Milking Money out of Parmalat

Milking Money out of Parmalat

“Parmalat reaffirms the strength of its financial and economic outlook.”

With this official note on November 11, 2003, Calisto Tanzi, chairman, CEO and majority
shareholder of Parmalat, and his right-hand man, CFO Fausto Tonna, replied brazenly to growing
market doubts.

In fact, at Parmalat’s headquarters in Collecchio (Parma), top management was desperately trying
to rescue the Group, negotiating a cash infusion of €3 billion1 with LBO funds, Blackstone and KKR,
and the investment banking arm of Deutsche Bank.

At the end of 2003, Parmalat Group was Italy’s eighth largest industrial concern and arguably one
of its most international. With over 37,000 employees, 139 production sites in 30 countries in all 5
continents, revenues in excess of €7.6 billion at the end of 2002, EBIT of about €600 million and a
market capitalization of €2.3 billion2, Parmalat was one of the largest food-processing companies
in the world and a renowned leader in UHT (Ultra High Temperature) milk production (see Exhibits
1 and 2).

Before that time, very few analysts had presented doubts about the Group’s financial strength,
and none could imagine the dimensions of the financial problems that would soon be discovered.

Parmalat’s History

The Parmalat Group was created by Calisto Tanzi a self-made entrepreneur and a local “patron”. In
1961, Mr. Tanzi, a young and ambitious businessman, inherited the family business from his
father. The company, Ditta Tanzi Calisto and Sons, had been founded by his grandfather, Calisto
senior, and mainly engaged in local trading of tomato sauce and the well known “prosciutto di
Langhirano”. Melchiorre Tanzi, Calisto junior’s father, had worked intensively to expand the
company’s commercial scope. However, at the beginning of the Sixties his health conditions forced
him to leave the control of the business to the oldest of his two sons, Calisto junior (see Exhibit 3).

Thus, at the age of 22 Calisto junior abandoned his university degree to take over the leadership of
a small business with revenues of about €100,000 and a regional commercial presence. Unsatisfied
with the prospects of the business inherited from his father, Calisto immediately followed three
main intuitions: First of all, the company needed a more appealing brand, something that its
customers could associate with a genuine diet. Secondly, the product offering was too narrow. The
Parma region was already famous for its cheese, parmesan, and according to Mr. Tanzi, the milk
business could also benefit from this established reputation. Finally, the Parma area was too small
to achieve a profitable scale and new areas had to be developed. So, Mr. Tanzi entered the milk
business by founding Deitelat Latte (precursor of Parmalat) and expanded his company’s presence
to Tuscany and Liguria, two nearby Italian regions.

However, the real turning point in Mr. Tanzi’s business adventure took place in 1968. During a
personal trip to Sweden five years earlier, he had entered a supermarket and seen that milk was
not sold in the traditional glass bottles but in plastic bricks produced by the Swedish company
Tetra Pack. This packaging innovation, together with the new UHT3 technology discovered in 1968,
were the foundations of his empire. In 1968, Mr. Tanzi changed the company name to Parmalat
and started producing and distributing UHT milk. By using a process that guaranteed a longer
conservation of milk without refrigeration, the company literarily revolutionized the whole Italian
milk business. In fact, at that time the milk market was very fragmented, due to the short shelf-life
of the fresh product.

Mr. Tanzi’s business idea quickly proved to be successful. In 1970, Parmalat revenues had already
reached about €3 million, and during the Seventies, Mr. Tanzi’s ambitions and business acumen
drove the company well above this level. Following the liberalization of the Italian milk market,
Mr. Tanzi embarked on an aggressive growth and diversification strategy, entering into other
related dairy businesses (yogurt, butter, cream) as well as the dessert business. Moreover, he
concentrated a significant part of his efforts on the sales and marketing side. In fact, in those years
Parmalat created an extensive distribution network and promoted the brand by sponsoring
numerous sportsmen and sporting events. In particular, Parmalat’s sponsorship of a number of
Formula One teams made its brand extremely famous both in Europe and South America, and
allowed the company to reach a turnover of about €150 million by the end of 1980.

