Southern Alaska Carpenters Pension Fund, Et Al. V. Parmalat Finanziaria
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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
x SOUTHERN ALASKA CARPENTERS : Civ. No. 04-CV-00030(LAK) EFC Case PENSION FUND, FONDAZIONE ITALO : MONZINO and RENATO ESPOSITO, On : ELECTRONICALLY FILED Behalf of Themselves and All Others Similarly : Situated, : FIRST AMENDED CLASS ACTION : COMPLAINT FOR VIOLATIONS OF THE Plaintiffs, : FEDERAL SECURITIES LAWS : vs. : : BONLAT FINANCING CORPORATION, : CALISTO TANZI, FAUSTO TONNA, : COLONIALE SpA, CITIGROUP, INC., : BUCONERO LLC, MORGAN STANLEY & : CO., ZINI & ASSOCIATES, P.C., GIAN : PAOLO ZINI, DEUTSCHE BANK AG, : BANK OF AMERICA CORPORATION, : DELOITTE TOUCHE TOHMATSU, : DELOITTE & TOUCHE SpA, GRANT : THORNTON INTERNATIONAL, GRANT : THORNTON LLP and GRANT THORNTON : SpA, : : Defendants. : x DEMAND FOR JURY TRIAL
Copyright © 2004 by William S. Lerach. William S. Lerach will vigorously defend all rights to this writing/publication. No copyright is claimed in the text of statutes, regulations, and any excerpts from analysts’ reports quoted within this work. All rights reserved – including the right to reproduce in whole or in part in any form. Any reproduction in any form by anyone of the material contained herein without the permission of William S. Lerach is prohibited. “Quis Custodiet Custodies?” “But Who Will Guard the Guards Themselves?”
INTRODUCTION
1. This is a securities fraud class action on behalf of the purchasers of the debt and equity securities of Parmalat Finanziaria, SpA and its subsidiaries (collectively, “Parmalat” or the
“Company”) between January 5, 1999 and December 29, 2003, inclusive (the “Class Period”), seeking to pursue remedies under the Securities Exchange Act of 1934 (the “Exchange Act”).
2. This action arises out of what the Securities and Exchange Commission (“SEC”) has termed one of the “largest and most brazen corporate financial frauds ever perpetrated.”
According to the Chairman of the SEC, “Clearly there’s been a massive fraud.” Parmalat’s insiders, together with Parmalat’s legal, accounting and financial advisors and investment and commercial banks (collectively, the “Defendants”) participated in a massive scheme and fraudulent course of business whereby Defendants falsified and overstated Parmalat’s reported revenues, assets, profits and shareholder equity by billions of dollars while concealing billions of dollars of Parmalat’s debt, for well over a decade. Defendants’ fraudulent scheme was worldwide – involving the manipulation of Parmalat’s balance sheet and income statement via the creation of bogus bank accounts, forged and falsified financial records, fictitious or inflated investment assets and sham transactions, which artificially boosted Parmalat’s reported assets and income, while concealing billions of dollars of debt at all of the companies in the Parmalat group and all the related entities
Parmalat controlled.
3. This fraud was accomplished, in part, through clandestinely controlled entities, including a Cayman Islands entity called Bonlat that the defendants created, structured, financed and used to do transactions with Parmalat to loot Parmalat for the benefit of Parmalat’s controlling shareholders (the Tanzi family) while inflating its profits and hiding debt, thus violating applicable
- 1 - accounting principles and the principles of “fair presentation” of financial results. Some 20 persons have already been arrested, including virtually all of Parmalat’s top insiders, its principal lawyer and accountants and several members of the Tanzi family. Parmalat’s bankers are under intensive investigation by prosecutors and regulatory authorities. One of the prosecutors putting the criminal case together in Milan has stated that there was “a pattern of false statements made by Parmalat over several years which were picked up and amplified by banks as they marketed [Parmalat’s] shares and bonds. A banker knows that something is false, and the banker helps Parmalat with operations or transactions so that the financial community believes Parmalat is a good company.
Instead, Parmalat is not a good company.”
4. Defendants’ scheme was designed to and did allow Defendants to participate in and benefit from the looting of Parmalat by which the controlling shareholders of Parmalat – the Tanzi family – diverted approximately $1 billion to themselves and/or to entities controlled by them – while other participants in the scheme also pocketed hundreds of millions of dollars via professional fees, clandestine asset transfers, and fees for structuring contrived and manipulative financial transactions, as well as fees from securities issuance transactions which enabled Parmalat to illegally raise more than $7 billion from investors to keep the scheme afloat for the Defendants’ benefit and enrichment.
5. Defendants’ scheme began to unravel in late 2003. During the Class Period,
Defendants had represented that Parmalat was achieving business success, had successfully expanded its business in 1999-2002 and was successfully integrating several acquired businesses into its operations, had strong internal controls that would prevent fraudulent misconduct inside the
Company and was achieving strong operating profits, was controlling its debt level (in part by repurchasing some $2 billion of its outstanding debt during 2003) and thus had billions of dollars of
- 2 - safe liquid assets and a balance sheet supporting billions of dollars of shareholders’ equity. These representations were false. In fact, it has come out that:
x Almost 40% of Parmalat’s entire asset base, cash or liquid assets – a $3-$4 billion account purportedly held in Bank of America – did not exist;
x The $625 million of Parmalat’s cash purportedly invested in a liquid investment fund in the Cayman Islands (“Epicurum”) could not be retrieved;
x Parmalat had not repurchased any of its outstanding bonds, let alone $2 billion of them in 2003;
x Parmalat could not pay its debts and was insolvent with only “nil” liquid assets and declared bankruptcy;
x Defendants had manipulated Parmalat’s income statements and balance sheet for more than a decade by using off-shore shell companies, special purpose entities (“SPEs”), forged documents and sham transactions;
x Parmalat’s actual net debt level was $16-$18 billion – eight times the previously reported levels – and billions of dollars of previously presented assets simply did not exist;
x Parmalat had actually been losing €350-€450 million per year for several years;
x Calisto Tanzi, Parmalat’s long-time Chairman and CEO, and all other top Parmalat officers had been ousted from the Company;
x The Tanzi family had looted Parmalat of some $1 billion; and
x Some 20 of Parmalat’s insiders, auditors and lawyers, including certain of the Defendants, had been arrested and taken into custody for the perpetration of this multi-billion dollar fraud.
As Defendants’ fraud began to be revealed, in order to try to cover up the prior wrongdoing and scheme, certain Defendants destroyed evidence and/or ordered their subordinates to destroy evidence of their fraudulent scheme in an effort to evade liability for their participation in one of the most shocking corporate scandals ever to afflict the global public financial markets. As the revelations of
Defendants’ misconduct unfolded, the price of Parmalat’s equity securities collapsed and became
- 3 - worthless when trading was suspended on December 29, 2003, while the price of Parmalat’s debt securities collapsed as well, becoming essentially worthless.
6. Tanzi and Fausto Tonna (Parmalat’s long-time CFO) and other Parmalat insiders have now admitted to criminal investigators:
(a) The alterations of the accounts and the shifting of money “involved all the companies of the [Parmalat] group and all the companies connected to the [Parmalat] group”;
(b) Parmalat’s financial woes and manipulations had dragged on for many years – at least since 1984. “The need to cover up losses had always been felt.” Parmalat actually lost at least €350-€450 million per year from the mid-90s on;
(c) Despite Parmalat’s true deteriorating financial situation and huge losses,
Parmalat’s financial reports “always closed with a profit”;
(d) The Bonlat subsidiary’s financial statements were “invented from top to bottom”;
(e) Parmalat’s need to diminish the debts of Parmalat, making them weigh on companies like Bonlat, were satisfied with methods of little sophistication;
(f) Grant Thornton “helped [Parmalat] set up Bonlat to enable ... Tanzi ... to embezzle funds” from Parmalat;
(g) Grant Thornton helped “Parmalat ... invent financial details that made the financing devices and other strategies appear legitimate,” including “creating ad hoc contracts that would create overbillings and credits from operations that were completely or partly fictional”; and
(h) “Grant Thornton well knew the reality [of the falsification] right from the beginning.” With Grant Thornton’s advice and help, Parmalat created and used “‘a system for
- 4 - constructing false papers’ at the close of each business quarter.” They would “verify the critical points ..., and then insert the changes ... by progressive approximations until a final result was reached.”
7. While in custody, Tanzi has also admitted that he was aware of the fraudulent falsification of Parmalat’s financial statements and looting of its assets for his family’s benefit.
Tonna has admitted to the massive falsification and embezzlement and stated that Parmalat’s lawyer,
Gian Paolo Zini, was a “mastermind” of the scheme, while Parmalat’s accountants, Deloitte &
Touche and Grant Thornton, had actively and knowingly participated in the falsification here in the
United States and elsewhere. Other Parmalat managers have not only also admitted that they
“cooked the books,” but also that they had destroyed evidence. In fact, one Parmalat manager has stated that in addition to being ordered to shred relevant documents, he had been ordered to use a hammer to destroy a laptop containing incriminating evidence and it has been reported that there has been a massive destruction of documentary and electronically stored evidence at Zini’s Park Avenue,
New York office. While the Defendants all personally profited from this scheme, public investors lost billions of dollars. Parmalat’s stock is now worthless as are most of its bonds.
- 5 - SUMMARY AND OVERVIEW OF COMPLAINT
8. The claims asserted in this action are on behalf of all purchasers of Parmalat’s equity and debt securities, including those issued by Parmalat and those of related entities, the repayment of which depended on Parmalat’s credit, financial condition and ability to pay, including Parmalat
Finance Corp. BV; Parmalat Capital Finance, Ltd.; Parmalat Capital NL, BV; Parmalat Capital
Netherlands, BV; and Parmalat Soparfi, SA, against:
(a) Certain of Parmalat’s top executives, directors and controlling shareholders and affiliated entities (the “Individual” or “Parmalat Defendants”);
- 6 - (b) Parmalat’s accountants and controlled affiliated entities and partners
(collectively, “Accounting Defendants”);
(c) Parmalat’s lawyers and the law firm that represented Parmalat and its related entities (“Lawyer Defendants”);
(d) Certain of Parmalat’s commercial and investment banks (the “Bank
Defendants”).
9. Each of the Defendants sued directly engaged or participated in the implementation of manipulative devices to inflate Parmalat’s reported profits and financial condition, made or participated in the making of false and misleading statements and participated in a scheme to defraud or a course of business that operated as a fraud or a deceit on purchasers of Parmalat’s securities during the Class Period. Each is thus a primary violator of the U.S. securities laws.
10. Both prior to and during the Class Period, Parmalat reported strong profits and a balance sheet which enabled it to maintain an investment grade credit rating. As a result of
Defendants’ wrongful conduct and scheme, Parmalat’s equity securities were artificially inflated, while Parmalat was able to create a market to issue and issued billions of dollars of debt securities which were sold at and then traded at artificially inflated prices. Defendants’ scheme and fraudulent course of business was also designed to and did enable Parmalat to issue billions of dollars of new securities to investors during the Class Period. This fraudulent scheme and course of business enabled Defendants to loot Parmalat of over a billion dollars and also pocket billions of dollars of legal, accounting/auditing and consulting fees, underwriting commissions, interest, and credit facility and financial advisory payments, such that each of the Defendants was significantly enriched.
- 7 - 11. Parmalat is an international food and dairy company founded in 1961 in Parma, Italy,1 by defendant Tanzi. Parmalat has always been controlled by the Tanzi family via its ownership and control of Coloniale S.p.A., which in recent years has held a 51% equity interest in Parmalat.
Beginning in the early 1990s, Tanzi, together with Parmalat’s then CFO Tonna, began a massive expansion-by-acquisition program whereby Parmalat acquired dozens of existing food service businesses in Europe, the United States and South America. In an effort to portray Parmalat as a strong and growing company and to cover-up and conceal the substantial business and financial problems Parmalat was then, in fact, experiencing, especially in its Latin and South American operations, Defendants pursued a scheme to defraud and course of business that operated as a fraud and deceit on purchasers of Parmalat securities. By manipulating acquisition accounting and using other artifices such as off-balance sheet accounting, SPEs and by simply falsifying financial records,
Parmalat insiders and the Company’s advisors were able to conceal Parmalat’s true operating performance and financial condition and portray the Company as one that was successfully expanding into the United States and generating strong operating profits and net income growth and had large amounts of safe liquid assets.
