By JASON NISSE
As the scandal at Parmalat started unravelling, it emerged that the Italian milk multinational had struck a series of unusual financial deals with the US bank Citigroup. One was named Bucerono - Italian for "black hole".
Whether this was a bad joke or prescience has yet to
be revealed.
But as the fraud that has brought the collapse of one of the country's most famous companies went on for more than a dozen years and may run to more than $16.8 billion, everyone is fearing the worst.
Parmalat was last week granted the Italian form of bankruptcy protection, under which it will be run by three appointed commissioners, including restructuring expert Enrico Bondi, who replaced Parmalat's founder, Calisto Tanzi, as chief executive two weeks ago.
The move, which followed an emergency decree from Silvio Berlusconi's Government, ended a period of rapid decline since the group admitted at the beginning of last month that it could not pay the interest on some of its bonds.
Investigations into what has happened at the milk, cheese and yoghurt giant, whose operations stretch from Brazil to the United States to Australia, have unearthed a scandal that could leave a bucerono of millions of euros.
The Parmalat affair seems to have almost everything a full-scale financial scandal needs.
There is money missing from overseas bank accounts, curious transactions with US banks which appear to have had the effect of boosting profits and hiding losses, investments in mysterious hedge funds, falsified documents given to auditors, and questions about whether these auditors were rigorous enough in checking financial statements.
Throw in a charismatic founder, who inherited his father's small food business when he was 21 and turned it into one of Italy's few multinationals - which owned two top football clubs, Parma in Italy and Palmeiras in Brazil, plus some of the best-known food brands in the world - and the result is a scandal of epic proportions.
The Parmalat collapse was precipitated by the revelation from the Cayman Islands subsidiary of Bank of America that an account held by a Parmalat financial subsidiary, Bonlat, did not have any money in it.
Parmalat's books said the Bonlat account held €3.9 billion ($7.5 billion).
Grant Thornton, the auditors that verified Bonlat had the €3.9 billion, said last week: "It does appear that Grant Thornton and others may have been the victim of a fraud committed by others."
The documents produced by Bonlat saying it had the money appeared to have been forgeries.
One key letter, purportedly from Bank of America in New York, was signed by Agnes Belgrave.
Ms Belgrave does work for Bank of America, but she has nothing to do with Parmalat and said she knew nothing of the letter.
The Parmalat story really begins in 1961, when, after the death of his father, Tanzi took over what was a small dairy and ham producer in the northern Italian town of Parma.
The 21-year-old saw possibilities in supplying areas such as Milan, Genoa and Florence with milk.
He opened his first business overseas, in Brazil, in 1974, and soon expanded into Germany and France. In 1990, he floated Parmalat in Milan - although he and his family retain a 51 per cent holding - and started a rapid expansion plan.
The company now operates in 30 countries, employing 36,000 people.
Around the time of the float, Parmalat started creating companies in the Caribbean islands of the Netherlands Antilles.
These acted to get rid of liabilities that it offset with assets elsewhere.
It now appears many of those assets were simply invented.
The structure, using entities not only in the Antilles but also in the Cayman Islands, Singapore and other foreign centres, was approved by the then auditors, Grant Thornton, which did not spot the fraud.
Under Italian law, companies have to change their auditors every nine years, so in 1999 Grant Thornton was replaced by Deloitte & Touche, though it continued to audit 17 of Parmalat's subsidiaries, including Bonlat.
In the past three or four years, Parmalat's use of these financial structures to boost its profitability has accelerated.
It set up a number of deals - including Bucerono - with the Wall Street banks Citigroup and Merrill Lynch that allowed it to make bets on the financial markets.
In one deal, Parmalat essentially gambled on its own credit rating. In another, it invested about €500 million ($958.2 million) in a Cayman Islands hedge fund called Epicurum.
Parmalat said Epicurum would pay its money back, but four weeks ago it emerged that Epicurum would be doing no such thing.
All sorts of things are now coming out of the woodwork. It appears that, in a conference call with investors in mid-November, Parmalat's chief financial officer, Fausto Tonna, referred to a currency swap deal that delivered a profit of €121 million.
As Parmalat's pre-tax earnings for the first half of this year were only €125 million, this raised a few eyebrows, especially as dealers speculate that Parmalat would have had to put more than €1 billion at risk to generate such a profit.
Tonna is one of 20 Parmalat employees and advisers who Italian criminal investigators have called in for questioning.
He spent most of Tuesday with magistrates and is understood to be "singing like a canary".
Meanwhile, shareholders and bondholders are keen to ask him a few questions too.
Not least about the €2.9 billion of bonds that Parmalat said in a financial statement it had bought back.
It appears the bonds were not repurchased and stand as a large liability looming over the group.
Prime Minister Berlusconi is keen to bail out Parmalat to prevent job losses and disruption to milk supplies.
But the European Commission has warned Berlusconi that it will be watching closely to ensure any help given to Parmalat does not breach EU state-aid rules.
Bondholders, who have hired their own lawyers, want Parmalat broken up and sold to pay its debts.
But this is unlikely to happen. The new chief executive, Enrico Bondi, is opposed to a break-up.
The finances are in such a mess that it may be a while before it is clear what can be sold.
And the two most likely purchasers of Parmalat's core dairy business, Nestle of Switzerland and Danone of France, have said they are not interested.
- INDEPENDENT
By JASON NISSE
As the scandal at Parmalat started unravelling, it emerged that the Italian milk multinational had struck a series of unusual financial deals with the US bank Citigroup. One was named Bucerono - Italian for "black hole".
Whether this was a bad joke or prescience has yet to
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