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INSIGHT

Corporate Fraud at Parmalat

Aired January 1, 2004 - 17:00:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

ROSEMARY CHURCH, CNN HOST: Another day, another financial scandal. A multibillion dollar accounting hole sours Parmalat's future as the investigation into one of the world's largest corporate scandals widens. Where did all the money go?
Hello and welcome. I'm Rosemary Church, in for Jonathan Mann.

United States regulators have called it one of the most brazen corporate financial frauds in history. Others refer to it as Europe's Enron. Calisto Tanzi, the founder and former chairman of the global food conglomerate Parmalat revealed a multimillion dollar hole in the books to prosecutors and admitted to diverting hundreds of millions of dollars to family companies.

Far from the luxury he's grown accustomed to, Tanzi now sits in a Milan jail as the investigation widens and more arrests are made.

On INSIGHT today, corporate greed or lack of corporate governance? CNN's Paula Hancocks begins our coverage.

(BEGIN VIDEOTAPE)

PAULA HANCOCKS, CNN CORRESPONDENT (voice-over): Living in Italy you'll find it practically impossible to avoid Parmalat products. Further a field, Italy's largest food company is known globally for its cartons of long-life milk.

Starting from a small dairy park four decades ago, Parmalat currently has 46,000 employees in 30 countries, a global reach, which makes the Parmalat scandal far more than merely an Italian problem.

Parmalat's fall from grace has been as swift as it has been shocking. In less than a month, the Italian icon has been declared insolvent and its once respected founder jailed. The shock is the most raw in the small Italian town of Collecchio, where the group was created.

UNIDENTIFIED MALE (through translator): In this town, every family has at least one member that works there. This is a really big hit.

UNIDENTIFIED MALE (through translator): Once you've spent so long in a factory, you grown affectionate towards it. The news does not come as a pleasant surprise.

HANCOCKS: Parmalat dropped a bombshell earlier this month when it revealed a hole of around $5 billion in its accounts, money thought to be in an account in the Cayman Islands, which turned out to be nonexistent.

So from a global brand with a $9.5 billion turnover last year, Parmalat now looks to be sitting on more than $12 billion of debt.

Parmalat's founder and former chief Calisto Tanzi is spending the new year in a Milan prison, accused of falsifying the accounts and embezzling up to $1 billion over the past decade. The 65-year-old has told investigators he did move $600 million from Parmalat, but only to support another of his companies.

UNIDENTIFIED MALE (through translator): We will now have to analyze the flow of the cash of these companies one by one to see how it came in, how it came out and where it went.

HANCOCKS: The exact questions Italian prosecutors are asking Tanzi and some members of his family who held positions of power in the group.

Family-run businesses have long been thought of as the ideal business model in Italy. The Agnelli dynasty at car-maker Fiat, the family structure at clothing group Benetton, both commanding the respect once enjoyed by the Tanzi's of Parmalat. But the scandal is raising uncomfortable questions about whether family businesses may be less open to scrutiny.

UNIDENTIFIED MALE: Italian businesses are not used to be as transparent as, for example, the Anglo Saxon world. Most businesses are still family-run businesses, and although there are some of them, at least, in the markets, abiding by the rules of transparency is apparently very hard for them.

HANCOCKS: Last weekend, Italian Prime Minister Silvio Berlusconi pledged his government would save the industrial part of Parmalat. He sped through an emergency decree making bankruptcy procedures quicker for large companies and giving them a better chance to restructure. His prime concern, Parmalat's 4,000 Italian employees and countless dependent industries.

Many diary farmers providing milk for Parmalat have not been paid for about five months.

UNIDENTIFIED MALE (through translator): We're worried. We're part of a cooperative, giving milk to Parmalat. We're wondering if we'll get paid for the milk we've already given them.

HANCOCKS: Parmalat has been dubbed the European Enron, a catchy title, but only partly apt. Billions of dollars did disappear from the U.S. energy giants accounts before it went bankrupt two years ago, but some experts say the regulation system in Italy must take part of the blame, a fragmented system that failed to spot any wrong-doing, a system Berlusconi promises to strengthen.

But the damage is already done to Italy's corporate reputation.