12. However, in attempting to grow Parmalat’s business worldwide through a series of large acquisitions, Parmalat’s insiders faced very substantial difficulties. Because the Tanzi family was then already looting Parmalat and abusing their positions of control of the enterprise, they had to be certain that they maintained their complete control of the Company during its vast expansion, so that their misdealings would not be discovered. As a result, the Tanzis were unwilling to finance
1 It is probably only a historical oddity, but Parma, Italy, was also the birthplace of the infamous Charles Ponzi who, in the 1920s orchestrated a massive pyramid scheme through his “Securities Exchange Company,” bilking investors of millions – bequeathing to our financial history the term “Ponzi scheme,” which so aptly applies to the Parmalat scandal.
- 8 - Parmalat’s expansion by selling new equity or stock, as this would dilute their control of the
Company. Therefore, Parmalat’s massive expansion had to be funded principally through the sale of debt securities to raise the capital necessary to buy other companies. However, in order for Parmalat to be able to sell the billions of dollars of new debt securities necessary to finance the expansion plan, Parmalat had to maintain an investment grade bond/credit rating which could not be accomplished unless Parmalat’s business appeared to be successful and its financial condition appeared to be strong – achieving substantial current period profits while maintaining its debt levels at controllable levels, with a balance sheet supported by substantial liquidity, shareholder equity and an improving debt-to-equity ratio.
13. As a result of the fraudulent scheme and course of business being pursued by
Defendants, Parmalat’s business appeared to be operating successfully, while generating substantial profits, and its overall financial condition appeared to be safe and sound, as was repeatedly certified to by two accounting firms – enabling Parmalat to raise billions of dollars of new capital through securities sales facilitated by the Accounting Defendants, Lawyer Defendants and Bank Defendants.
So long as the scheme and fraudulent course of business succeeded and went forward and the
Parmalat Ponzi scheme could be sustained through the constant infusions of fresh capital, all the participants benefited – the Tanzis could loot the Company, while paying off top Parmalat officers and insiders and other co-schemers to facilitate that illegal conduct, while Parmalat’s auditors and lawyers pocketed large fees for their participation in key aspects of the scheme, and Parmalat’s investment/commercial banks pocketed millions in commissions for selling new Parmalat securities to investors while pocketing millions more as fees for structuring numerous contrived and manipulative financial transactions to falsify Parmalat’s financial condition.
- 9 - 14. By the mid-1990s, as the size and scope of the Parmalat Ponzi scheme accelerated
and grew ever larger, Parmalat’s capital, i.e., cash requirements, were increasing exponentially as
Parmalat was not only, in truth, suffering from huge losses and being looted, it needed cash to
acquire scores of diverse food companies. Tonna, Tanzi, Zini and Grant Thornton also realized that
their ability to conceal their ongoing fraud was further jeopardized by accounting rules which
required Parmalat to replace Grant Thornton (which had audited Parmalat’s books for a decade as
Parmalat’s existing audit firm) beginning with Parmalat’s fiscal year (“FY”) 99 audit.2 So as to continue the falsification of Parmalat’s financial statements and to avoid having to reveal the truth to the public about the then ongoing massive falsification of Parmalat’s financial statements, Tonna and
Tanzi and Grant Thornton and Deloitte & Touche engaged in a contrived arrangement whereby they created, and had Grant Thornton audit, a substantial number of Parmalat operating and financing subsidiaries which were key central parts of the fraud while Deloitte & Touche would begin auditing and certifying Parmalat’s consolidated 1999 financial statements. This way, Deloitte & Touche would be provided a degree of deniability and protection while the scheme could continue and Grant
Thornton, which was, under law, to be rotated out as Parmalat’s auditor, continued to audit entities with 45% of Parmalat’s claimed assets.
15. Thus, in connection with the 1999 auditor transition, Tanzi, Tonna, Grant Thornton and Deloitte & Touche worked together with Parmalat’s legal firm, Zini, to create a new Cayman
Islands subsidiary, Bonlat Financing Corp., which Parmalat, Tonna, Tanzi, Grant Thornton and
2 Defendant Grant Thornton International, an Illinois corporation with headquarters in London, England, is an organization dedicated to providing accounting services to middle-market public and private clients with member firms in approximately 100 countries, including its U.S. member, Chicago-based Grant Thornton LLP, its Italian member Grant Thornton SpA and its Singapore member Foo Kan Tan Grant Thornton (collectively, “Grant Thorton”).
- 10 - Deloitte & Touche agreed Grant Thornton would audit so that Defendants could continue to conduct manipulative and fictitious financial transactions within Bonlat and thereby ensure that Parmalat would continue to publicly report strong profits and a healthy financial condition and conceal that
Parmalat’s balance sheet and income statements were artificially inflated.
16. In addition to preparing and/or disseminating false financial statements, defendants
Tonna and Tanzi also worked with Parmalat’s financial advisors, accountants, lawyers and banks to artificially boost Parmalat’s reported financial performance by: (i) creating secretly controlled entities to manipulate Parmalat’s financial condition by raising cash for Parmalat in a manner that concealed Parmalat’s actual financial condition and additional liabilities incurred by Parmalat, thereby making its balance sheet appear stronger than it actually was; and (ii) raising additional cash by using credit linked notes and other financing mechanisms.
17. By 1998, Parmalat was a hall of mirrors inside a house of cards – reporting millions of dollars of phony profits each year, while concealing billions of dollars of debt that should have been on its balance sheet, thus inflating its shareholder equity by billions of dollars. Parmalat had evolved into an enormous Ponzi scheme – likely the largest in history – constantly raising money from public offerings of securities to sustain itself, while appearing to achieve successful growth and profits. But, because Parmalat’s reported profits were all being generated by phony, non-arm’s- length transactions and improper accounting tricks, Parmalat was cash starved. Yet, to continue to report growing profits and positive cash flow, Parmalat was forced to not only continue to engage in such phony transactions and improper accounting tricks, but to accelerate the number and size of such transactions it engaged in, which created a vicious cycle only further exacerbating Parmalat’s need to obtain cash. By 1998, Parmalat had become completely dependent on maintaining its investment grade credit rating so that Parmalat could continue to have access to the capital markets
- 11 - to borrow billions and to enable it to periodically raise hundreds of millions of dollars of new longer term capital it needed to repay the short-term loans it was receiving from its banks to sustain its business operations.
18. Because of the nature and the rapid expansion of Parmalat’s business, Parmalat needed constant access to huge amounts of capital. For Parmalat to continue to appear to succeed it had to keep its investment grade credit rating. Parmalat’s investment grade credit rating and high stock price could only be maintained by (i) limiting the amount of debt shown on Parmalat’s balance sheet; (ii) reporting strong current period earnings; and (iii) forecasting strong future revenue and earnings and debt control/retirement. Yet Parmalat was able to achieve these ends only through pursuing an increasing number of phony transactions, many of which were accomplished by increasing the number and size of transaction entities which were supposedly independent of
Parmalat, but which, in fact, Parmalat controlled through a series of secret understandings and illicit financing arrangements. The creation of these contrived and manipulative transactions was accomplished with the knowing and active participation of Parmalat’s bankers, lawyers and accountants. Parmalat’s illicit financial transactions allowed Parmalat to conceal hundreds of millions of dollars of losses and generate hundreds of millions of dollars of phony profits, while concealing billions of dollars of debt that belonged on its balance sheet and inflating its reported stockholders’ equity by billions of dollars. As a result of reporting strong earnings, the apparent success of its business and its future earnings growth forecasts, Parmalat had virtually unlimited access to the capital markets, borrowing billions of dollars and selling Parmalat securities to the public. Parmalat and its commercial/investment bankers, working with Parmalat’s lawyers and accountants, raised at least $7 billion in new debt capital from public investors through numerous securities offerings between 1998 and late 2003, thus raising the capital necessary to allow Parmalat
- 12 - to repay or pay down its short-term debt to the banks and continue to operate the Ponzi scheme from which they were all benefiting.
19. During 1999, Coloniale, Tonna, Tanzi and Zini caused Parmalat to make a clandestine transfer of approximately $188 million from Parmalat to Holding Italiana Turismo, a travel company owned by the Tanzi family. The $188 million cash transfer, combined with the effect a 1999 devaluation of the Brazilian currency was having on Parmalat’s Brazilian operations, placed Parmalat in a severe cash crunch by December 1999. It was apparent to Defendants that unless they could immediately raise millions in cash by year-end 1999 for Parmalat, Defendants would no longer be able to conceal their financial shenanigans and continue their fraudulent scheme.
Tonna and Tanzi turned to Citigroup, Inc. (“Citigroup”) which worked with the Individual
Defendants to appear to quickly raise $137 million in cash so that Parmalat would not be forced to reveal that the Company was cash strapped, notwithstanding its purportedly substantial operating profits and cash holdings. In this regard, Parmalat and its insiders, Zini and Citigroup created a
Delaware entity named Buconero (which means “black hole” in Italian). Buconero was designed to and did allow Citigroup, Zini and the Parmalat insiders to quickly raise $137 million in cash prior to year-end 1999, but to structure the transaction in a manipulative and deceptive way, so that what was in reality, a Citigroup loan could be disguised as equity on Parmalat’s balance sheet. As part of these Defendants’ agreement to (mis)characterize the amounts transferred to Parmalat as equity,
Citigroup was secretly guaranteed to recoup its investment and earn a multi-million dollar fee as a result of its willingness to engage in the creation and implementation of this transaction, which was a manipulative device and contrivance designed to artificially inflate Parmalat’s financial statements on an ongoing basis.
- 13 - 20. During 1999, as investor concerns mounted over the losses of Parmalat’s Brazilian subsidiary and the carrying value of that huge asset, Parmalat attempted to sell a minority interest in that operation at a price that would demonstrate that the operation, in fact, had great potential and was undervalued. However, when no sophisticated buyer with an opportunity to do due diligence on the Brazilian operation would pay such a price, in December 1999, Tanzi, Tonna and Zini, with
Bank of America, structured a phony sale of 18% of the Brazilian operations to “North American investors” for $300 million – a huge price that valued the Brazilian subsidiary at $1.35 billion – a transaction that caused Parmalat’s stock to soar. However, there was no economic substance to the transaction. Not only did Parmalat promise to buy out the “investors” at a premium if the
Brazilian operation had not been taken public by year-end 2003, it also secretly provided the down payment money ($8.25 million) to the supposed buyers, by clandestinely transferring that money to the buyers via secret Bank of America and Citigroup transfers. Bank of America also sold over $750 million in worthless Parmalat bonds to U.S. investors via false and misleading materials – deals managed by Luca Sala, the Bank of America executive who was in charge of the Parmalat relationship and who has now been arrested for his participation in the scheme, having admitted that he took $27 million in bribes from Parmalat – monies diverted to him out of the Parmalat bond sales Bank of America managed for Parmalat here in the U.S.
21. During 2002, defendants Tanzi, Tonna, Zini, Grant Thornton and Deloitte & Touche realized that despite the Company’s publicly reported strong operating performance and healthy balance sheet, in reality, Parmalat was, in fact, teetering on the edge of a financial collapse due to huge operating losses and excessive amounts of debt – requiring them to concoct some asset to claim they “invested” Parmalat’s hundreds of millions of dollars of phony profits in, in order to avoid revealing that Parmalat’s hundreds of millions in previously reported profits did not actually exist
- 14 - and that it had no liquidity. Zini together with Tanzi, Tonna, Deloitte & Touche and Grant Thornton caused Parmalat to record that it had transferred more than $625 million to a Cayman Islands investment fund named Epicurum via Parmalat’s recently created subsidiary, Bonlat Financing Corp.
This was a complete contrivance and faked transaction. No money was actually transferred and
Epicurum was a shell entity, operated out of Zini’s Park Avenue office in New York City.