It was only in the Eighties, however, that Parmalat acquired a substantial weight in the food
industry and became a multinational player. In that period, Mr. Tanzi consolidated his company’s
presence in South America, especially in Brazil, and entered the US, the German, the French and
even the Nigerian markets. At the same time he accelerated the Group’s diversification strategy,
acquiring numerous brands in the juice and bakery businesses, such as Santal, Grisbì and Mister
Day.

The results were not long in coming. By 1985, Parmalat had achieved a domestic milk market
share of about 25%, followed by its closest competitors, Ala and Granarolo, with 4.5% and 4.3%
respectively. Moreover, with its Chef brand, Parmalat was also the market leader in the UHT
cream business, with a market share of 26%. Consolidated turnover reached €360 million in 1984,
€410 million in 1985, €460 million in 1986 and €480 million in 1987.

The Eighties were also years of unsuccessful non-related diversification initiatives. Probably with
the aim of nurturing his political connections, Parmalat entered the broadcasting business with
Euro TV in 1982, and acquired Odeon TV in 1987. At that time, Mr. Tanzi was also negotiating the
purchase of Rete 4, a national TV channel, with Fininvest. His plan was to create a third pole within
the Italian TV context, as an alternative to RAI, the public broadcaster, and Fininvest, Mr.
Berlusconi’s company. However this deal was never closed, and Odeon TV turned out to be a
financial disaster. It was later divested for a substantial loss.

Parmalat’s first financial troubles started appearing in the late Eighties. In fact, the Group
appeared to be under-capitalized and suffered from liquidity problems. The origins of these
problems could mainly been found in the Group’s low operating margins and in its tremendous
level of debt, necessary to finance the diversification and growth strategy . At the end of 1987,
Parmalat’s financial debt was about €150 million and its passive interests were about €23 million,
more than twice its cash flow.

In 1989, Parmalat experienced its first financial crisis. The echo of this crisis also reached other
food multinationals, and Mr. Tanzi was approached by Kraft with a purchase offer close to his
company’s turnover. However, Mr. Tanzi, probably sustained and encouraged by his bankers and
his political connections8, decided not to sell.

Mr. Tanzi’s plan to overcome the crisis consisted in taking the company public. However, given the
strict limits imposed by Consob, the Italian SEC, a number of financial operations were necessary
first. In 1989, through the family holding Coloniale, Mr. Tanzi acquired 51% of Fcn, a listed
company owned by Giuseppe Gennari. The same year he sold Fcn the 20% of Parmalat that he had
previously acquired from his mother, Angiolina Fontanesi. Then, in August 1990, another 35.4% of
Parmalat was sold to Fcn for about €283 million. Finally, Fcn changed its name to Parmalat
Finanziaria. As a result, Parmalat obtained access to the financial markets through its new listed
holding, Parmalat Finanziaria and Mr. Tanzi could avoid a public offering and especially the
publication of a detailed financial report for new investors (see Exhibit 4).

The fact of being listed on the Italian stock exchange granted Parmalat access to international
financial markets and spurred the international growth of the Group in the Nineties, with 120
acquisitions in 25 countries for an aggregate consideration inexcess of €2.5 billion. Unfortunately,
the series of acquisitions often proved unprofitable and generated, over the years, considerable
operating losses.

While growing relentlessly and aggressively, Parmalat’s corporate structure became increasingly
complicated (see Exhibit 5) troubling investors with its lack of transparency, as it was spearheaded
by the majority shareholder, Calisto Tanzi and his family.

During the Nineties, Parmalat’s debt-raising capacity was also used to support two new passions of
the Tanzi family: tourism and soccer . Between 1990 and 1998, approximately €250 million were
channeled to the tourism companies owned by the Tanzi family and led by Francesca Tanzi,
Calisto’s daughter. In the notes to the Group’s statements the true nature of the tourism
companies was never detailed and Parmalat’s credits to these companies were systematically
transferred to offshore subsidiaries and paid through fake bank accounts . A similar mechanism
was used to support the family’s soccer adventure.

However in this case, it was Stefano Tanzi, Calisto’s son, who led Parma Calcio, the soccer team
acquired by the Group in 1990.