UNIDENTIFIED MALE: Parmalat, on the global stage, as the investigation has found out (UNINTELLIGIBLE) having very dodgy accounts in tax haven countries. Of course it will be more difficult for Italian groups and, for example, in the United States as well. I believe, I think, the United States investor will be much more cautious, at least in the near future, to invest in Italian companies.

HANCOCKS: U.S. foreign investment in Italy was minimal even before the scandal. The American Chamber of Commerce says only 2 percent of its overseas investment makes it to Italy, just 1/10 of the business that Britain attracts.

(on camera): Looking to the future of Parmalat, the company will either have to sell a lot of milk or, more likely, a lot of assets. The Italian dairy business should remain in tact. Berlusconi has pledged to safeguard jobs and factories.

But that protection is unlikely to extent to factories in Brazil and North America, two of Parmalat's largest markets.

In looking beyond the scandal, experts say many companies are waiting in the wings to pickup the parts of Parmalat that they want.

Paula Hancocks, CNN, Rome, Italy.

(END VIDEOTAPE)

CHURCH: And we'll take a short break now.

When we come back, the specifics of doing business in Italy.

Stay with us.

(COMMERCIAL BREAK)

CHURCH: Italy's prime minister is the richest man in Italy and one of the richest men in Europe. Silvio Berlusconi's empire includes a soccer team, insurance and estate agencies. But his biggest interests are in something perhaps more powerful. Mr. Berlusconi controls an estimated 90 percent of Italy's media.

Welcome back.

The Italian business world is somewhat unique in Europe. There's a strong tradition of family-owned businesses and there are complex corporate structures that in some cases are not as transparent as they could be.

The lawyer for Parmalat founder Calisto Tanzi reportedly said his client knew nothing about finances. Fabio Bologna (ph) described Tanzi as a broken man who committed fraud not to enrich himself but to save his company.

Well, a short while ago, we got in touch with Richard Heller, the European editor for "Forbes Global."

(BEGIN VIDEOTAPE)

RICHARD HELLER, "FORBES GLOBAL": Well, as I think I've said before, the problem with Italy is that it is terribly under-regulated. There is a turf war, bureaucratic war, between CONSOB, which is their SEC, the Bank of Italy, which is of course the central bank, and the Milan Borsa, which is the stock exchange itself. And so you have under-funded, under-powered chaps trying to keep up with some rather fast-moving people.

CHURCH: And what about the Italian prime minister himself, Silvio Berlusconi? How big a role did he play in creating an environment that allowed this level of fraud to take place in his country?

HELLER: Not much. I think that's a relatively unfair rap in his case.

I mean, the thing about the Italian securities world is that we like to talk about globally homogeneous markets. Italy is, as are some other Mediterranean countries, about to securities regulation what Australia is to flora and fauna. I mean, it's a different world. It's an entirely different world, the multiplicity of family-controlled corporations, the long tradition of under-regulation. Even the international accounting firms are a little vague about their Italian outlets.

It's just another world. I don't think you can blame Silvio in particular.

CHURCH: What about reports that he has removed penalties for this level of fraud?

HELLER: Well, those aren't just reports. He has in fact decriminalized certain fiddling around with accounting matters, I gather primarily because of charges against himself and certain associates.

Nevertheless, Italy is one of those countries that has a great many laws and a great many potential criminal matters, but very little enforcement in the end. And, furthermore, it takes about 8 or 10 years to come to any kind of a verdict.

CHURCH: We're talking about multibillion dollars here, gone missing. Where has this money gone?

HELLER: Well, obviously we all wish we knew. My personal take and my personal guess is that Mr. Tanzi, in building Parmalat, may have gone to some people that perhaps he shouldn't have gone to in financing himself and his earlier startups, and indeed his second surge of explosive growth, and such people frequently want to be repaid.

My own feeling -- and beyond that, of course, he invested heavily in Latin America, which has not exactly been a profitability center.

But the business, from beginning to end, I notice that the media is in general saying that it's a good producer, but my take has always been that the margins aren't really there in milk and in dairy products the way he's organized.

So I think what's happened is that to keep himself growing, he's taken a lot of money that he's had to give some people back, and there are holes in the balance sheet because he can't explain that.

