Required: Explain the actions committed by Parmalat that can be charged as criminal fraud.
Many regard Parmalat as Europe's Enron because of its size and involvement with Special Purpose Entities (SPEs), off balance-sheet, and sham transactions. In 2002, the company reported 7.6 billion euros in annual sales, but was placed under administration and declared insolvent in 2003. The company did not go through a process of consolidation or cost-cutting. The case of Parmalat Finanziaria S.P.A raises a number of ethical issues that impact all stakeholders, with respect to the integrity of company management. The company's founder and former CEO, Tanzi, stands accused of market rigging, false auditing, and fraud.
In 2003, the company defaulted on a 150 million euros (U.S. $184 million) payment to bondholders. The fraud was uncovered when auditors failed to properly determine that about 200 companies created by the company, such as Bonlat, did not exist. To give the appearance of greater liquidity to its bankers and other investors, the company created a series of fictitious offshore companies that were used to conceal Parmalat's losses, Parmalat disassociated itself with the companies by selling them to American citizens with Italian surnames, only to repurchase them later. Some banks, including Deutsche Bank and Citibank, bought more debt and promoted their bonds as sound financial assets. The actions of the banks raises questions about possible collusion between them and the management at Parmalmat.
By doing so, he ensured financing from individuals who believed that Parmalat was a sound company. Tanzi was accused of dealing in fraudulent complex financial deals and bond deals, creating non-existent offshore accounts to hide losses, and false bookkeeping. U.S. Securities and Exchange Commission (SEC) charged the company with securities fraud on December 30, 2003, and filed amended charges in July 2004. In 1999, Parmalat was required to change auditors (and did so but only partially) from Grant Thornton to Delloite.
As of September 30, 2003, Parmalat Finanziaria had understated its reported debt of 6.4 billion euros by at least 7.9 billion euros. The company used various tactics to understate its debt, including recording approximately 1 billion euros of debt as equity through fictitious loan participation agreements and removing 500 million euros of liabilities by falsely describing the sale of certain receivables as nonrecourse when in fact the company retained an obligation to ensure they were ultimately paid. Parmalat Finanziaria used the nominee entities to disguise intercompany loans from one subsidiary to another that was experiencing operating losses. As a result, rather than have a neutral effect on the consolidated financials, the loan transaction served to inflate both assets and net income. On January 29, 2004, PricewaterhouseCoopers took over as the auditor of Parmalat.
By March 2004, eleven people from Grant Thornton had been arrested, and more arrests may follow. A number of large banks were also complicit in the fraud, says Enrico Bondi. The Bondi Report suggests that, as early as 1997, there was sufficient information available about Parmalat's true condition for the financial community to have realized the company was in trouble….
Required:
Explain the actions committed by Parmalat that can be charged as criminal fraud.
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