Despite the many concerns being raised, the financial markets continued to support Parmalat.
“Milk and honey?” wondered a Lehman Brothers’ report on Parmalat published in August 1997,
and of course the answer was: “Yes!”. These bankers’ recommendation, like many others’, was
“Buy!”.

The Financial Scheme Behind the Scandal

The “usual mechanism” which led to the collapse of the Group, as described by Mr. Tonna to the
judges, was already active from the late Eighties, and it was quite simple: Parmalat issued debt to
its own subsidiaries in order to cover their losses, or it issued debt to shell companies that
transferred those funds to the Tanzi family companies. The issued debt appeared on Parmalat’s
balance sheet; however, subsequently, the debt was transferred to some other fake subsidiary in
exchange for cash payments. In other words, Parmalat lent money to its subsidiaries and
thereafter sold these credits to other subsidiaries, in exchange for cash that was never really paid.
The cash presumably paid was also transferred to offshore companies and the documentation
proving the existence of such funds was routinely falsified. In order to sustain its ongoing losses,
Parmalat ended up raising bonds and using its subsidiaries’ false cash deposits as collateral.

According to PWC’s estimate, in the first nine months of 200311, more than €14 billion had
disappeared from Parmalat’s accounts through a worldwide series of false billings and statements
made over the years. Moreover, the Group’s turnover was estimated to be 25% lower than what
was declared in its financial statements and its operating margin was about 81% lower (see Exhibit
6). In fact, executives from the Italian food multinational faked offshore transactions in Singapore
and the Cayman Islands, falsifying commercial and financial contracts which they would then use
as collateral in order to raise cash from banks and thus cover operating losses.

The “Triumvirate” of Tanzi, Tonna and Zini

The number of people under investigation for more than 15 years of financial fraud is of course
impressive (see Exhibit 7). However, there are three characters central to the scandal: Calisto
Tanzi, the Group’s founder, Fausto Tonna, CFO of the Group until March 2003, and Gianpaolo Zini,
Parmalat’s lawyer and representative. This “triumvirate”, currently held in custody, is credited
with bearing most of the responsibility for the company’s demise.

Calisto Tanzi

“We give too much importance to money. It is an excessive symbol. I would like my sons to live in
a more human society. [...] When family is broken, society is broken. [...] I love to stay with my
friends, people with the Christian sense of life. I would never live in Milan. I am a provincial
person; I am very attached to my hometown.” (Calisto Tanzi, 1980)

“I would like my sons to preserve the importance of family, to have a solid moral sense and to be
sincere, always.” (Calisto Tanzi, 1986)

Calisto Tanzi’s personality and values are key to understanding the Parmalat affair. His closest
entourage commented that the very same motivations that helped him develop Parmalat also led
his firm to bankruptcy. His public image, before the end of 2003, contrasts sharply with the
fraudulent events that underlay his company. A smart but aggressive entrepreneur, for years Mr.
Tanzi commanded enormous respect in the Italian business community. In fact, he was one of the
most favored candidates for the prestigious post of President of Confindustria, the Italian
Association of Industrial Businesses.

Moreover, he presented a public image of a devout catholic. His support for charitable initiatives
had always been generous and started close to home, restoring the frescoes of Parma’s cathedral
and financing programs for the poor, AIDS patients and drug addicts. Unlike the representatives of
other prestigious Italian families, Mr. Tanzi didn’t seek public fame by joining the international jet
set.

For years, Mr. Tanzi’s fervent approach was used to explain some of the decisions he took. For
example, Parmalat, while buying assets on the brink of bankruptcy, did not usually close many
plants. The Group was even seen as a best practice example of corporate social responsibility by
not laying off employees, keeping the community spirit alive, and looking after more than simple
short-term profits.

However, like many other Italian family businesses, Parmalat was managed in a very patriarchal
manner, even when it reached multinational dimensions. In fact, Mr. Tanzi surrounded himself
with managers often born in the Parma area, people he knew from school and who he could
control. Moreover, Parmalat’s board of directors was mainly made up of family members and
family friends (see Exhibit 8). His niece, Paola Visconti, a member of the BoD, frequently
recommended that he bring in external management. However, Calisto consistently refused,
missing out on the opportunity to bring in a set of “fresh values” that could have helped to put the
company back on track.