22. During 1Q 03, Parmalat, Grant Thornton and Deloitte & Touche utilized forged documents confirming the liquid assets purportedly deposited in Bonlat’s $4+ billion Bank of
America account and other forged third-party confirmations relating to sham transactions totaling hundreds of millions of dollars as part of its FY 02 audit of Bonlat and 17 other Parmalat subsidiaries. During 2002, Grant Thornton also accepted Zini’s, Tonna’s and Tanzi’s oral promises that Bonlat’s purported $625 million Epicurum “investment” was made on an arm’s-length basis.
Grant Thornton ostensibly relied on the “arm’s-length” nature of Parmalat’s $625 million Epicurum
“investment,” even though Grant Thornton never spoke with or even attempted to speak with anyone at Epicurum – which, in fact, did not exist. Rather, Grant Thornton agreed that it was an arm’s- length investment based upon the fact that when the names of the directors of Epicurum were read to
Grant Thornton, they did not “sound Italian.” Grant Thorton warned Deloitte & Touche of this extremely unusual and very dangerous situation. The two firms agreed not to press this sensitive issue.
23. In mid-2003 – in order to try to shield his family from the impending collapse of
Parmalat, which he knew was increasingly likely – Tanzi, working with Deutsche Bank, secretly put in place a hedge or “put” on the Tanzi family’s (La Coloniale) Parmalat holdings – a collar – which amounted to a secret insider sale of a substantial portion of Tanzi’s holdings.
- 15 - 24. In the summer of 2003, as Parmalat’s internal finances continued to deteriorate dramatically and it was increasingly desperate for cash, Morgan Stanley worked with Parmalat to sell $384 million in Parmalat bonds to Nextra, Inc., the money management arm of a large Italian bank, in a private placement. The sale, which was publicly disclosed, stated that the interest rate on the bonds was 3.05% over Eurobor, a very favorable rate for Parmalat, indicating that sophisticated buyers of Parmalat debt, entitled to do due diligence into its finances, were willing to lend it money at prime interest rates. However, as Morgan Stanley knew, this was false and misleading, as
Parmalat in a secret side letter had agreed to pay a higher interest rate. Tanzi has admitted to prosecutors that Parmalat declared a lower interest rate than it was actually paying so that markets would not figure out that Parmalat was desperate for cash – “If such information had been revealed to the market, it would have emerged that we were in a difficult financial situation,” Tanzi has admitted.
25. During the first week of December 2003, in a last desperate attempt to prevent the public disclosure of Defendants’ fraud, Tanzi and his inept son, Stefano Tanzi, arranged a secret meeting in New York City to discuss a possible leveraged buy-out of Parmalat by a major U.S. investment firm, the Blackstone Corp. However, in the New York City meeting, the young son,
Stefano Tanzi, made the mistake of telling someone outside the family what he was thinking – that, in fact, the assets on the Company’s balance sheet as publicly reported were overstated by billions of dollars. Quickly, rumors began to circulate that even though Parmalat purportedly had billions of dollars of liquid assets on hand, Parmalat would be unable to make a required payment of $400 million to repurchase a purported minority interest in its Brazilian operation and/or extinguish $187 million of outstanding bond debt coming due in early December 2003.
- 16 - 26. By late December 2003/early January 2004, it was revealed that almost 40% of
Parmalat’s entire assets which were purportedly held in a bank account at Bank of America did not exist and that the $625 million of Parmalat’s cash purportedly invested in a liquid investment fund in the Cayman Islands could not be obtained. The Company’s senior executives were ousted as it was revealed that they had manipulated the Company’s income statements and balance sheet for more than a decade by using off-shore shell companies, SPEs, forged documents and sham transactions; that the Defendants destroyed relevant evidence by, among other things, using a hammer to destroy a computer which contained incriminating data; that Parmalat was insolvent; and that many of
Parmalat’s senior insiders, auditors and lawyers, including certain of the Defendants, had been taken into custody in connection with one of the worst financial frauds ever perpetrated.
27. Then the house of cards collapsed. In December 2003, Parmalat vaporized.
Parmalat’s stock collapsed, its credit rating was downgraded to “junk” and it went bankrupt, as it was revealed and investors realized that the huge profits Parmalat had reported over the past several years had been grossly inflated and falsified, that Parmalat had created billions of dollars of false assets and hidden billions of dollars of debt that should have been reported on Parmalat’s balance sheet and that Parmalat had misrepresented the current success and future prospects of its businesses and that Defendants had destroyed massive amounts of evidence to try to cover up their scheme.
28. The scheme to defraud Parmalat investors was extraordinary in its scope, duration and size. Billions of dollars in phony profits were reported. Billions of dollars of debt was hidden.
Parmalat’s shareholders’ equity was overstated by billions of dollars. This was accomplished over a multi-year period through numerous manipulative devices and contrivances and misrepresentations to investors in Parmalat releases and financial statements utilized to raise billions of dollars of new capital which was indispensable to keep Parmalat afloat. This fraudulent scheme could not have
- 17 - been and was not perpetrated only by Parmalat and its insiders. It was designed and/or perpetrated only via the active and knowing involvement of Parmalat’s counsel, Zini, Parmalat’s accounting firms, Grant Thornton and Deloitte & Touche, and Parmalat’s banks, including Citigroup, Deutsche
Bank and Bank of America. Each of these actors directly violated the securities laws as primary violators and played an important role in the fraudulent scheme and wrongful course of business complained of.
29. This frenzy of fraud created enormous financial benefits for the participants. In addition to the billions of dollars of capital Parmalat was able to raise during the Class Period to sustain Parmalat’s operations, hundreds of millions of dollars of interest, underwriting, consulting and advisory fees were generated for Parmalat’s bankers, the accountants received hundreds of millions of dollars of consulting and auditing fees, Zini received over $100 million in legal fees, and
Parmalat’s top insiders pocketed over $1 billion.
30. At end of the day, the Parmalat fiasco represents a massive wealth transfer from public investors, including institutional investors and pension funds, to corporate insiders, Wall
Street bankers and the accounting and legal professionals who perpetrated the fraud. The graphic that follows outlines these sordid events:
- 18 - - 19 - JURISDICTION AND VENUE
31. The claims asserted herein arise under and pursuant to §§10(b) and 20(a) of the
Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule l0b-5 promulgated thereunder by the SEC
[17 C.F.R. §240.l0b-5].
32. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.
§§1331 and 1337 and §27 of the Exchange Act [15 U.S.C. §78aa].
33. In connection with the acts alleged in this complaint, Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets.
34. This Court has subject-matter jurisdiction over the claims of all class members, including those living outside of the United States, that purchased Parmalat securities, either in or outside the United States, because of the facts alleged in this section and elsewhere in this complaint.
35. Parmalat conducted a very substantial part of its business here in the United States.
In fact, one of the primary objectives of Parmalat’s vast expansion-by-acquisition plan during the late 1990s and early 2000s was to expand into the United States by acquiring such businesses as
Farmland, New Atlanta and Sunnydale Farms Dairies (milk, ice cream and other dairy products),
Black Diamond Cheese (cheeses) and MA Holdings (Archway, animal and private label cookies).
By 1997, Parmalat’s acquisition program focused increasingly on the United States, as the following chart indicates:
Year Acquisition Country Activity
1997 Dasi Corporation USA Dairy
1998 SunnyDale USA Dairy
Clinton/Kinnet/Welsch Farm USA Milk/Dairy
- 20 - 1999 Farmland Dairies LLC USA Dairy
Dasi of Alabama USA Dairy
2000 MA Holdings USA Biscuits
Delicious Brands USA Bakery
Netgrocer.com USA E-commerce
Transora.com USA E-commerce
36. It was an essential element of Defendants’ fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Parmalat’s securities to raise billions of dollars of new capital by selling bonds in the United States and elsewhere via Parmalat’s falsified financial statements to fund Parmalat’s expansion into the United States.
37. By 2003, Parmalat, which operated in the United States through Parmalat USA and
Parmalat North America operations, had over 3,100 employees in the United States and did $5 billion in annual business here, with plants in Decatur, Ala.; Atlanta, Ga.; Grand Rapids, Mich.;
Wallington, NJ; West Caldwell, NJ; Brooklyn, NY; Battle Creek, Mich.; and Ashland, Ohio. In
2001, Parmalat described itself as “a US $7 billion company,” and stated that “the Company’s strategic development in this [dairy] sector is thus concentrated on the East Coast and it is especially strong in New York’s metropolitan area, where it holds 50% of the market.”
38. The SEC has sued Parmalat for violations of the United States securities laws in this district, alleging substantial illegal conduct here in the United States, including the sale of billions of dollars of Parmalat bonds to US investors via “road shows” in the United States whereby Tonna and
Tanzi disseminated false and misleading information about Parmalat, its businesses and its financials, both orally and by distributing Parmalat’s false financial statements and releases.
- 21 - Securities and Exchange Commission v. Parmalat Finanziaria SpA, No. 03 CV 10266 (S.D.N.Y.), alleges that Parmalat engaged in “one of the largest and most brazen corporate financial frauds in history” here in the United States. Also, several major Parmalat entities/subsidiaries, including
Parmalat USA Corp., Milk Products of Alabama LLC and Farmland Dairies LLC, have filed for bankruptcy here in the Southern District of New York.
39. Parmalat sold at least $5 billion – and likely as much as $8 billion – in debt securities to investors located in the US – mostly institutional investors. According to The New York Times,
“the Company sold more than 80% of its outstanding bonds to American investors.”
40. The fraudulent scheme complained of was centralized in substantial part in New York
City, where Gian Paolo Zini (Zini & Associates), Citigroup and Bank of America – all key participants in the scheme – have offices and took important and substantial steps to facilitate and further the fraud.
41. In fact, so extensive were the activities of the schemers here in the United States, that in 1998 or 1999, Zini (who had been Parmalat’s head lawyer at a Milan, Italy-based law firm for some years) was sent to the United States by Tanzi to open a law office at 460 Park Avenue to control and implement the scheme – a location selected because of the key importance of New York as the world’s financial center to the ongoing scheme and because the office was physically very close to Citigroup headquarters in New York City, enabling Zini to quickly meet personally with
Citigroup officials. Tonna, Parmalat’s CFO for many years, has told criminal investigators that Zini was “at the center of Parmalat’s financial scheme” and was one of its “masterminds.”
42. Zini’s only client of any significance was Parmalat and entities he and Parmalat created to implement and facilitate the fraud. According to former employees, Zini’s New York
- 22 - office – which had 20 lawyers – was a “legal factory to produce documents and manage offshore transactions for Parmalat.”
43. Zini was used by the schemers for several key functions. For instance, Zini acted as the key point of contact between Citigroup and Parmalat – with Zini frequently shuttling between his office at 460 Park Avenue and Citigroup’s headquarters at 53rd and Lexington Avenues to deal with the illicit Parmalat and Citicorp deals, as well as fund transfers which were key to the continuation of the scheme. Parmalat and the illicit subsidiaries Zini established and operated regularly transferred millions of dollars from Bank of America accounts in New York to a Zini-controlled bank account with Citigroup in New York and other Citigroup accounts in London.
44. Zini, from and in New York, also created the fictitious and fraudulent Epicurum entity – supposedly a Cayman Islands investment fund which held over €500 million of Parmalat’s liquid funds. Zini not only set up and maintained the fictitious Epicurum entity from his New York operation, but he also assured the investment community in November 2003 from there that there was no reason for investors to be worried about the liquidity of the fund – just weeks before it was revealed that the fund – and Parmalat’s claimed investment in it – was a complete fiction.
45. When Zini learned that criminal authorities and securities regulators were coming onto the massive Parmalat fraud in November 2003-December 2003, he ordered and then oversaw a massive effort to destroy evidence in New York City of the fraudulent scheme and his participation in it. Huge amounts of documents were shredded and/or removed and discarded at and from Zini’s
Park Avenue office, while electronically stored data was erased or transferred to storage devices which were then removed and hidden or destroyed. Zini has been arrested for his conduct and is currently in prison.
- 23 - 46. Parmalat, with the active participation of Tanzi and Tonna and Bank of America and
Citigroup, actively marketed and sold Parmalat securities in the United States and diverted $27 million of the bond sale proceeds to Bank of America executive Sala as his pay-off for helping to orchestrate the scheme. In order to offer and sell these Parmalat securities in the United States, the schemers arranged for “road shows,” i.e., visits to major US cities to meet with institutional investors and try to sell the bonds to them. During these road shows, Tanzi, Tonna and Zini and representatives of Bank of America who participated in the road shows distributed false and misleading information about Parmalat to US investors.
