The Securities and Exchange Commission today charged Parmalat Finanziaria S.p.A. ("Parmalat") with securities fraud. The Commission's complaint, filed in U.S. District Court in the Southern District of New York, alleges that Parmalat engaged in one of the largest and most brazen corporate financial frauds in history.
The Commission's complaint alleges as follows: From August through November 2003, Parmalat fraudulently offered $100 million of unsecured Senior Guaranteed Notes to U.S. investors by materially overstating the company's assets and materially understating its liabilities. As Parmalat acknowledged in a press release dated December 19, 2003, the assets in its 2002 audited financial statements were overstated by at least â¬3.95 billion (approximately $4.9 billion). In addition, Parmalat falsely stated to U.S. investors that it used its "excess cash balances" - which actually did not exist - to repurchase corporate debt securities worth â¬2.9 billion (approximately $3.6 billion), when in fact it had not repurchased those debt obligations and they remained outstanding. The $100 million note offering failed after Parmalat's auditors raised questions about certain Parmalat accounts.
The complaint further alleges that as of the end of 2002, Parmalat purportedly held the â¬3.95 billion worth of cash and marketable securities in an account at Bank of America in New York City in the name of Bonlat Financing Corporation ("Bonlat"), a wholly owned subsidiary incorporated in the Cayman Islands. Bonlat's auditors certified its 2002 financial statements based upon a false confirmation that Bonlat held these assets at Bank of America. The bank account and the assets did not exist and the purported confirmation had been forged. These non-existent assets are reflected on Bonlat's 2002 books and records and, in turn, in Parmalat's 2002 consolidated financial statements, as well as in its consolidated financial statements as at June 30, 2003, which were provided to U.S. investors to whom Parmalat offered notes from August through November 2003. The complaint further alleges that a private placement memorandum that Parmalat provided to U.S. investors in August 2003 contained numerous material misstatements about the company's financial condition. For example, the memorandum falsely states: "Liquidity is high with significant cash and marketable securities balances...."
The complaint further alleges that on December 9, 2003, Parmalat's Chairman and Chief Executive Officer, and his son, a senior Parmalat executive, met with representatives from a New York City-based private equity and financial advisory firm regarding a possible leveraged buyout of Parmalat. During that meeting, one of the New York firm's representatives noted that Parmalat's financial statements showed that the company had a large amount of cash. In response, the son stated that the cash was not there, and that Parmalat really had only â¬500 million in cash. Later, Parmalat's Chief Financial Officer joined the meeting. During a discussion of Parmalat's outstanding debt, the CFO stated that Parmalat's debt was actually â¬10 billion, much higher than the balance sheet showed. The CFO indicated that the balance sheet was incorrect because the company had not repurchased â¬2.9 billion of Parmalat bonds. The balance sheet falsely reflected that the bonds had been repurchased.
The complaint further alleges that based on these revelations, the New York firm's representatives offered to send members of the firm's restructuring group to meet with Parmalat representatives. The following day, representatives of the firm's restructuring group met with the Parmalat representatives, and informed them that Parmalat needed to publicly disclose the facts disclosed to the New York firm if that firm were to continue to have any involvement. When it became clear that the Parmalat representatives were unwilling to do so, the New York firm's representatives terminated their discussions with Parmalat.
The complaint further alleges that from 1998 through 2002, Parmalat and certain of its top managers and directors, including its then Chairman and CEO and its CFO, actively marketed and sold nearly $1.5 billion in notes and bonds to U.S. investors. Parmalat also sponsored an American Depositary Receipts ("ADR") program. Parmalat's ADRs were originally privately placed in the U.S. on August 9, 1996. Before December 19, 2003, the price of Parmalat ADRs had been artificially inflated by the materially false and misleading statements described above.
Parmalat is charged with violating Section 17(a) of the Securities Act of 1933. The Commission seeks against Parmalat a permanent injunction from future securities fraud violations and a substantial civil penalty.
The Commission's investigation into these events is continuing.
The Commission acknowledges the assistance of Commissione Nazionale per la Societ e la Borsa ("Consob"), the public authority responsible for regulating the Italian securities market.