Another aspect that may help to understand Mr. Tanzi’s choices is represented by his connections
with the Italian banking and political scenes. For years, Calisto financed several political parties,
often using Group funds12, and he had intense relationships with major representatives of Italian
institutions. Moreover, Mr. Tanzi had strong connections with the top management of many
Italian banks. A local Parma bank, CariParma, in particular, granted extensive credit to Parmalat for
years without a comprehensive due diligence. Additionally, Luciano Silingardi, former president of
CariParma was a member of Parmalat’s BoD and, at the same time, members of the Tanzi family
were on the BoD of the bank. Another local bank, Banca Monte Parma, granted generous financing
to Parmalat, with its president, Franco Gorreri, leading Parmalat’s treasury office till 1992 .

Fausto Tonna

Mr. Tonna, a 52-year-old executive, started working at Parmalat as an accountant at the age of 21.
In 1988, he was promoted to CFO of the company and subsequently became Calisto Tanzi’s
confidant and right-hand man.

He is seen as the main architect of the financial engineering operations which led to the collapse
of Parmalat. In fact, he admitted he started cooking the books in 1989 by invoicing via subsidiaries
in Liechtenstein and undertaking other manipulations of the Group’s balance sheet in order to
hide losses .

Mr. Tonna has been described by his collaborators as a tough person, very easy to irritate and
anger. Everybody, Mr. Tanzi included, feared his fits of anger. However, he certainly was a hard
worker. He used to spend about 14 hours a day in his office, including weekends, and he accepted
no help in his job, even though he had 80 employees on his payroll .

His relationship with Mr. Tanzi has been described as one between two old partners. They often
fought and they could even spend weeks without talking to each other; but neither could live
without the other. A common interest kept them together: Mr. Tanzi was the owner, and could
take all the strategic decisions and Mr. Tonna was aware of it. But he was also aware of his crucial
role within the Group. He was the author of numerous illegal activities and the person who best
knew the financial schemes that Parmalat used to cover its financial crises. Thus, Mr. Tanzi could
not get rid of him .

However, in March 2003, given the pressure from the Group’s main bankers, Mr. Tonna resigned.
“My conscience could no longer carry the weight of all the things done,” Mr.Tonna commented to
the prosecutors at the end of 2003 when explaining his resignation . But he did not leave the
Group completely: he kept his seat on Parmalat’s board of directors and his responsibilities within
Coloniale, the Tanzi family holding.

Luciano Del Soldato, a senior manager in the company, took charge of the former CFO’s
responsibilities together with Alberto Ferraris.

Gianpaolo Zini

Mr. Zini started dealing with Parmalat at the beginning of the Nineties, while working for the law
firm Pavia&Ansaldo. In 1997 he moved to New York and two years later he started up his own law
firm, Zini&Associates, with offices first in Park Avenue, and later in Seattle, Rome and Milan.

Parmalat was his most important client and, according to Mr. Tonna, Mr. Zini invoiced about €2-3
million annually for his legal and consulting activities. He earned a lot but “he also worked a lot” .
He created numerous companies in his offices, most based in Delaware, which officially had
nothing to do with Parmalat, but which were actually used by the Group to raise debt and redirect
funds toward some of the Tanzi family companies .

Zini&Associates’ New York Office is also suspected of being at the centre of the forgery of
Parmalat’s invented bills, invoices, false bank accounts and most of the transactions regarding the
Cayman Islands subsidiaries of Parmalat and the Epicurum fund, where Parmalat apparently
invested about €495 million of its liquid assets.

As in other accounting scandals, the destruction of documents is at the core of the accusations.
Boxes of documents were being removed by the trolley-load in the weeks before the Manhattan
State Attorney officials raided the offices of Zini&Associates on December 31, 2003. “Key
computer files were removed from the main server at Zini and placed on a new server set up and
controlled by its New York office manager and IT manager.”20

The Role of the Auditors and the Banks

The impressive size of this financial black hole led the US and Italian regulators and prosecutors to
at least two of the largest auditing firms and many of the world largest banks.

