Parmalat

TEAM: Glavan Daniel, Bolboaca Eugen, Coste Cristian, Ceau Mihai

GROUP: 128

For a hard-charging executive like Alberto Ferraris, being named chief financial officer of a Ð'Ђ7.6 billion company was a career-making moment Ð'-- and he wasn't going to let a few nagging doubts stand in his way. Since the company was Parmalat, the Italian dairy-and-food conglomerate the U.S. Securities and Exchange Commission has charged with perpetrating "one of the largest and most brazen corporate financial frauds in history," and since Ferraris now faces charges of market rigging and issuing false information, he may wish he had heeded those doubts. But back in March 2003, he says, he knew the company had some financial problems but had no idea how bad things were about to get.

Parmalat was trying to style itself as the "Coca-Cola of milk," and Ferraris, 46, a former Milan-based corporate banker for Citigroup, had spent six years building its operations in Canada and Australia. But in late February the company stock had nosedived when the firm's irascible CFO, Fausto Tonna, announced an unexpected new bond issue Ð'-- a fresh increase in corporate debt Ð'-- that came on the heels of several other big capital-raising moves. Parmalat's founder and lifetime CEO, Calisto Tanzi, called back the bonds the following day and replaced Tonna with Ferraris to calm the waters. Within a few days, the thickset new CFO was defending his company before a roomful of financial analysts in Milan. He painted a rosy picture: sales and earnings were up, debt was under control, and the firm was awash in cash. Satisfied that he'd reassured the financiers, Ferraris hoped the worst was over. "It was my job to patch up relations with the market," he told in an interview at his lawyer's Milan office.

Then his doubts started to pile up. First, Ferraris says, he couldn't understand why the company was paying so much to service its debt; the interest payments seemed far higher than warranted for the Ð'Ђ5.4 billion in debt on the books. Even more troubling, the company wouldn't give him total access to the corporate accounts. When Ferraris complained to Tonna (who, to his annoyance continued to deal with some of the banks), he says he was told that chief accounting officer Luciano Del Soldato, a 20-year Parmalat veteran, would continue handling the accounts as a consolation prize for not getting the CFO job.

Ferraris reluctantly accepted the division of roles, but wasn't satisfied. So he asked two trusted members of his staff to mount a quiet investigation. After calling around Parmalat's worldwide operations, they came back with shocking news: a total debt estimate of Ð'Ђ14 billion, more than double that on the balance sheet. "Until then, I never suspected the accounts were false," says Ferraris.

He knew he had to go to the top. In mid-October he met with Tanzi. Until then, Ferraris says, he had valued Tanzi as "an excellent person, a real entrepreneur" Ð'-- a charismatic but steady leader who was so proficient at math that he always spotted calculation errors in presentations. "I expected him to say, 'Your numbers are wrong.'" Instead, he recalls, Tanzi just shrugged. "He said, 'Eight billion, 11 billion, 14 billion Ð'-- it's all the same.'" Stunned, Ferraris urged Tanzi to call a meeting with the company's banks to explain the situation. Tanzi refused, and Ferraris quit. "I was flabbergasted," he says.

A few weeks later, on Dec. 19, 2003, the biggest corporate scam in European history was exposed when Parmalat confirmed that an account it had claimed to have at Bank of America with Ð'Ђ3.95 billion in cash simply did not exist. That was merely the first revelation in the scandal that turned Parmalat into Europe's Enron, a morass of fraud and financial failure made all the more dramatic by the fact that the company was Italy's eighth largest and had established itself as a global consumer brand.

In the past year, the story of Parmalat has emerged in fits and starts, as three teams of forensic accountants have combed through the company books and dozens of executives, including Tonna, Tanzi, Ferraris and Del Soldato Ð'-- have made detailed confessions to magistrates in Parma and Milan. Using their testimonies and thousands of pages of official documents, it's now possible to piece together the key parts of the affair. Here's the inside story of how the Coca-Cola of milk managed to go sour.

A CRUDE FORGERY

For well over a decade, from about 1990 to 2003, investigators say, Parmalat borrowed money from global banks and justified those loans by inflating its revenues through fictitious sales to retailers. In a scheme that authorities charge was devised and executed by Tanzi, top managers, the firm's outside lawyer, Gian Paolo Zini, and two outside auditors, Maurizio Bianchi and Lorenzo Penca, it would then cook its books some more to make the debt vanish, by transferring it to shell companies based in offshore tax havens. (Zini, Bianchi and Penca deny any wrongdoing.) When the hole grew too large to hide, Tanzi, Tonna and the two auditors allegedly came up with Parmalat's most audacious invention: a bogus milk producer in Singapore that supposedly supplied 300,000 tons of nonexistent milk powder to a Cuban importer via Bonlat, a Cayman Islands subsidiary that held the fake Bank of America account. "What struck and surprises me is the simplicity," says Francesco Greco, the senior magistrate in Milan on the case. "It was almost banal."

So far, 29 people have been charged in Milan; more are expected to be charged in coming weeks by magistrates in Parma. Parmalat's losses are now officially put at Ð'Ђ12 billion and its investors have lost another Ð'Ђ14 billion Ð'-- though the company's 33,000 employees have emerged relatively unscathed, as the firm continues to operate while in bankruptcy. Most of the money that moved in, around and out of the company has since been traced, although the final destination of some of it is still unknown. Tanzi has admitted transferring some Ð'Ђ500 million to family firms, but investigators told that up to Ð'Ђ1.3 billion may have gone this route.

But one huge mystery remains: how could such a crude forgery have continued for so long, and on such a massive scale? For years, Parmalat dealt with the world's largest banks, its most sophisticated investors and its most reputable