CHURCH: So where does this leave the rescue management team? Can they work through these massive problems?

HELLER: Yes, I think they probably can, but it's going to take some artful planning. Mainly, there's going to have to be a certain amount of surgical steps, in terms of ridding the organization of assets so that it at least has some hope of having an asset-to-debt relationship that makes sense. And then running what's left in a meaningful way.

My own guess is that what will be left is the Italian chain of dairies, which don't forget, were all privatized. These were dairies that used to be owned by municipalities back in the 80's. I think someone could string those together and make money out of them, although I hear there is a competitor that would like to buy them.

CHURCH: So what does the Italian government need to do to make sure this level of fraud is not witnessed again in Italy? Is it doing anything at this point to stop that from happening?

HELLER: To me, it doesn't look like it is, but what it needs to do is what should have been done yea 20 years ago.

The Securities Exchange Commission, which is to say CONSOB, has to be empowered, given a strong leader, given enough money and given the power to subpoena witnesses, put people in jail and so forth and so on.

The moment you start to treat some of these people with a little less deference, it's going to be hard for them to string along a project as long as Mr. Tanzi has in this case.

CHURCH: All right, Richard Heller, thanks for talking with us here on INSIGHT.

HELLER: Thank you.

(END VIDEOTAPE)

CHURCH: And we have to take another break. When we come back, the other big corporate scandals around the world.

Stay with us.

(COMMERCIAL BREAK)

CHURCH: The Parmalat case has prompted comparisons with the collapse of U.S. energy trader Enron two years ago. As the U.S. Justice Department continues its multilayered probe into Enron's affairs, 16 defendants, including top executives, are scheduled to stand trial in 2004.

A warm welcome back.

In the wake of Enron, the United States and many European countries have tightened laws governing corporate finance. But Italy was not among them. Instead, Italian lawmakers have tried to end criminal penalties for accounting fraud and passed decrees making it easier for companies like Parmalat to reorganize.

If the Parmalat scandal is Europe's Enron, just how similar are the two cases?

Well, a short while ago we got in touch with CNN's Maggie Lake and I put that question to her.

(BEGIN VIDEOTAPE)

MAGGIE LAKE, CNN CORRESPONDENT: Well, Rosemary, both have the unfortunate distinction of being among the largest corporate scandals in their region. Huge amounts of money are involved. Prosecutors estimate the alleged fraud has left Parmalat with debts of 10 to 13 billion euros. Enron was even larger. It was left with about $17 billion in obligation following its bankruptcy.

So that's the main similarity and, of course, in both cases, it's the thousands of employees and shareholders and investors who are suffering from the company's collapse.

CHURCH: So big similarities there, but there have to be some differences. Can we just look at those differences?

LAKE: Absolutely.

First, Parmalat's founder, Calisto Tanzi, has actually admitted to knowing about the fraud. In the case of Enron, Kenneth Lay and Jeffrey Skilling, two of the top men, say they have no idea. Prosecutors are still trying to build a case against them.

The nature of the fraud in both cases seems different as well. Enron's involved very sophisticated and complex financial transactions and partnerships that prosecutors are still trying to understand. In Parmalat's case, it seems the alleged fraud apparently involved poorly forged documents, signatures that were cut and pasted from different documents. Some really basic stuff.

But the most important difference people are pointing to is the fact that Parmalat's affair is believed to be specific to Italy and problems with Italian corporate governance. Enron's fallout was much broader. It severely undermined investor confidence. It called into question the validity of financial statements. It prompted many probes into other companies, and actual reform into accounting and reporting practices here in the United States. So it was much more systematic and the fallout much more systemic than what we seem to be seeing in Parmalat's case, at least that's the impression right now -- Rosemary.

CHURCH: All right, Maggie Lake, at the New York Stock Exchange, thanks for that.

(END VIDEOTAPE)

And a short time ago we got in touch with Melvin Weiss, a senior partner at Milberg Weiss Bershad Hynes & Lerach. The company is lead counsel in several high-profile cases, including the IPO litigation, Martha Steward, Tyco and Enron.

I asked Mr. Weiss just how brazen he thought the Parmalat company had been in its accounting efforts.