The Auditors

“We do not tolerate behavior that deviates from our ethical standards.” (Grant Thornton21)

“If anything, we are the ones who have been the victims of a serious fraud” (Lorenzo Penca, head
of Grant Thornton Italy)

In his confession to the judges, Mr. Tonna explained how Grant Thornton, Parmalat’s auditor since
1985-86, was fully aware of all the legal and illegal activities of the Group. But Grant Thornton is
not the only firm involved. In fact when, in 1998, following Italy’s 8th company law directive22,
Parmalat had to rotate its auditors, Deloitte&Touche was chosen. Grant Thornton hinted that any
other auditor would have found out about the irregularities in the Group’s financial statements
and wouldn’t have certified the reports. Thus, according to Mr. Tonna’s declarations, they
suggested that Parmalat establish a new Cayman-based subsidiary, Bonlat, to which the Group
would transfer all of the balance sheet anomalies, and to retain Grant Thornton for the
certification of the financial statements of those subsidiaries (representing 49% of the holding’s
assets). In this way Grant Thornton could legally certify Parmalat’s anomalies and Deloitte&Touche
would audit only the consolidated accounts and up to 51% of the Group assets, meeting the limits
of the legal requirements .

Even if Grant Thornton’s involvement has not been proven yet and Maurizio Bianchi, president of
Grant Thornton Italy, drastically denies all Mr. Tanzi’s and Mr. Tonna’s accusations, a reasonable
doubt exists . How could the auditors never have detected anything illegal?

Actually, after five years of auditing activity, Deloitte&Touche realized that something suspicious
was going on at Collecchio’s headquarter. In particular, on October 31, 2003, Deloitte & Touche
communicated to Parmalat’s top management the impossibility of expressing its opinion on the
2nd quarter financial statements of the Group. In fact the auditors could not verify the value of
Parmalat’s investment in the Epicurum fund and believed that the investment had deeply
modified the risk profile of the Group. However, this communication was made public only on
November 11.

The Banks

“Parmalat often obtained credit not covered by real assets. Our financial statements contained
false data, but the falsification was not sophisticated enough to fool experts. If they had compared
our B/S debt with the public data on our bonds, they would have found a big difference and they
would have realized the amount of our real debt.” (Fausto Tonna, 200425)

According to Mr. Tonna’s declarations to the prosecutors, many banks were aware of Parmalat’s
real financial situation well before November 2003 and despite that, kept assisting the dairy
group .In some cases, the relationships between Parmalat and Italian banks were so close that the
Group was forced to close some deals .

“Once upon a time in Italy top bankers learned to play a delicate game. [...] Could they use their
influence with a long-standing client in trouble, or perhaps a smaller bank that needed a friendly
rescue? [...] When did a favor turn from the sensible into the corrupt?” (The Economist, February
21, 2004)

However, it is not only the behavior of the Italian banks that is questioned in the Parmalat scandal.
As it turned out, the possible profits of doing business with Parmalat drew foreign banks “like bees
to a honey pot”. Their expertise in setting up more sophisticated financial instruments was needed
and well rewarded .

In particular, Bank of America is suspected of having placed tens of unclear USPPs (US Private
Placements) on the US market, the last at the end of September 2003, when Parmalat was very
close to bankruptcy. In this way the Group raised about US$1.5 billion whose destination hasn’t
been clarified yet .

At the end of 2003, Parmalat’s bonds amounted to about €8 billion, including both private and
public placements. And, of course, Bank of America was not the only bank to support the Group.
For instance, JP Morgan Chase, between 1997 and 2001, took care of ten placements for a value of
almost €3 billion. Morgan Stanley, in 2002 and 2003, assisted the Group in three placements for
€853 million, while Merrill Lynch followed six placements for €870 million between 1997 and
1999. The list of banks that helped Parmalat to finance itself through bonds and convertible loans
is long and also includes Barclays (€424 million), Paribas (€281 million), UBS (€258 million), and
Bank of Boston (€127 million). Among the Italian banks a relevant role was played by San Paolo-Imi
(€1.3 billion), UniCredit (€875 million), MPS (€300 million) and Akros 30 (€300 million) .

In any case, their involvement has been costly. Italian banks alone may have lost about €1.3
billion, with their international counterparts losing an equally large 31 amount .