47. In addition, Parmalat’s ADR securities (American Depository Receipts representing
Parmalat’s common shares) were traded here in the US in the over-the-counter market. The price of these ADRs was artificially inflated throughout the Class Period and purchasers thereof were damaged thereby.
48. Citigroup and Bank of America knowingly and actively participated in and furthered the fraudulent scheme and course of business that operated as a fraud and deceit on purchasers of
Parmalat’s securities, by taking actions here in the United States that were key to the continuation of the scheme.
49. Citigroup and Bank of America provided extensive banking services for Parmalat, including transferring funds between Parmalat entities to further and cover up the fraudulent and manipulative accounting practices of Parmalat, by structuring and forming bogus and manipulative transactions to falsify Parmalat’s financial condition by artificially inflating its reported profits and hiding its true debt levels and by selling Parmalat’s securities to investors in the United States.
50. One major fraudulent and manipulative transaction facilitated by Citigroup was known as “Buconero.” In late 1999, Citigroup and Parmalat formed a Delaware entity by which
- 24 - they would have Citigroup funnel (loan) money to Parmalat, but disguise the loans as investments in
Parmalat subsidiaries. Because of the falsified financial condition of Parmalat, the Citigroup and
Parmalat personnel involved in these transactions called this entity “Buconero,” which is Italian for
“black hole.” During 1999-2001, Citigroup “invested,” i.e., advanced, over €117 million to
Buconero, which then upstreamed the money to Parmalat. In fact, the transactions were loans by
Citigroup to Parmalat and were understood to be so by the participants. However, to conceal the fact that the transactions were loans, i.e., Parmalat debt, the deal was structured as an investment by
Citigroup in Buconero and the interest payments made to Citigroup on the loan were concealed as
“minority interest payments.”
51. From 1995 forward, Citigroup also engaged in the “Eureka Securitization” transaction by which Citigroup facilitated Parmalat obtaining $350 million in financing based on what Citigroup knew were phony, duplicate supermarket invoices. However, Citigroup avoided any financial risk or loss to itself on these bogus and manipulative transactions by “laying off” of advances on third parties here in the United States, i.e., secretitizing the receivables, while raking off lucrative fees for itself as part of the deal.
52. All during the Class Period, Citigroup was active in inflating and manipulating the price of Parmalat’s equity securities and marketing new bonds of Parmalat to raise the new capital to keep the Parmalat “Ponzi scheme” going.
53. Parmalat’s ADRs traded in the over-the-counter market here in the United States.
Citigroup was Parmalat’s ADR agent, responsible for issuing those ADRs and making a market in those ADRs, as well as Parmalat’s common stock – thus purchasing and selling Parmalat’s equity securities on a daily basis.
- 25 - 54. Key to the continuation of the Parmalat scheme was the constant raising of new capital to fund the Ponzi scheme since Citigroup knew Parmalat’s actual business operations were losing large amounts of money – over €300 million per year. During the Class Period, Bank of
America acted as an underwriter or placement agent of at least $750 million in worthless Parmalat debt securities in the United States.
55. Citigroup also purchased a 24% interest in Parmalat Canada at an over-inflated price to inflate Parmalat’s balance sheet, assets and shareholder equity. This investment gave Citigroup further information as to the true falsified financial condition of Parmalat. Citigroup later caused
Parmalat to repurchase its 24% interest in Parmalat Canada to protect Citigroup from any loss in a phony non-arm’s-length transaction.
56. Venue is proper in this District pursuant to §27 of the Exchange Act, and 28 U.S.C.
§1391(b) as Defendants, including Citigroup, Bank of America, Deutsche Bank, Buconero, Zini &
Associates and Deloitte & Touche and Grant Thornton are located in and/or conduct substantial business in this District. Many of the acts and practices made in furtherance of Defendants’ scheme and complained of herein occurred in substantial part and/or had an effect in this District, including the creation and implementation of the manipulative devices and contrivances and the sale of
Parmalat securities.
THE PARTIES
Plaintiffs
57. (a) Plaintiff Southern Alaska Carpenters Pension Fund (a.k.a. Southern Alaska
Carpenters Retirement Trust), as set forth in the certification previously filed with the Court, incorporated by reference herein, purchased Parmalat securities at artificially inflated prices during the Class Period and has been damaged thereby.
- 26 - (b) Plaintiff Fondazione Italo Monzino, as set forth in the accompanying certification, incorporated by reference herein, purchased Parmalat securities from Citigroup at artificially inflated prices during the Class Period and has been damaged thereby.
(c) Plaintiff Renato Esposito, as set forth in the accompanying certification, incorporated by reference herein, purchased Parmalat securities at artificially inflated prices during the Class Period and has been damaged thereby.
Parmalat
58. Parmalat Finanziaria SpA is a worldwide producer of dairy and vegetable products and conducts business through almost 200 operating and financing subsidiaries, including at least 22 wholly owned subsidiaries which are incorporated in and/or located in the United States and defendant Bonlat Financing Corporation, a Cayman Islands corporation (collectively, “Parmalat”).
As detailed below, Parmalat Finanziaria SpA is 50.68% owned by defendant Coloniale SpA, which in turn is owned and/or controlled by defendant Calisto Tanzi and its Chairman Fausto Tonna.
Coloniale S.p.A. Public Tanzi Family Shareholders Ň Ň Ň 50.68% Ň 49.32% Ň Ň
Parmalat Finanzaria S.p.A.
Because it is bankrupt, Parmalat is not named as a defendant.
Defendants
59. Defendant Calisto Tanzi (“Tanzi”) served at all relevant times prior to his December
2003 “resignation” and subsequent incarceration in the San Vittore jail as Chairman, Managing
Director and a member of the Executive Committee of Parmalat. Tanzi is a controlling shareholder of defendant Coloniale SpA, which owns 50.68% of the equity of Parmalat. Tanzi controls
- 27 - Parmatour, the Tanzi family’s holiday holdings company as well as other Tanzi family ventures, including SATA and Holding Italiana Turismo, to which hundreds of millions of dollars were diverted as part of Defendants’ fraudulent scheme to loot Parmalat. Tanzi is liable under §§10(b) and 20(c) of the Exchange Act.
60. Defendant Fausto Tonna (“Tonna”) served at relevant times prior to his February
2003 resignation as CFO and his December 2003 resignation from the Board as the CFO, director and a member of the Executive and Audit Committees of the Company. Tonna is also the Chairman of the Board of defendant Coloniale SpA. Tonna is also a director of Bonlat Financing Corporation.
61. Defendants Tanzi and Tonna are referred to herein as the Individual or Parmalat
Defendants. Because of the Individual Defendants’ positions with the Company, they had access to the information about its business, operations, financial statements, and present and future business prospects via access to internal corporate documents (including the Company’s operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of
Directors meetings and committees thereof and via reports and other information provided to them in connection therewith. Each of the Individual Defendants participated in the drafting, preparation, and/or approval of the various reports and other communications complained of herein and were aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom, and were aware of their materially false and misleading nature. Because of their Board membership and/or executive and managerial positions with Parmalat, each of the Individual Defendants had access to the adverse undisclosed information about Parmalat’s business prospects and financial condition and performance as particularized herein and knew (or recklessly disregarded) that these
- 28 - adverse facts rendered the representations made by or about Parmalat and its business materially false and misleading.
62. As officers and controlling persons of a publicly held company whose securities were traded in efficient markets on several exchanges worldwide, including the Luxemburg Stock
Exchange, the Mercato Telematico Azionario, the Milan Stock Exchange and in the United States in the form of American Depository Receipts (“ADRs”), the Individual Defendants each had a duty to disseminate prompt, accurate and truthful information with respect to the Company’s financial condition and performance, growth, operations, financial statements and present and future business prospects, and to correct any previously issued statements that had become materially misleading or untrue, so that the market price of the Company’s securities would be based upon truthful and accurate information.
63. Defendant Bonlat Financing Corporation (“Bonlat”) is a Cayman Islands-based subsidiary of Parmalat. Defendant Bonlat is liable under §10(b) of the Exchange Act.
64. Defendant Coloniale SpA (“Coloniale”) is the holding company owned and controlled by defendant Tanzi and his family. Coloniale is liable under §§10(b) and 20(a) of the
Exchange Act.
65. Coloniale is the controlling shareholder of Parmalat as it owns 50.68% of the equity of Parmalat. Coloniale and its affiliates were participants in Defendants’ fraudulent scheme and wrongful course of business and were the recipients of hundreds of millions of dollars diverted from
Parmalat pursuant thereto.
66. Defendant Citigroup, Inc. (“Citigroup”) is an integrated financial-services institution based in New York City. Citigroup is liable under §§10(b) and 20(a) of the Exchange Act.
- 29 - 67. Citigroup and its directly and indirectly owned and/or controlled subsidiaries, including Buconero LLC, Citibank, N.A. and Citicorp, are collectively referred to herein as
“Citigroup.” Through its subsidiaries and divisions, Citigroup provides strategic and financial- advisory services and participated in a scheme to defraud and engaged in acts and a course of business that operated as a fraud or deceit upon purchasers of Parmalat securities. Citigroup directly and indirectly controlled and directed the acts of its employees and subsidiaries that participated in the fraud. Citigroup, through its Citibank, N.A. subsidiary headquartered in NewYork City, is also the depositary which, during the Class Period, served as the administrator of the Parmalat ADR
Program providing stock transfer services, dividend distribution services and registry services in connection with the trading of Parmalat ADRs.
68. Defendant Buconero LLC (“Buconero”) is a Delaware LLC that was formed, owned and controlled by Citigroup. Buconero is liable under §10(b) of the Exchange Act for its participation in defendants’ scheme to defraud, which operated as a fraud or deceit upon purchasers of Parmalat securities. Buconero was formed on or about December 9, 1999 by Citigroup, for the sole purpose of manipulating Parmalat’s financial statements and concealing from Parmalat investors the true nature of the financial arrangement between Citigroup and Parmalat.
69. Defendant Bank of America Corporation (“BankAmerica”) is an integrated financial services institution based in the United States. BankAmerica is liable under §§10(b) and 20(a) of the
Exchange Act.
70. BankAmerica and its directly and indirectly owned and/or controlled subsidiaries are collectively referred to herein as “BankAmerica.” Through its subsidiaries and divisions,
BankAmerica provides strategic and financial-advisory services and participated in a scheme to defraud and engaged in acts and a course of business that operated as a fraud or deceit upon
- 30 - purchasers of Parmalat securities. BankAmerica directly and indirectly controlled and directed the acts of its employees and subsidiaries that participated in the fraud.
71. Defendant Morgan Stanley & Co. (“Morgan Stanley”) is an investment bank based in the United States. Morgan Stanley is liable under §10(b) of the Exchange Act.
72. Morgan Stanley and its directly and indirectly owned and/or controlled subsidiaries are collectively referred to herein as “Morgan Stanley.” Through its subsidiaries and division,
Morgan Stanley provides strategic and financial-advisory services and participated in a scheme to defraud and engaged in acts and a course of business that operated as a fraud or deceit upon purchasers of Parmalat securities. Morgan Stanley directly and indirectly controlled and directed the acts of its employees and subsidiaries that participated in the fraud.
73. Defendant Deutsche Bank AG is an integrated financial services. Deutsche Bank is liable under §§10(b) and 20(a) of the Exchange Act.
74. Deutsche Bank and its directly and indirectly owned and/or controlled subsidiaries are collectively referred to herein as “Deutsche Bank.” Through its subsidiaries and divisions, Deutsche
Bank provides strategic and financial-advisory services and participated in a scheme to defraud and engaged in acts and a course of business that operated as a fraud or deceit upon purchasers of
Parmalat securities. Deutsche Bank directly and indirectly controlled and directed the acts of its employees and subsidiaries that participated in the fraud.
75. Defendants Gian Paolo Zini and his law firm, Zini & Associates, P.C. (collectively,
“Zini”), are based in New York City. Zini is liable under §10(b) of the Exchange Act.
