This is the future the Federal Reserve is planning for gold


By Andrew Davis
Bloomberg News Service
Wednesday, July 21, 2004

ROME -- Parmalat Finanziaria SpA's main banks such
as Citigroup Inc. and UBS AG allowed the bankrupt
Italian foodmaker to hide the true state of its
finances for more than a decade, according to a
report ordered by Milan prosecutors probing the
company's collapse.

Bloomberg News obtained a copy of the 445-page
report that outlines about 14 billion euros ($17 billion)
of bond sales, private placements, and loans made
to the dairy company founded by the Tanzi family
in Parma, Italy. Parmalat collapsed in December
after disclosing that a 3.95 billion-euro account at
Bank of America Corp. in the United States didn't

"The tolerance or even the complicity of several
financial companies that collaborated with Parmalat
allowed for the artificial survival of a company in the
stock market that had been ailing for a long time,
while being perceived by small investors as solid
and reliable," Milan-based financial consultant Stefania
Chiaruttini wrote in the report filed Tuesday in the
Milan court.

Chiaruttini, 41, who was hired by the Milan
prosecutors' office, based her review on the testimony
of more than 50 people, including Parmalat founder
Calisto Tanzi and three former chief financial officers,
according to the report. She also had access to
documents and e-mails seized by police from the
Italian affiliates of Bank of America, Citigroup, and

Chiaruttini said banks, regulators, and analysts
failed to discover more than a decade of fraud at
the maker of long-life milk, Kyr yogurt, and Archway
cookies. Three Milan prosecutors have requested
indictments against Tanzi and 28 others, including
former officials of Bank of America Corp. in Italy
and ex-auditors at the Italian units of Grant Thornton
International and Deloitte Touche Tohmatsu.

"The problems at Parmalat weren't due to lax Italian
accounting standards," Chiaruttini said in a telephone
interview. "The banks were more interested in form
than in substance." An accountant by training,
Chiaruttini is a partner in a 14-member consulting
firm based in Milan that specializes in bankruptcies.
"I'm not interested in healthy companies, only in
troubled ones," she said.

Francesco Greco, who is leading the Milan investigation
into Parmalat, Italy's biggest bankruptcy case,
declined to comment.

"Given the size of the financial mess, it would have been
difficult to imagine that the company got away with
covering it up on its own," said Marco Benedetti, who
helps manage $319 million at Fumagalli Soldan Sim
SpA in Milan. He doesn't own Parmalat bonds.

By reviewing the amount of debt, investments, and
cash that Parmalat declared in its public statements,
it should have been clear to the company's banks that
Parmalat's financial condition was "worrisome," the
report said.

Italian newspapers including financial daily Il Sole-24
Ore reported excerpts of the report today. A Parmalat
spokesman declined to comment on the report.

Chiaruttini focuses on foreign banks that carried out
more than 80 percent of the 10 billion euros of bond
sales and private placements between 1990 and 2003.
That borrowing financed a 5 billion-euro acquisition
spree that expanded Parmalat's business in 30
countries while saddling it with debt and losses.

UBS, Europe's biggest bank, was "was fully aware
of the critical situation of Parmalat" when it organized
a transaction in July 2003, Chiaruttini said. UBS sold
420 million euros of debt, though most of the proceeds
covered guarantees and commissions, leaving
Parmalat only 110 million euros in additional

"Parmalat represented itself to UBS as a financially
sound investment-grade company," said David Walker,
a spokesman for the bank in London. "We have
absolutely no evidence that any UBS employees have
done anything misleading, fraudulent, or illegal in their
dealings with Parmalat or were aware of the true state
of Parmalat's finances."

The report also examined Citigroup Inc.'s role in helping
Parmalat raise more than 300 million euros through
securitizing receivables from the company's milk
distributors. Former Parmalat managers including
accountant Claudio Pessina have testified that many
of the receivables had been doubled billed, according
to documents obtained by Bloomberg.

Citigroup "was aware of the mechanism of double
billing" when it sold the securities to investors,
Chiaruttini's report says, citing a study of the sales
by the Bank of Italy on behalf of prosecutors.

Citigroup arranged the securitization based on what
it understood were legitimate invoices," said Dan
Noonan, a spokesman for the bank. "It is absurd to
suggest that Citigroup was aware that false invoices
were involved and yet continued to arrange financing.
Citigroup was a victim of this fraud."

Between 1990 and 2003 Parmalat's debt jumped from
100 million euros to 14 billion euros, according to the
report. In the period the company only generated 900
million euros of cash flow at the operating level and
spent 3.8 billion euros servicing debt.

Enrico Bondi, Parmalat's government-appointed
administrator, is offering the company's creditors
shares and warrants in a new holding company to
cancel their debt and allow Parmalat to return to
the Italian Exchange.


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