Parmalat and Italian Corporate Governance Practices

The collapse of the Collecchio Group has led to questions about the soundness of accounting and
financial reporting standards as well as the Italian corporate governance system and practices.

The Group’s ownership and control structure have Italian traits and might suggest that Parmalat is
a particularly Italian corporate governance case. It is true that the ownership and control structure
of Italian listed companies is characterized by a high level of concentration32 and by the presence
of a limited number of shareholders linked by either family ties or agreements of a contractual
nature (i.e. shareholders’ agreements). From this point of view Parmalat represents a very Italian
case.

However, analyzing Parmalat’s corporate governance structure in more detail, it appears evident
that Mr. Tanzi’s group failed to comply with some of the key existing Italian corporate governance
standards of best practice (see Appendix I). In particular, it failed with regard to the following
aspects:

1. Effectiveness of the board of statutory auditors. Parmalat Finanziaria’s board of statutory

auditors (a typical Italian monitoring structure) never reported anything wrong in its reports,
either to the courts or to Consob. Nor did the statutory auditors at Parmalat Spa or at any of its
subsidiaries. Even when, in December 2002, a minority shareholder (Hermes Focus Asset
Management Europe Ltd) filed a claim (pursuant to clause 2408 of the Italian civil code) regarding,
among other issues, related-party transactions, the board of statutory auditors answered that “no
irregularity was found either de facto or de jure”. The inefficiency of the board of statutory
auditors as a monitor can be probably attributed to its lack of access to information related to
shareholder activities and to its lack of independence from the controlling shareholders.

2. Composition of the BoD. The BoD of Parmalat Finanziaria was composed of thirteen members
(see Exhibit 8). Four of them, including the chairman-CEO, were linked by family ties. Parmalat
Finanziaria, in its 2003 report on corporate governance, claimed that among the members of its
BoD, five could be considered non-executive directors. However, the fact that non-executive
directors are less than executive directors is rather unusual among Italian listed companies .
Moreover, one of the allegedly non-executive directors, Mr. Barili, belonged to the executive
committee and had been working in Parmalat as a senior manager between 1963 and 2000. With
regard to the composition of the board, it is also interesting to observe that eight of the Parmalat
Finanziaria directors also sat on the board of directors of Parmalat Spa.
3. Independent directors. Parmalat Finanziaria claimed to have three independent directors on its
board. However, this number is far below the average for Italian listed companies which have an
average of five independent directors. And again, Mr. Barili was considered independent.

4. Appointment of directors and the Nomination Committee. Parmalat Finanziaria did not have a
nomination committee, claiming that shareholders never faced difficulties in proposing candidates
for elections. Even if formally this may be considered an adequate explanation, the inexistence of
the committee could clearly prevent minority shareholders from being adequately represented on
the BoD.

5. Internal Control Committee. At Parmalat Finanziaria, the Internal Control Committee was
composed of three members. Two of them, Mr. Tonna and Mr. Giuffredi, were also members of
the Executive Committee. Thus, the recommendation of the Preda code (that the majority should
be represented by independent directors) was not complied with, but no adequate explanation
was given by the company in its corporate governance report. It is also interesting to note that the
third member and chairman of the committee, Mr. Silingardi, was allegedly an independent
director. However, he was an old personal friend of Mr. Tanzi and a former schoolmate.

6. Transactions with related parties . Finally, even if in its corporate governance

report Parmalat Finanziaria claimed to treat these transactions according to the criteria of
“substantial” and “procedural” fairness, the evidence collected so far by prosecutors (i.e.
relationships between Parmalat Spa and Parmatour35) demonstrate that the Tanzi Group was not
compliant with the Preda Code’s recommendations.

Thus, although Italian corporate governance standards are not the highest at the international
level, and might need improvement36, it cannot be concluded that the corporate governance
problems that emerged at Parmalat were purely country-specific. In fact, the ineffectiveness of
both external and internal control structures can be seen as a common element between Parmalat
and other European or US corporate scandals.

