U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18803 / July 28, 2004
Accounting and Auditing Enforcement
Release No. 2065 / July 28, 2004
Securities and Exchange Commission v. Parmalat Finanziaria, S.p.A., Case No. 03 CV 10266 (PKC) (S.D.N.Y.)
SEC ALLEGES ADDITIONAL VIOLATIONS BY PARMALAT FINANZIARIA, S.p.A., AND SIMULTANEOUSLY SETTLES CIVIL ACTION
Parmalat Finanziaria Agrees to Entry of Permanent Injunction and Corporate Undertakings
The Securities and Exchange Commission ("Commission") today filed an amended complaint in its lawsuit against Parmalat Finanziaria S.p.A. in U.S. District Court in the Southern District of New York. The amended complaint alleges that the company engaged in one of the largest financial frauds in history and defrauded U.S. institutional investors when it sold them more than $1 billion in debt securities in a series of private placements between 1997 and 2002. Simultaneously with the filing of the amended complaint, Parmalat Finanziaria consented to the entry of a final judgment settling the Commission's action against it. The settlement is subject to the Court's entry of the proposed judgment.
The complaint the Commission filed today alleges the following, among other things:
- Parmalat Finanziaria consistently overstated its level of cash and marketable securities. For example, at year-end 2002, Parmalat Finanziaria overstated its cash and marketable securities by at least 2.4 billion Euros ("€"). As of year-end 2003, Parmalat Finanziaria had overstated its assets by at least €3.95 billion (approximately $4.9 billion).
- As of September 30, 2003, Parmalat Finanziaria had understated its reported debt of €6.4 billion by at least €7.9 billion. Parmalat Finanziaria used various tactics to understate its debt, including: (a) eliminating approximately €3.3 billion of debt held by one of its nominee entities; (b) recording approximately €1 billion of debt as equity through fictitious loan participation agreements; (c) removing approximately €500 million of liabilities by falsely describing the sale of certain receivables as non-recourse, when in fact the company retained an obligation to ensure that the receivables were ultimately paid; (d) improperly eliminating approximately €300 million of debt associated with a Brazilian subsidiary during the sale of the subsidiary; (e) mischaracterizing approximately €300 million of bank debt as intercompany debt, thereby inappropriately eliminating it in consolidation; (f) eliminating approximately €200 million of Parmalat S.p.A. payables as though they had been paid when, in fact, they had not; and (g) not recording a liability of approximately €400 million associated with a put option.
- Between 1997 and 2003, Parmalat S.p.A. transferred approximately €350 million to various businesses owned and operated by Tanzi family members.
- Parmalat Finanziaria transferred uncollectible and impaired receivables to "nominee" entities, where their diminished or nonexistent value was hidden. As a result, Parmalat Finanziaria carried assets at inflated values and avoided the negative impact on its income statement that would have been associated with a proper reserve or write-off of bad debt.
- Parmalat Finanziaria used these same nominee entities to fabricate non-existent financial operations intended to offset losses of its operating subsidiaries. For example, if a subsidiary experienced losses due to exchange rate fluctuations, the nominee entity would fabricate foreign exchange contracts to offset the losses. Similarly, if a subsidiary had exposure due to interest rate fluctuations, the nominee entity would fabricate interest rate swaps to curb the exposure.
- Parmalat Finanziaria used the nominee entities to disguise intercompany loans from one subsidiary to another subsidiary that was experiencing operating losses. Specifically, a loan from one subsidiary would be made to another subsidiary operating at a loss. The recipient then improperly applied the loan proceeds to offset its expenses and thereby increase the appearance of profitability. As a result, rather than have a neutral effect on the consolidated financials, the loan transaction served to inflate both assets and net income.
- Parmalat Finanziaria recorded fictional revenue through sales by its subsidiaries to controlled nominee entities at inflated or entirely fictitious amounts. In order to avoid unwanted scrutiny due to the aging of the receivables associated with these fictitious or overstated sales, the related receivables would be transferred or sold to nominee entities.
In its consent, Parmalat Finanziaria has agreed, without admitting or denying the allegations of the amended complaint, to be permanently enjoined from violating Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5, as well as Section 17(a) of the Securities Act of 1993. In addition, Parmalat Finanziaria has agreed to adopt changes to its corporate governance to promote future compliance with the federal securities laws, including adopting by-laws providing for governance by a shareholder-elected board of directors, the majority of whom will be independent and serve finite terms; specifically delineating in the by-laws the duties of the board of directors; adopting a Code of Conduct governing the duties and activities of the board of directors; adopting an Insider Dealing Code of Conduct; and adopting a Code of Ethics. The by-laws will also require that the positions of chairman of the board of directors and managing director be held by two separate individuals. Parmalat Finanziaria's consent also provides for the continuing jurisdiction of the U.S. District Court to enforce its provisions.
The Commission's investigation into federal securities law violations related to the fraud at Parmalat Finanziaria is continuing.
SEC Complaint in this matter