76. Zini served as Parmalat’s outside counsel during the Class Period. Zini also served as counsel to the Tanzi family controlled companies, including Parmatour and Coloniale. Parmalat was one of Zini’s largest clients. Zini received millions of dollars during the Class Period for its
- 31 - participation in the fraudulent scheme alleged herein, including the structuring and implementation of certain of the manipulative devices and contrivances utilized by Defendants, including Epicurum.
77. Zini was a central actor and primary participant in Defendants’ scheme by, among other things, participating in the structuring of partnerships and/or creation of false documentation, which acts were perpetrated in order to conceal the true status of Parmalat’s operations, knowing these manipulative devices and contrivances were being used to falsify Parmalat’s reported financial results and financial condition. These manipulative devices and contrivances were designed to and did artificially boost Parmalat’s reported profits and assets by: (i) artificially inflating Parmalat’s reported operating performance; (ii) hiding billions of dollars of debt obligations that belonged on
Parmalat’s balance sheet; and (iii) depicting billions of dollars of fictitious assets that did not exist.
78. Defendant Deloitte Touche Tohmatsu, headquartered in New York City, is a professional services organization with member firms around the world, including members in the
United States, Deloitte & Touche LLP, and Italy, Deloitte & Touche SpA (collectively, “Deloitte &
Touche”). Deloitte & Touche is liable under §§10(b) and 20(a) of the Exchange Act.
79. The leadership structure of Deloitte & Touche is centralized with a global Chief
Executive Officer and a global Board of Directors. The Board of Directors of Deloitte & Touche is the highest governing body of the worldwide organization. Deloitte & Touche markets itself as a single global organization, describing itself as follows:
Deloitte Touche Tohmatsu is an organization of member firms devoted to excellence in providing professional services and advice. We are focused on client service through a global strategy executed locally in nearly 150 countries. With access to the deep intellectual capital of 120,000 people worldwide, our member firms (including their affiliates) deliver services in four professional areas: audit, tax, consulting, and financial advisory services. Our member firms serve over one-half of the world’s largest companies, as well as large national enterprises, public institutions, and successful, fast-growing global growth companies.
- 32 - 80. On its Web site Deloitte & Touche discusses the importance of its name Deloitte in the worldwide marketplace:
One word says it all
Beginning 1 October 2003, our organization will be recognized in the marketplace by the single brand name “Deloitte.” The legal name of our global organization will continue to be Deloitte Touche Tohmatsu, and the legal names of our local organizations will largely remain the same.
It is the name by which we are most widely known around the world and the name to which we are most often abbreviated.
It illustrates the completeness of the Deloitte proposition and our integrated approach to solving clients’ problems.
Executives are facing more complex issues than ever before and have to respond to a greater number of constituents in a shorter time frame. Deloitte brings a unique and more comprehensive way of looking at every issue and understands the broader implications of each business decision.
Our ability to collaborate more effectively, combined with our broad range of services, enables our member firms to create the more complete solution.
To learn more about Deloitte and what we can do for you, please contact your nearest Deloitte office. You can also use the Global Site Selector at the top of this page to navigate directly to one of our member firms.
81. Deloitte & Touche reports revenue for the organization on a combined basis. In a release dated October 1, 2003, Deloitte & Touche stated:
Deloitte Touche Tohmatsu, the global professional services organization, announced today its tenth consecutive year of annual growth, with combined worldwide revenues from its member firms totaling US$15.1 billion, a 20.8 percent increase over FY2002 revenues of US$12.5 billion. Additionally, the global organization announced the launch of the new brand name “Deloitte” to highlight the value of its multidisciplinary organization. Today’s change means that the firms known in various national and global markets as Deloitte Touche Tohmatsu, Deloitte & Touche, and Deloitte Consulting, while retaining their local legal names, will now be known as the brand “Deloitte.”
William G. Parrett, global chief executive officer, said, “The FY2003 results are a testament to our people’s dedication and commitment to serving our clients, their stakeholders, and the capital markets. We accomplished this growth in a year that witnessed sweeping regulatory changes around the world – changes that altered the way our member firms conduct our business.” - 33 - Deloitte & Touche has also publicly stated that its “global organization” decided to retain its consulting arm of the business, further confirming that decisions affecting Deloitte & Touche are made on a centralized basis and followed by its member firms.
82. Deloitte & Touche was engaged by Parmalat to provide independent auditing and/or consulting services to Parmalat, including the preparation, examination and/or review of Parmalat’s consolidated financial statements for FY 99-FY 02, which financial statements were disseminated to investors in the United States and were included in offering memoranda and other selling documents used by Defendants to raise over $5 billion during the Class Period via the sale of Parmalat securities for which Deloitte & Touche received millions of dollars in fees. Deloitte & Touche was engaged to and performed these services so that Parmalat’s financial statements would be presented to, reviewed and relied upon by securities purchasers, governmental agencies, the investing public and members of the financial community. As a result of the services it rendered to Parmalat, Deloitte & Touche’s representatives were frequently present at Parmalat’s corporate headquarters and financial offices between 1999 and 2003 and had continual access to Parmalat’s confidential corporate financial and business information, including Parmalat’s true financial condition, financial statements and business problems which information Deloitte & Touche was aware of and/or recklessly disregarded.
Deloitte & Touche actively participated in the presentation, review and issuance of Parmalat’s false financial statements.
83. Defendant Grant Thornton International, an Illinois corporation with headquarters in
London, England, is an organization dedicated to providing accounting services to middle-market public and private clients with member firms in approximately 100 countries, including its U.S. member, Chicago-based Grant Thornton LLP, its Italian member Grant Thornton SpA, and its
- 34 - Singapore member, Foo Kan Tan Grant Thornton (collectively, “Grant Thornton”). Grant Thornton is liable under §§10(b) and 20(a) of the Exchange Act.
84. Grant Thornton markets itself as a global organization. Grant Thornton issued a release on August 13, 2003, which stated:
Grant Thornton is first global accounting organization to file with PCAOB
Grant Thornton, the leading global accounting, tax and business advisory firm dedicated to serving the needs of mid-size companies, filed today the first Public Company Accounting Oversight Board (PCAOB) registration application of any major international accounting organization.
“We are committed to restoring public trust in the audit process and the accounting profession, and I am proud that Grant Thornton is the first major global organization to have taken this step toward that goal,” said Grant Thornton Chief Executive Officer Edward Nusbaum.
* * *
Grant Thornton is the leading global accounting, tax and business advisory firm dedicated to serving the needs of middle-market companies. Founded in 1924, Grant Thornton serves public and private middle-market clients through 50 offices in the United States, and in 585 offices in 110 countries through Grant Thornton International. Grant Thornton’s Web site address is www.grantthornton.com.
85. Grant Thornton International requests its members to comply with the procedures, policies and practices it sets forth. In fact, Grant Thornton International performs a review of its members at least every three years to ensure their compliance with such procedures, policies and practices. A review of Grant Thornton SpA is scheduled to take place in 2004.
86. Grant Thornton provides accountancy, audit and business advice around the world, which services generate approximately $2 billion per year in fees, of which the U.S. unit’s shares were approximately $460 million. Grant Thornton audited Parmalat’s financial statements prior to
1999, and beginning in 1999 was engaged by Parmalat to provide auditing services, including the preparation, examination and/or review of the financial statements of Bonlat and at least 17 other
Parmalat subsidiaries, which financial data Grant Thornton knew was being disseminated to
- 35 - investors and included in offering memoranda and other selling documents used to raise over $5 billion from unsuspecting investors via the issuance of newly issued securities for which Grant
Thornton received millions of dollars in fees. Grant Thornton performed these services so that
Parmalat’s consolidated financial statements would be presented to securities purchasers, governmental agencies, the investing public and members of the financial community. As a result of the services it rendered to Parmalat, Grant Thornton’s personnel were present at Parmalat’s corporate headquarters and financial offices in Italy and/or in the United States frequently between
1999 and 2003 and had continual access to Parmalat’s confidential corporate financial and business information, including Parmalat’s false financial statements and true financial condition. Grant
Thornton actively participated in the preparation, review and issuance of Parmalat’s false financial statements and fictitious financial documents, including false audit opinions and false confirmation requests, including those relating to Bonlat used in connection with Grant Thornton’s FY 02 audit of
Bonlat and purportedly sent to BankAmerica on December 20, 2002, and to seven other third parties on or about January 31, 2003.
87. Camfield Pte. Ltd is a Singapore-based holding company, which has ties to Parmalat.
Camfield also has ties to Grant Thornton. The Singapore address and phone number for Camfield are the same as Grant Thornton’s Singapore affiliate, Foo Kan Tan Grant Thornton. Additionally,
Camfield’s company secretary, Lawrence Kwan, is an employee of Kon Choon Kooi, which is an affiliate of Foo Kan Tan Grant Thornton.
88. In a press release dated December 31, 2003, Grant Thornton International made the following announcement concerning the ongoing investigation:
31 December 2003 – STATEMENT FROM GRANT THORNTON INTER- NATIONAL REGARDING GRANT THORNTON SpA
Grant Thornton International announced today (31 December 2003) that, following its request, Grant Thornton SpA, its Italian member firm, took the actions - 36 - outlined below after the arrest by the Italian authorities of two Grant Thornton SpA senior executives in relation to the Parmalat matter.
x Grant Thornton SpA has accepted the resignation of Lorenzo Penca as chairman of the Italian member firm
x The two deputy chairmen, Carlo Andreis and Contardino Mangiarotti will operate as acting co-chairmen until a new chairman is appointed shortly
x Lorenzo Penca and Maurizio Bianchi have both been suspended with immediate effect from all responsibilities for an indefinite period
Grant Thornton International is continuing, with the involvement of legal counsel, its investigation into the Parmalat matter and its review of Grant Thornton SpA.
David McDonnell, chief executive of Grant Thornton International said: “Grant Thornton International has built a strong worldwide reputation over the years and I remain confident for the future. I would like to thank all our clients from around the world who have sent us messages of support and confidence at this difficult time and for the dedication and support of staff working for all Grant Thornton International member firms around the network.”
PLAINTIFFS’ CLASS ACTION ALLEGATIONS
89. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a class consisting of all those who purchased or otherwise acquired the securities of Parmalat during the Class Period and who were damaged thereby.
Excluded from the Class are Defendants, the officers and directors of the Company, at all relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which Defendants have or had a controlling interest.
90. The members of the Class are so numerous that joinder of all members is impracticable. As of December 31, 2002, there were more than 700 million Parmalat shares and/or
ADRs issued and more than $5 billion face amount of Parmalat debt outstanding. Throughout the
Class Period, Parmalat securities were actively traded on the Luxemburg Stock Exchange, the
Mercato Telematico Azionario, the Milan Stock Exchange and in the United States in the form of
- 37 - ADRs, traded over the counter. While the exact number of Class members is unknown to plaintiffs at this time and can only be ascertained through appropriate discovery, plaintiffs believe that there are thousands of members in the Class. Record owners and other members of the Class may be identified from records maintained by Parmalat or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions.
91. Plaintiffs’ claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by Defendants’ wrongful conduct in violation of federal law that is complained of herein.
92. Plaintiffs will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in class and securities litigation.
93. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:
(a) Whether the federal securities laws were violated by Defendants’ acts as alleged herein;
(b) Whether statements made by Defendants to the investing public during the
Class Period misrepresented material facts about the business, operations and financial statements of
Parmalat; and
(c) Whether Defendants’ participation in the fraudulent scheme and course of business alleged herein took place as alleged and creates liability.
- 38 - DEFENDANTS’ SCHEME, WRONGFUL COURSE OF BUSINESS AND FALSE STATEMENTS
94. Parmalat is an international food and dairy company and was founded in 1961 by defendant Tanzi. Beginning in the late 1980s, defendants Tanzi and Tonna commenced a massive acquisition/roll-up scheme whereby Parmalat acquired dozens of existing food service businesses in
Europe, the United States and South America in an effort to portray Parmalat as a strong and growing company and to mask the substantial business reversals Parmalat was then experiencing at its Latin American operations. By using “creative” acquisition accounting and other artifices such as off-balance sheet accounting, SPEs and by otherwise falsifying financial records, Parmalat and its financial advisors were able to conceal Parmalat’s true operating performance and financial condition and portray the Company as one that possessed a healthy balance sheet and was generating strong operating profits and net income growth.