The Scandal Becomes Public

The alleged fellowship of fraud at Parmalat began to emerge on Friday, December 19, 2003, when
Bank of America informed Parmalat’s auditors that a €3.9 billion bank account the company
claimed to hold was a fake. The false BoA account served as collateral for a chunk of bonds due in
December 2003, that Parmalat was unable to repay. While his subordinates were dealing with the
ensuing uproar, Mr. Tanzi was on the other side of the world at the Hotel Akros in Quito, Ecuador,
en route to the Galapagos Islands for a holiday with his wife, according to a transcript of an
interview with Mr. Tanzi by Milan prosecutor Guido Salvini . The Italian press, in the dark as to his
whereabouts, began suggesting that he was on the run.

Mr. Tanzi’s colleagues back home rallied to cover the fraud, as transcripts of the interrogations
show. In the nearby financial capital of Milan, prosecutors summoned Gianfranco Bocchi, a 44-
year-old accountant in Parmalat’s finance department, for questioning on Saturday, December 20.
Mr. Bocchi claimed to know nothing about the unfolding scandal, and the next day he headed back
to Collecchio (near Parma), the company’s headquarters, for an emergency meeting with
Parmalat’s CFO, Luciano Del Soldato. The aim of the meeting was to destroy evidence of years of
fraud at Parmalat’s subsidiary Bonlat, including a Bank of America logo and a scanned-in old
signature of a bank employee that were used to forge the US bank’s letterhead, Mr. Bocchi said,
according to the interrogation’s transcripts .

As Parmalat’s finances were imploding in early December, Mr. Bocchi had already, in the previous
two weeks, twice ripped up and thrown away piles of Bonlat-related documents that he kept in his
house, as he told investigators. He had also shredded papers he kept at his desk, he said. But that
Sunday, Mr. Del Soldato was determined to be thorough: “Hit the laptop with a hammer” he told
Mr. Pessina, Mr. Bocchi’s colleague in the finance department, according to the transcripts .

When Mr. Del Soldato was out of earshot, according to Mr. Bocchi’s transcript, Mr. Bocchi
convinced Mr. Pessina to take everything straight to the prosecutors. Mr. Pessina spared the
computer. The next evening at 7 pm, Mr. Bocchi fetched a CD of computer files, went back to the
prosecutors’ office in Milan and began talking. The interrogation lasted into the evening and
picked up again the next day. Mr. Bocchi revealed the key points of the alleged fraudulent
behavior by Parmalat since he had joined the company in 1993. According to the transcript, he
said that Fausto Tonna, the former CFO and Mr. Tanzi’s longtime right-hand man, had been the
“creative mind” behind most of Parmalat’s allegedly fraudulent financial schemes, such as the
alleged sale of tons of powdered milk to Cuba through a Singapore-based holding company. The
sale was used to boost revenues and improve reported profitability. In late 2000, Mr. Bocchi, who
acknowledged taking part in the scheme, told Mr. Tonna: “We are exaggerating with this
powdered milk. They’re going to drown in it.” However the scheme continued, he said.

During his interrogations, Mr. Bocchi started spilling the Tanzi family secrets. He said that between
1999 and 2003, Parmalat had directly transferred money to Holding Italia Turismo, a travel
company that belonged to the Tanzi family, and SATA, another Tanzi family company. He also
added that Epicurum, a mysterious Cayman Islands-based fund, had been created by Mr. Tonna
and the company’s lawyer as a vehicle to hide the money transferred into Mr. Tanzi’s family
companies.

Then, Mr. Bocchi explained how, with scissors, scanner and fax machine, he forged documents
such as the alleged Bank of America bank account. “It was Mr. Tonna who asked me to falsify the
bank statements,” Mr. Bocchi said, according to the transcript.

That day Mr. Del Soldato, Mr. Bocchi’s boss, was also summoned to an interrogation room and
started giving a glimpse of Mr. Tanzi’s own role. Mr. Del Soldato had taken over as CFO after Mr.
Tonna had resigned in March 2003, and, prosecutors allege, continued the falsification of accounts
and balance sheet adjustments that his predecessors had been undertaking. According to Mr. Del
Soldato, Mr. Tanzi was not only aware of the fraudulent practices, but ordered the falsification of
documents to sustain them.