(BEGIN VIDEOTAPE)

MELVIN WEISS, ATTNY.: Well, based upon what's been printed, it sounds like it wasn't even done carefully, and that's the most shocking part of this, that it escaped the eyes of the auditors for what looks like more than a decade, even though it was done in a very amateurish way.

CHURCH: Now you've had dealings with Enron, with Tyco. How does this scandal compare with the scale of Enron and Tyco and others indeed that you have had dealings with?

WEISS: It's monumental because it's so pervasive and so enormous in dollar amounts.

When you read statistics in the newspapers that they booked entries for sales to countries like (UNINTELLIGIBLE) would have created a flood of milk in Cuba and they were able to do this without being discerned for so long, it's really shocking.

CHURCH: And why do you think they got away with it for so long?

WEISS: Well, I think this is a cultural problem. I think that a lot of what we're seeing coming out of European companies now have the fingerprints of a total breakdown of any final watchdog function by regulators, by accountants, by lawyers. It just doesn't exist. There's no board of directors independence. There's nothing.

CHURCH: These types of financial scandals, they're becoming fairly commonplace, aren't they, right across the globe. Is it just about corporate greed?

WEISS: Well, it's about corporate greed. It's about the lack of anybody looking after, you know, the store, so to speak. And, you know, even if you start off in small ways, it starts building, and over time it becomes enormous. So you can't even say it's just greed. It's just sloppy corporate governance.

CHURCH: And would you expect to see more of those popping up right across the globe?

WEISS: Well, I've been predicting this for a long time. And recently I was on a tour of Europe with a senior partner at one of the major accounting firms that does a lot of this investigation after the fact, and he said in no uncertain terms that he could walk into any company in Europe and within a week, with only two or three of his team, find material systemic problems in their accounting and major violations of generally- accepted accounting principles. That's a shocking observation.

CHURCH: So what happens to the tens of thousands of workers, in this case, working at Parmalat, relying on this company for this livelihood? What happens to them?

WEISS: Well, it depends on what the government wants to do. The workers we saw in Enron lost in a lot of ways. They lost jobs, they lost pension money because their pension money was invested in their own companies.

But there's another group of victims, the investors. They just did a $.5 billion bond offering and that money is going to be lost. People who buy stock in these companies under American law wind up at the bottom of the totem pole in the bankruptcy proceeding.

So, you know, it's touch enough to get a remedy here in the United States, where we have decent laws to get remedies for people. In Europe, there's virtually no way to get compensated as a defrauded investor.

CHURCH: What are the ramifications?

WEISS: Well, the ramifications, I hope, will be that the governments in Europe will start appreciating the need for better regulatory oversight and laws that will permit litigation on behalf of defrauded victims so that there's some hope of getting back their money and that would act as a deterrent against future wrongdoing.

It's rather shocking to me to read an article where the heads of this company come to the United States, meet with Blackstone Group and try to sell the company to them and admit to these people at Blackstone that they have phony financials. And then when Blackstone insists that they make disclosure, they say no, we don't want to disclose this, even after having revealed it to an investment bank, such as Blackstone.

This shows a cultural misunderstanding of what's needed internationally to perform as a public company and I think we need an international commission to start dealing with how we're going to set rules for conduct of these kinds of companies.

I also am appalled at the failures of the accountants. These are international accounting firms that have had plenty of experiences in the past with similar situations. I'm reminded of Pharmor. I'm reminded of ESM (ph), Enron. There are so many examples of this kind of situation, and yet they don't learn how to properly assess the risks in these types of companies. They should have been able to see that these were offshore companies, that they changed accountants only in a limited way in 1999 despite the law that says that they should shift accountants every nine years. They kept (UNINTELLIGIBLE) in these offshore companies and what was the (UNINTELLIGIBLE) when that happened and why didn't they look further into these offshore companies and the reasons for them?

These are things that are inexplicable given the history of corporate fraud that we've recently gone through.

CHURCH: Melvin Weiss, thanks for talking to us. Appreciate it.

WEISS: Thank you.

(END VIDEOTAPE)

CHURCH: And that's it for this edition of INSIGHT. I'm Rosemary Church. The news continues.

END

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