95. By 1998, Defendants began to have a difficult time concealing the truth about
Parmalat’s operating problems. Moreover, Parmalat’s capital requirements were increasing exponentially as Parmalat was not only generating poor operating performance, it was acquiring scores of diverse food companies across the globe. Defendants’ ability to conceal their fraud was further aggravated by new accounting rules which required Parmalat to replace its existing audit firm, Grant Thornton (which had audited Parmalat’s books for a decade), beginning with its FY 99 audit. Knowing this, defendants Tanzi, Tonna and Coloniale worked together with Grant Thornton to create additional subsidiaries which these defendants could use to execute sham transactions on a going forward basis which Parmalat was becoming increasingly reliant upon to post the net profit growth promised by Defendants. Importantly, new entities could, unlike Parmalat’s consolidated financial statements, continue to be audited by Grant Thornton.
- 39 - 96. On November 30, 1998, a news story appeared on the Dow Jones Newswire noting that Parmalat would generate return on capital of 20% within five years, a 30+% increase from current levels. The story detailed Parmalat’s FY 97 results and expected FY 98 performance and was “alive” in the market when the Class Period commenced on January 5, 1999. The story stated:
Dairy and food products group Parmalat Finanziaria SpA (I.PFS) expects stable operating profit in 1998 from 1997 despite a hefty set of acquisitions made during the latest year.
Parmalat Financial Director Fausto Tonna told analysts at [a] meeting here that the effects of its expansion weren’t as onerous as originally thought and thus wouldn’t weigh on operating profit.
Parmalat’s 1997 operating profit rose to ITL529 billion from ITL470 billion in 1996.
Over the next five years, Parmalat aims to improve its return on capital employed to 20% from 15%, Tonna also said.
97. On February 3, 1999, a news story titled “Parmalat to Buy Cirio Unit; 2nd Half
Pretax up 40%,” appeared on Bloomberg News stating:
Parmalat Finanziaria SpA, the world’s largest dairy company, said it will buy the dairy unit of its main Italian rival, Cirio SpA, for 780 billion lire ($458 million) in cash and assumed debt, consolidating its hold over the Italian market for milk, cheeses and yogurt.
Parmalat, which also implied second-half pretax profit rose 40 percent to 273 billion lire, said it plans to sell as much as 500 million euros ($565 million) in bonds convertible into common stock through Morgan Stanley Dean Witter & Co to finance the acquisition.
Parmalat has been accumulating large amounts of debt as it expands through acquisitions in Italy and abroad, consolidating its position as the world’s leading dairy company. In 1998 the company’s debt more than doubled to 3.4 trillion lire as it spent 1.6 trillion lire acquiring companies in eight different countries.
* * *
Parmalat said 1998 pretax profit rose at least 38 percent to “above 500 billion lire from 362 billion lire in 1997. In 1998, sales rose 38 percent to 9.8 trillion lire, though Parmalat’s profitability as a percentage of sales decreased slightly to 10.3 percent.
- 40 - In 1998, 29 percent of sales were in Europe, 27 percent in North America, 37 percent in South America and 7 percent in the rest of the world
98. On April 14, 1999, the Dow Jones Newswire carried a news story discussing the
Company’s FY 98 financial results, which stated:
Italian food and dairy group Parmalat Finanziaria SpA (I.PFS) said Wednesday that consolidated net profit in 1998 rose to ITL262 billion from ITL203 billion in the year earlier as revenues jumped to ITL9.833 trillion from ITL7.120 trillion.
Parmalat said operating profit rose to ITL719 billion in 1998, compared with ITL529 billion in the year earlier period.
Parmalat also said that net debt rose to ITL3.418 trillion from ITL1.555 trillion in 1997 due to significant acquisitions made during the course of the year.
The company said that if the full consolidation of its 1998 acquisitions could have been taken into account, 1998 revenues would have been ITL11.4 trillion.
In February 1998, Parmalat acquired U.S. dairy company Sunny Dale while in April, the company bought 51% of the company that controls the Brazilian Batavo brand of dairy products. In May 1998, Parmalat also acquired Belgorod, a Russian dairy company.
In June 1998, Parmalat bought a 63% interest in a South African dairy products company Bonnita Holdings Ltd.
In the same month, Parmalat bought Australian dairy concern National Foods Ltd. (A.NFD).
99. On or about April 22, 1999, Defendants caused Parmalat to issue a Notice of Annual
General Meeting. The Notice of Annual General Meeting was signed by defendant Tanzi and stated that Parmalat had posted FY 98 net profit of 262 billion lire and had shareholder equity as of
December 31, 1998 of 2.47 billion lire.
100. On or about October 15, 1999, Defendants caused Parmalat to distribute a report on the Company’s operations for the first half of 1999. The report stated:
- 41 - (a) Parmalat had posted purported “significant growth” for the first six months of
1999, including 30% growth in gross operating margin and 12% growth in pre-tax earnings over the corresponding period of 1998;
(b) As of June 30, 1999, Parmalat had (i) total liabilities and shareholders’ equity of €8.19 billion; (ii) total current assets of €3.83 billion; and (iii) total shareholder equity of €2.16 billion; and
(c) As to Grant Thornton, it “did not acquire knowledge of any significant variations or alterations that should be added” to Parmalat’s balance sheet or income statements for the first half of 1999.
101. On or about April 18, 2000, Defendants caused Parmalat to convene a press conference and announced a 28% increase in net profit for FY 99 as compared to FY 98.
Immediately thereafter, based upon representations by defendants Tonna and Tanzi:
(a) The Dow Jones Newswire reported:
Parmalat said earnings were in line with targets despite economic troubles in Brazil, where the company has large operations.
* * *
For 2000, Parmalat predicted flat internal revenue growth, but said further consolidation of newly acquired businesses will benefit earnings. Operating profitability should improve, Parmalat said.
Parmalat said sales volumes in the first few months of 2000 was in line with expectations in North America, Venezuela, Colombia, Chile, Australia and Italy. The drought, and consequent milk shortage, that has hit Uruguay and part of Argentina is being felt in its operations in other South American countries. Conversely, floods in South Africa are disrupting distribution, while sales volumes in Eastern Europe are higher than a year before.
(b) Bloomberg News disseminated a news story titled “Parmalat 1999 Profit Rose as Takeovers Lifted Sales,” which stated:
- 42 - Parmalat Finanziaria SpA, Italy’s largest dairy company, said 1999 profit rose 28 percent, boosted by revenue from the dairy business it bought from Cirio SpA and by other recent acquisitions.
Profit rose to 337 billion lire ($165 million), or 225.6 lire a share, from 262 billion lire, or 176.9 lire a share, in 1998. Sales rose 25 percent to 12.3 trillion lire. The company said it will pay a dividend of 22 lire a share, up from 20 lire a share last year.
“What made the sales go up so much is the first time consolidation of the milk business of Cirio,” said Beatrice Reich, an analyst at Bank Vontobel in Zurich. “Their growth is especially by acquisitions.”
The company’s earnings exceeded Reich’s full-year earnings estimate of 154 million euros.
Parmalat has boosted profit in recent years with takeovers such as that of rival Cirio’s dairy unit. In the second half of the year, the dairy and food company also benefited from gradual recoveries in Europe and South America, two of its main markets.
Parmalat is also pushing to cut costs at home, planning to reduce its Italian staff of 4,500 by about 14 percent, or 610 people through an early retirement plan, said Stefano Tanzi, an executive with the company.
“This will give us an advantage as we seek to boost our international competitiveness,” he said at a press conference.
Parmalat shares rose 0.04 euros, or 3.3 percent, to 1.16.
Parmalat also said its board will seek permission from shareholders to sell as much as 300 billion lire par value of additional stock and 500 billion lire of convertible bonds during the next five years.
Parmalat also plans to ask shareholders to agree to the creation of stock with a par value of as much as 300 billion lire to service a convertible bond it plans to sell. It didn’t give any details of the timing.
Parmalat could use the proceeds of the additional stock and bond sales for acquisitions or joint ventures, said Parmalat Chief Financial Officer Fausto Tonna.
102. On or about May 15, 2000, Defendants caused Parmalat to announce its results for 1Q
00, which confirmed:
Parmalat Finanziaria SpA, Italy’s largest dairy company, posted first-quarter earnings before interest, taxation, depreciation and amortization of 190.4 million
- 43 - euros ($174.5 million). The company did not provide comparable figures for the period last year.
Parmalat said earnings before interest and taxation amounted to 123.3 million euros, adding that it expects operating profit in 2000 to surpass that of last year.
Parmalat has bought several companies producing dairy and food products, including rival Cirio’s dairy unit, which increased the company’s earnings. Profit was also boosted by faster economic growth in Europe and South America, two of its main markets, which spurred demand for its goods.
“Sales in 2000 will benefit from the acquisitions that were carried out in 1999,” the company said.
The dairy and food producer said its board will seek permission from shareholders to sell as much as 300 billion lire par value of additional stock and 500 billion lire of convertible bonds during the next five years.
103. On or about September 12, 2000, Defendants caused Parmalat to issue a statement concerning Parmalat’s positive results for the first half of 2000, resulting in a Bloomberg News story titled “Parmalat 1st-Half Pretax Profit Rises 27% on Acquisitions,” which stated:
Parmalat Finanziaria SpA, the world’s largest dairy company, said first-half pretax profit rose 27 percent, boosted by acquisitions. It also announced a new purchase in the U.S.
Pretax profit rose to 167 million euros ($144 million) from 132 million euros as sales increased 17 percent to 3.5 billion. Parmalat said it agreed to buy MA Holding, a U.S. biscuit maker that produces the Mother’s and Archway brands, for $250 million.
“This purchase completes the baked-goods investment strategy” in North America, said Parmalat in a faxed statement. “It gives Parmalat a 10 percent share in the U.S. biscuit market.”
Parmalat hadn’t made any major acquisitions in the past 12 months after a buyout spree in which it acquired businesses including the dairy unit of its main Italian rival, Cirio SpA. The company has been seeking an acquisition outside of Italy, where it already gets about 70 percent of its sales.
Parmalat said it saw full-year operating sales in line with those in the first half.
- 44 - 104. On or about November 14, 2000, Defendants caused Parmalat to issue a Directors’
Report for 3Q 00 which included net operating profit of €139.77 million and total liquid assets of
€2.87 billion. The Directors’ Report stated:
Income Data
(thousand Euro) Third Quarter 2000 (1 July – 30 September) Sales 1,917,238 Other income 80,386 Production costs excluding (1,773,482) depreciation/amortization Gross operating margin (EBITDA) 224,142 Depreciation/amortisation (84,369) Adjusted net operating margin (EBIT) 139,773 Amortisation of price premium paid for the acquisition of subsidiary Parmalat spa (4,379) Financial income and charges (26,536) Result before adjustments to the value of financial assets, extraordinary income and charges, taxes and profit relating to minority interests 108,858 Gross operating margin/sales ratio 11.7% Net operating margin/sales ratio 7.3%
* * *
Net Financial Position
(thousand Euro) 30 September 2000 Bank and debenture loans Short term 787,760 Medium term 4,261,959 Total bank and debenture loans 5,049,719 Liquid Assets Short term 2,838,295 Medium term 38,275 Total liquid assets 2,876,570 Total borrowing net of available resources 2,173,149
* * *
Parmalat Finanziaria’s consolidated equity structure, as of 30 September 2000, showed total consolidated net equity, including pre-tax earnings for the period 1 January – 30 September 2000, amounting to ... 2,913 million euro .... It should be mentioned that the increase in consolidated shareholders’ equity also benefited from
- 45 - exchange gains arising from the positive trend in the main currencies of operation, which were posted as a variation to the “Consolidation reserve.” These positive variations could obviously be affected by future exchange fluctuations.
