in banks, increased by 13% as compared with September. The supply of cash on the market was higher than ever in the last decade. Central Bank specialists and corporate analysts, explain this unprecedented exchange activity by the collapse of the U.S. dollar and the increase of the euro.

"The decline of the ruble-dollar exchange rate in September, combined with the rise of the euro, greatly increased the interest in the euro among Russian individual depositors," reported the Central Bank in its monthly review of the currency market. "The demand for euro increased by 42% in October. The structure of currency demand has abruptly changed in favor of the euro, while the demand for the U.S. dollar fell by 11%."

Housing Bubble Accounts for Half of Britain, Inc.

Britain, Inc. is worth almost 5 trillion pounds, but over half of that is the housing bubble. The British Office for National Statistics has determined that Britain overall is worth 4,983 trillion pounds, but 55% of that—2.7 trillion pounds—is the "value" of British homes. The second biggest chunk, 565 billion pounds, is the value of commercial and public property, adding to the scale of the real-estate bubble.

Just 10 years ago, in 1994, residential property was worth 1.2 trillion pounds, and Britain's net worth was 2.8 trillion pounds.

Martin Weale, of the National Institute of Economic and Social Research, warned of the consequences. "Sharp increases in house prices crowd out productive investment. The country as a whole cannot become better off by pushing up house prices, whereas it can by building roads and factories," Weale said. Sharply rising house prices mean new generations will not be able to afford houses, he said. "In a sense, it's paying for the present by robbing the future."

The British government is also deeply in debt, with a net worth of minus 124 billion pounds. Until 1980, Weale said, "the government owned quite a lot of what were then nationalised industries and had positive net worth. Since then, it's been selling them off and borrowing money."

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