On December 23, 2003, it was Mr. Tonna’s turn. In a nine-hour interrogation, he laid out the
details that ultimately led to Mr. Tanzi’s arrest on Saturday night. “Mr. Tanzi was not only well
aware of all the problems of the Group, but he was also the one who decided to hide them. Every
time I tried to present him with a financial problem, he would invite me to find a solution that
obviously presumed some sort of fraudulent hiding mechanism.” Mr. Tonna said. He also claimed
he was ordered by Mr. Tanzi not to discuss any of the financial engineering activities with the
board of directors or any of the controlling agencies.

For example, Mr. Tonna said that until 2001 he used to sign bank transfers from Parmalat to the
chairman’s family companies on behalf of Mr. Tanzi. In 2001, Mr. Tonna said he grew
uncomfortable with channeling the cash, so Mr. Tanzi began doing the transfers himself, even
though that might have compromised his ability to deny involvement. “Mr. Tanzi was desperate
because of the financial condition of the family companies, and when you are desperate you’ll do
anything,” said a former Parmalat top manager.

The day after Mr. Tonna’s interrogation, when it became clear that the Group could not repay its
bonds, Parmalat filed for bankruptcy and the Italian court appointed a new management team.

On Saturday evening, December 27, Calisto Tanzi, back from his South American trip, asked to
meet Mr. Bondi, the newly appointed manager of his company, in an office in midtown Milan. He
said he wanted to explain to Mr. Bondi where to find the funds to save the Group. After stepping
out from the unsuccessful meeting, Mr. Tanzi was arrested by the Italian Guardia di Finanza (tax
authority).

The following day, Sunday, December 28, Mr. Tanzi was questioned for over six hours by the Milan
and Parma prosecutors, and the story of the Parmalat crash began to emerge . In his interrogation
the following week, he broke down and started admitting to the financial hole in Parmalat’s
accounts.

Mr. Bondi and Parmalat: Future Perspectives

The first months of 2004 were extremely hectic. Judges continued their job, and numerous other
managers were arrested (included Mr. Zini and Mr. Tanzi’s son and daughter).

Unfortunately, as had happened in other accounting scandals, a terrible suicide occurred. On

January 23, Alessandro Bassi, a close collaborator of Mr. Del Soldato within the Parmalat financial
department, fell to his death from a bridge near Parma.

While investigations started producing evidence and acquiring a more international scope, both
the Italian government and all other financial authorities (Consob, Banca d’Italia) began creating
committees to analyze the roots of the problem and propose solutions for the future.

In the meantime Enrico Bondi, the court-nominated administrator of Parmalat, was working,
together with some banks and his assistants, in order to analyze the Group’s real financial
conditions (see Exhibit 9) and to find ways to rescue it. Finally, on Friday, March 26, 2004, he
presented the company’s restructuring plan.

With many of the people who built Parmalat in jail, its new head announced he would chop the
company down to concentrate on Italy, Europe, Canada and Australia .Moreover, Parmalat would
slash its workforce by nearly half (from 32,000 to less than 17,000) as it sold or liquidated
operations in 20 different countries. In fact, at a first meeting with international creditors, Mr.
Bondi declared that he was in talks with a bidder for the US unit and also planned to sell
operations in Mexico, much of Latin America and Asia.
Part of the turnaround would also require creditors to swap part of Parmalat’s €14.3 billion of
debt into equity. In fact, Mr. Bondi asked about 30 banks and 20 bondholders to convert their debt
without distinction between creditor classes. He also invited all the creditors to create a single
working group. This was to help contain many creditors’ complaints of not having been consulted
on the plans for Parmalat, as was possible under US bankruptcy law.

Moreover, Mr. Bondi appealed to the banks to help pull Parmalat out of its crisis, even though
some banks were unwilling to loan more money, nervous that Parmalat’s turnaround strategy
could involve legal actions against them.

The restructuring plan, including the asset sales and debt-for-equity swap, was expected to kick
into gear in August or September 2004.

But would Mr. Bondi’s efforts be sufficient to rescue Parmalat? And what could be done at
different levels (regulators, Consob, SEC, Italian Central Bank...) to prevent this kind of event from
happening again?