105. On or about March 30, 2001, Defendants caused Parmalat to issue a release detailing the Company’s FY 00 performance and containing Parmalat’s FY 00 financial statements. The release stated:
Parmalat Finanziaria – consolidated
The year 2000 saw the Parmalat Group achieve further growth, in part via completion of the acquisitions and expansion strategy adopted over recent years. This has allowed the Group to reinforce its position in major dairy product markets and extend its presence across all continents. 2000 also saw the Group strengthen its competitive position via the continued launch of new products that are better suited to meeting the growing demand for healthy food products from consumers.
The introduction of new products is proving to be the driving force behind a new phase of organic growth for Parmalat, following a decade of growth primarily as a result of acquisitions. In particular, sales of special milk products took off in Italy, where they represent 35% of UHT milk volumes, and saw growth in other countries around the world, following the launch of such products during the year.
Key Consolidated Results from Parmalat Finanziaria SpA for 2000
2000 1999 (millions of euro) Change Sales 7,349 + 15.6% Gross operating profit (EBITDA) 871 + 20.6% EBITDA margin (%) Net operating profit (EBIT) 544 + 17.7% EBIT margin (%) Net profit attributable to the Group 195 + 11.9% Cash flow (total profit plus amortisation and depreciation) 579 + 22.3% Total shareholders’ equity 2,643 + 6.2% Shareholders’ equity attributable to the Group 1,714 + 10.4%
* * *
Total shareholders equity (as per 31 of December, 2000) totaled ... 2,643 million euro. Minority interests amounted to ITL 1,799 billion or 929 million euro.
* * *
- 46 - Operating outlook
The performance of the Group’s sales during early 2001 was substantially in line with projections.
The Group is proceeding with its restructuring of the businesses acquired in the various countries over recent years and the upgrading of production technology.
The Group’s consolidated sales for 2001 will reap the benefits, net of the dismissals made during 2000, of the consolidation of the acquisitions made during the previous year and not consolidated across the full financial year, and of the acquisition completed at the beginning of 2001. Organic growth in volume terms is expected to remain in step with the trend seen in 2000, whilst it is not possible to predict the performance of consolidated revenues, expressed in the Group’s unit of currency, given that this will depend on exchange rates over the year. Continuation of the restructuring programme should lead to an improvement in consolidated operating profit with respect to 2000.
106. On or about March 30, 2001, Defendants caused to be issued “Information regarding compliance with the guidelines contained in the Voluntary Code of Best Practice for listed companies.” This report was prepared and disseminated in connection with Parmalat’s 2001 general meeting and specifically addressed the Company’s internal auditing procedures and practices. With respect to Parmalat’s internal controls, the report stated:
We believe that the Group’s existing structure is already sufficiently well organised to manage so-called internal audit procedures and that the existing internal procedures are, in line with the needs of the group, capable of guaranteeing healthy and efficient management, adequate to identify, prevent and manage risks of a financial and operational nature and fraudulent behavior that may damage the company.
107. On or about April 13, 2001, defendants Tanzi, Tonna, Grant Thornton and Deloitte &
Touche completed their preparation and review of Parmalat’s FY 00 financial results in connection with the dissemination of the Board of Directors’ FY 00 Annual Report. That report was disseminated to shareholders and reported Parmalat’s FY 00 net profit of €195 million, total current assets of €4.7 billion and shareholder equity of approximately €2.7 billion. The report also included an April 13, 2001 opinion of Deloitte & Touche which stated that Deloitte & Touche had conducted
- 47 - an audit in connection with the preparation and dissemination of Parmalat’s FY 00 financial results which required Deloitte & Touche to “plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.” Deloitte & Touche asserted that its “audit provides a reasonable basis for our opinion,” and that “[i]n our opinion, the consolidated financial statements present fairly the financial position of the Company as of
December 31, 2000.”
108. On or about April 30, 2001, Defendants caused Parmalat to issue a release reiterating that the Company’s FY 00 gross operating profits had increased by 20.6%, that its consolidated net profit had increased by 11.9% and that the Company’s FY 00 financial statements had been examined and approved at a meeting of the Board of Directors.
109. On or about May 15, 2001, Defendants caused Parmalat to issue a release which noted that the Company’s “net operating profit [was] up by 11.9%” and stated:
Today’s meeting of the Board of Directors, chaired by Cav. Lav. Calisto Tanzi, today examined the report on operations for the first quarter of 2001 (from January 1 to March 31).
* * *
Consolidated Results:
(thousands of euro) 1st qtr. 2001 1st qtr. 2000 % change 2000 (Jan. 1-March 31) (Jan. 1-March (Jan. 1 – 31) Dec. 31) Sales 1,826,990 1,664,663 +9.7 7,349,294 Other revenues 48,852 26,929 112,419 Operating costs before (1,656,709) (1,501,189) (6,590,949) amortisation and depreciation Gross operating profit 219,133 190,403 +15.1 870,764 (EBITDA) Amortisation and depreciation (81,110) (67,112) (326,196) Adjusted net operating profit 138,023 123,291 +11.9 544,568 (EBIT) Ratio gross operating 12.0% 11.4% 11.8% profit/sales Ratio net operating profit/sales 7.6% 7.4% 7.4%
- 48 - * * *
Net Financial Position
(thousands of euro) March 31, 2001 December 31, 2000 Bank debt and debenture loans 771,786 873,344 Short-term Medium-term convertible bonds 631,200 281,200 Other medium-term 3,723,556 3,857,916 Total bank debt and debenture loans 5,126,542 5,012,460 Cash and cash equivalents 2,909,778 2,702,664 Short-term Medium-term 38,890 38,351 Total cash and cash equivalents 2,948,668 2,741,015 Total debt net of cash and cash 2,177,874 2,271,445 equivalents
110. On or about September 11, 2001, Defendants caused Parmalat to issue a release which reported the Company’s first half 2000 results, stating:
Key Consolidated Results:
(millions of euros) First half 2001 First half 2000 2000 Sales 3,834 3,454 7,349 Gross operating profit 461 406 871 EBITDA margin 12.0% 11.7% 11.8% Amortisation/depreciation 176 150 326 Net operating profit 285 256 545 ROS 7.4% 7.4% 7.4% Group pre-tax profit 194 167 338
* * *
Net debt breaks down as follows at the end of the first half:
(millions of euros) June 30, 2001 December 31, 2000 Bank debt and debenture loans Falling due within 12 months 746,02 873,344 Falling due between 1 and 5 years 2,195,93 2,522,722 Falling due beyond 5 years 1,725,736 1,616,394 Total bank debt and debenture loans 4,667,131 5,012,460 Cash and cash equivalents Cash on hand and at banks 1,623,298 1,920,455 Short-term financial assets 834,376 782,209
- 49 - Other investment securities 39,009 38,351 Total cash and cash equivalents 2,496,683 2,741,015 Total debt net of cash and cash 2,170,448 2,271,445 equivalents
* * *
Significant subsequent events
The trend in sales since the close of the first half of the year has substantially confirmed the positive performance registered in the first six months.
Operating outlook
Forecasts indicate that the Group’s sales during 2001 will benefit from the consolidation of the acquisitions made during the previous year and not consolidated across the full financial year, and from the acquisitions made at the beginning of the current year, net of disposals during 2000. Organic volume growth is expected to remain in step with the trend seen in 2000, whilst it is not possible to predict the performance of consolidated revenues, expressed in the Group’s unit of currency, given that this will depend on exchange rates over the year.
Continuation of the restructuring programme should result in confirmation of the consolidated operating profit margins seen during the first half of the year.
The Parent Company’s net profit for 2001 as a whole is expected to be substantially in line with that of the previous year.
The consolidated balance sheet and profit and loss account as of and for the six months ended June 30, 2001 are attached. The accounts, which are in the process of being examined by Deloitte & Touche spa and have yet to be checked by the Board of Statutory Auditors, show the corresponding data for the first half of the previous year and for the year to December 31, 2000 for comparative purposes.
111. On or about November 14, 2001, Defendants caused Parmalat to issue a release announcing that Parmalat’s “[n]et operating profit rose 9%” for the first nine months of 2001.
(a) The release confirmed Parmalat’s shareholder equity of €2.822 billion and detailed the Company’s assets and liabilities, stating:
Today’s meeting of the Board of Directors, chaired by Cav. Lav. Calisto Tanzi, examined the Report on Operations for the third quarter of 2001 (July 1 to September 30).
* * * - 50 - Net Financial Position
(thousands of euro) September 30, June 30, 2001 December 31, 2001 2000 Bank debt and debenture loans Short-term 761,529 746,302 873,344 Medium-term convertible bonds 631,200 631,200 281,200 Other medium-term 3,376,901 3,289,629 3,857,916 Total bank debt and debenture loans 4,769,630 4,667,131 5,012,460 Cash and cash equivalents Short-term 2,659,552 2,457,674 2,702,664 Medium-term 49,086 39,009 38,351 Total cash and cash equivalents 2,708,638 2,496,683 2,741,015 Total debt net of cash and cash equivalents 2,060,992 2,170,448 2,271,445
(b) The release also detailed the Company’s operating results for 3Q 01 and the nine months ended September 30, 2001, stating:
(thousands of euro) Period January 1 Period January 1 Change 2000 – September 30, – September 30, (Jan. 1 – 2001 2000 Dec. 31) Sales 5,810,910 5,371,556 439,354 7,349,294 Other revenues 141,513 104,626 36,887 112,419 Operating costs before (5,254,109) (4,846,511) (407,598) (6,590,94 amortisation and depreciation 9) Gross operating profit 698,314 629,671 68,643 870,764 (EBITDA) Amortisation and depreciation (266,689) (233,727) (32,962) (326,196) Net operating profit (EBIT) 431,625 395,944 35,681 544,568 EBITDA margin 12.0% 11.7% 11.8% EBIT margin 7.4% 7.4% 7.4%
* * *
(thousands of euro) 3rd quarter 2001 3rd quarter 2000 Change (July 1 – September (July 1 – September 30) 30) Sales 1,977,073 1,917,238 59,835 Other revenues 75,512 80,386 (4,874) Operating costs before (1,815,367) (1,773,482) (41,885) amortisation and depreciation
- 51 - Gross operating profit 237,218 224,142 13,076 (EBITDA) Amortisation and depreciation (90,422) (84,369) (6,053) Net operating profits (EBIT) 146,796 139,773 7,023 EBITDA margin 12.0% 11.7% EBIT margin 7.4% 7.3%
112. On or about March 29, 2002, Defendants caused Parmalat to issue a release announcing “double-digit growth (+12.2%)” in net profit, stating:
Today’s meeting of the Board of Directors of Parmalat Finanziaria spa, chaired by Cav. Lav. Calisto Tanzi, examined and approved the statutory and consolidated financial statements as of and for the year ended December 31, 2001.
In 2001 consolidated sales rose 6.2% from the 7,349 million euros of the previous year to 7,802 million euros, thus exceeding the threshold of 15,000 billion Italian lire, EBITDA increased by 8.9% from 871 million to 948 million euros, whilst EBIT was up 9.6% from 545 million to 597 million euros.
Consolidated net profit attributable to the Group reached 218.5 million euros, representing an increase of over 12% on the 194.7 million euros of 2000. Total net profit amounted to 262.1 million euros, compared with the 235.3 million euros of the previous year.
* * *
Key consolidated results for Parmalat Finanziaria spa for 2001
2001 2000 % change (millions of euros) (millions of euros) Sales 7,802 7,349 +6.2 Gross operating profit (EBITDA) 948 871 +8.9 EBITDA margin (%) 12.2% 11.8% Net operating profit (EBIT) 597 545 +9.6 EBIT margin (%) 7.7% 7.4% Net profit attributable to the Group 218.5 194.7 +12.2 Cash flow (total profit plus amortisation and depreciation) 631 579 +8.9 Total shareholders’ equity 2,835 2,643 +7.3 Shareholders’ equity attributable to the Group 1,874 1,714 +9.3
* * *
Total consolidated shareholders’ equity as of December 31, 2001 amounts to 2,835 million euros (2,643 million euros as of December 31, 2000), of which 961 million euros is attributable to minority interests.
- 52 - * * *
Financial Position
An analysis of net debt at the end of the year is provided below
(millions of euros) December 31, 2001 December 31, 2000 Bank debt and debenture loans Falling due within 12 months 831,215 873,344 Falling due between 1 and 5 years 2,475,235 2,522,722 Falling due beyond 5 years 1,618,657 1,616,394 Total bank debt and debenture loans 4,925,107 5,012,460 Cash and cash equivalents Cash on hand and at banks 1,464,777 1,920,455 Short-term financial assets 1,459,650 782,209 Other investment securities 44,275 38,351 Total cash and cash equivalents 2,968,702 2,741,015 Total debt net of cash and cash equivalents 1,956,405 2,271,445
* * *
The Parent Company, Parmalat Finanziaria
The financial statements of Parmalat Finanziaria as of December 31, 2000 report a net profit of 26 million euros compared with the 25.2 million euros of the previous year, after income tax expense of 15.8 million euros.
The result for the year derives mainly from the dividend received from the subsidiary, Parmalat spa, and the interest earned on loans to subsidiaries.
* * *
The Company’s assets primarily consist of the value of its equity investments in subsidiaries, totaling 865.3 million euros and more or less unchanged with respect to the previous year, and loans granted to subsidiaries amounting to 1,040.4 million euros, compared with the 785.1 million euros of December 31, 2000.
113. On April 30, 2002, Defendants caused Parmalat to issue a release which stated that the Company’s financial statements for FY 01 had been approved and that the appointment of
Deloitte & Touche had been confirmed. The release stated:
Today’s Ordinary General Meeting of the Shareholders of Parmalat Finanziaria spa, held in Milan under the Chairmanship of Cav. Lav. Calisto Tanzi, approved the financial statements for 2001, which report consolidated net profit attributable to the Group of 218.5 million euros (up 12% on the 194.7 million euros
- 53 - of the previous year). Total consolidated net profit amounted to 262.1 million euros (235.3 million in 2000). The Meeting passed a resolution to distribute a dividend with a total value of 16 million euros, equal to a pre-tax payout of 0.02 euros for each of the 801,609,207 ordinary shares in issue. The payment date for the dividend is May 23, 2002, following the surrender of coupon no. 1 on May 20, representing the ex-dividend date.
The Chairman, Mr. Tanzi, summarized the Parmalat Group’s operating results for the year to December 31, 2001. Consolidated sales rose 6.2% from 7,349 to 7,802 million euros, thus exceeding the threshold of ITL 15 billion. EBITDA increased by 8.9% from 871 to 948 million euros, whilst EBIT was up 9.6% from 545 to 597 million euros. Operating cash flow (gross profit plus amortisation and depreciation) totaled 631 million euros, compared with 579 million euros for the previous year.
The Chairman also highlighted the fact that the performance of the Group’s sales during early 2002 is substantially in line with projections.
Organic volume growth is expected to remain in step with the trend seen in 2001, whilst it is not possible to predict the performance of consolidated revenues, expressed in euros, given that this will depend on exchange rates over the year. Continuation of the restructuring programme should enable the Group to maintain consolidated operating profit in line with the figure for 2001.
* * *
The meeting also renewed the engagement of Deloitte & Touche to audit the statutory and consolidated financial statements for the three-year period 2002/2004, and to carry out a review of the six-month reports for the three-year period 2003/2005.
114. On or about May 15, 2002, Defendants caused Parmalat to issue a Directors’ Report on Operations for 1Q 02. The Directors’ Report was purportedly “prepared in compliance with generally accepted principles for consolidated accounts” and stated:
Results of Operations
(thousands of euros) 1st Quarter 2002 1st Quarter 2001 Change 2001 (Jan. 1 – March (Jan. 1 – March 31 (Jan. 1 – Dec. 31) 31) Sales 1,847,544 1,826,990 +1.1% 7,801,611 Other revenues 41,101 48,852 189,500 Operating costs before amortisation and depreciation (1,664,227) (1,656,709) (7,042,970) Gross operating profit 224,418 219,133 +2.4% 948,141 (EBITDA) - 54 - Amortisation and depreciation (83,989) (81,110) (351,093) Net Operating Profit (EBIT) 140,429 138,023 +1.7% 597,048 Amortisation of goodwill paid in acquiring control of (4,362) (4,370) (17,477) Parmalat spa Interest income (expense), net (39,857) (27,834) (122,388) Income before adjustments to financial assets, extraordinary items, income taxes and minority interests 96,210 105,819 -9.1% 457,183 in income EBITDA margin 12.1% 12.0% 12.2% EBIT margin 7.6% 7.6% 7.7%
Analysis of Net Debt
(thousands of euros) March 31, 2002 December 31, 2001 Bank debt and debenture loans Short-term 806,437 831,215 Medium-term convertible bonds 631,200 631,200 Other medium-term debt 3,667,604 3,462,692 Total bank debt and debenture loans 5,105,241 4,925,107 Cash and cash equivalents Short-term 3,032,377 2,924,427 Medium-term 44,515 44,275 Total cash and cash equivalents 3,076,892 2,968,702 Total debt net of cash and cash equivalents 2,028,349 1,956,405
* * *
Financial Position
Net debt stands at 2,028 million euros as of March 31, 2002, compared with the 1,956 million euros of December 31, 2001. Operating cash flow was partially used to cover the cost of investment and working capital requirements.
The consolidated balance sheet of Parmalat Finanziaria as of March 31, 2002 shows total consolidated shareholders’ equity, before income taxes for the period and after deducting dividends for 2001, as approved by the General Meeting of April 30, 2002, of 2,793 million euros. Consolidated shareholders’ equity attributable to the Group amounts to 1,981 million euros compared with the 1,874 million of December 31, 2001.
It should be noted that consolidated shareholders’ equity was negatively impacted by the performance of a number of key operating currencies, whose effect
- 55 - was charged to the “Consolidation reserve.” Such movements may, of course, be subject to future fluctuations in exchange rates.
* * *
Operating Outlook
Organic volume growth should remain substantially in step with the trend witnessed during the first quarter. It is not, however, possible to predict the performance of consolidated revenues, expressed in euros, given that this will depend on exchange rates over the year.
The operating performance should enable the Group to maintain consolidated operating profit margins in line with the figures for the first quarter.
115. On or about September 11, 2002, Defendants caused Parmalat to issue a release concerning the Company’s results for the first half of 2002. The release stated:
Results for first half of 2002 Key Consolidated Results may be summarized as follows:
(millions of euro) First half 2002 First half 2001 2001 Sales 3,857 3,834 7,802 Gross operating profit (EBITDA) 468 461 948 EBITDA margin (%) 12.1% 12.0% 12.2% Amortisation and depreciation 171 176 351 Net operating profit (EBIT) 297 285 597 ROS 7.7% 7.4% 7.7% Group’s pre-tax profit 191 194 371
Today’s meeting of the Board of Directors of Parmalat Finanziaria Spa, chaired by Cav. Lav. Calisto Tanzi, examined and approved the “Interim Report for the first half of 2000 ....”
* * *
EBITDA rose 1.5% from the 461.1 million euro of the first half of the previous year to 467.9 million.
The EBITDA margin stood at 12.1%, compared with the 12% of the corresponding period of the previous year and the 12.2% of the entire year 2001.
Net Operating Profit increased by 4.2% from the 284.8 million euro of the first half to 296.7 million. The EBIT margin amounted to 7.7%, in line with the entire year 2001 and on the increase compared to the 7.4% of the corresponding period of the previous year.
- 56 - * * *
Operating cash flow (EBITDA minus net interest expense) amounted to 393 million euro, compared with 402.2 million in the first half of the previous year and was used to cover financial needs arising from capital expenditure and working capital requirements.
Total consolidated shareholders’ equity as of June 30, 2002, including profit in the first half pre-tax, amounts to 2,394 million euro (2,835 million as of December 31, 2001) of which 736 million euro is attributable to minority interests (961 million as of December 31, 2001).
It should be noted that the decrease in consolidated shareholders’ equity was due to the negative performance of several key operating currencies, charged, accordingly to the Italian accounting standards, to the “Consolidation reserve.” Such movements may, of course, be subject to future fluctuations in exchange rates.
An analysis of net debt at the end of the period is provided below:
(million of euro) June 30, 2002 December 31, 2001 Bank debt and debenture loans Falling due within 12 months 1,225,540 831,215 Falling due between 1 and 5 years 2,561,128 2,475,235 Falling due beyond 5 years 1,620,518 1,618,657 Total bank debt and debenture loans 5,307,186 4,925,107 Cash and cash equivalents Cash on hand and at banks 1,513,038 1,464,777 Short-term financial assets 1,706,061 1,459,650 Other investment securities 72,675 44,275 Total cash and cash equivalents 3,291,774 2,968,702 Total debt net of cash and cash equivalents 2,015,412 1,956,405
* * *
The controlling group’s operating performance for the entire year 2002 is expected to be in line with the previous year.
116. On or about November 8, 2002, Defendants caused Parmalat to issue a release containing Parmalat’s 3Q 02 results and a Directors’ Report for 3Q 02 which stated:
Today’s meeting of the Board of Directors of Parmalat Finanziaria spa, chaired by Cav. Lav. Calisto Tanzi, examined the Report of Operations for the third quarter of 2002 (July 1-September 30).
* * *
- 57 - EBITDA amounted to 687.3 million euros, down 1.6% on the 698.3 million of the first nine months of the previous year. The EBITDA margin stood at 12.1%, substantially in line with the 12% of the same period of 2001 and the 12.2% of full year 2001.
* * *
Consolidated Results for Third Quarter 2002
(thousands of euros) 3rd quarter 2002 3rd quarter 2001 change (July 1-September 30) (July 1-September 30) 2002-2001 Sales 1,806,316 1,977,073 (170,757) Other income 38,306 75,512 (37,206) Operating costs excluding (1,625,160) (1,815,367) 190,207 amortisation and depreciation EBITDA 219,462 237,218 (17,756) Amortisation and (62,761) (90,422) 27,661 depreciation EBIT 156,701 146,796 9,905 EBITDA margin 12.1% 12.0% EBIT margin 8.7% 7.4%
Financial review
Net debt has shifted from the 2,015 million euros of June 30, 2002 to l,966 million euros as of September 30, 2002 (1,956 million euros as of December 31, 2001). Operating cash flow was used to cover the cost of investment and working capital requirements.
Analysis of Net Debt
(thousands of euros) September 30, June 30, 2002 December 31, 2002 2001 Bank debt and debenture loans Short-term 1,167,644 1,125,540 831,215 Medium-term convertible bonds 938,000 938,000 631,200 Other medium-term debt 3,211,451 3,243,646 3,462,692 Total bank debt and debenture loans 5,317,095 5,307,186 4,925,107 Cash and cash equivalents Short-term 3,278,789 3,219,099 2,924,427 Medium-term 72,615 72,675 44,275 Total cash and cash equivalents 3,351,404 3,291,774 2,968,702 Total debt net of cash and cash 1,965,691 2,015,412 1,956,405 equivalents
The consolidated balance sheet of Parmalat Finanziaria as of September 30, 2002 shows total consolidated shareholders’ equity, including pre-tax profit for the
- 58 - period January 1-September 30, 2002, of 2,426 million euros, compared with the 2,394 million of June 30, 2002 and the 2,835 million of December 31, 2001.
117. On or about April 14, 2003, Defendants caused Parmalat to disseminate a Board of
Directors’ Report in connection with the Company’s 2003 meeting. The report included the
Company’s FY 02 sales of €7.59 billion and net operating profit of €613 million. The report also included a summary analysis of Parmalat’s outstanding debt:
The Group’s Financial Position
Net debt as of December 31, 2002 amounted to 1,862 million euros, representing an improvement of 94 million euros compared with the figure for December 31, 2001.
An analysis of net debt at the end of the year is provided below:
(millions of euros) December 31, 2002 December 31, 2001 Bank debt and debenture loans 1,155,685 831,215 Falling due within 12 months Falling due between 1 and 2,980,888 2,475,235 5 years Falling due beyond 5 years 1,299,237 1,618,657 Total bank debt and 5,435,810 4,925,107 debenture loans Cash and cash equivalents Cash on hand and at banks 950,620 1,464,777 Short-term financial assets 2,412,945 1,459,650 Other investment securities 210,134 44,275 Total cash and cash 3,573,699 2,968,702 equivalents Total debt net of cash and 1,862,111 1,956,405 cash equivalents
118. On or about May 15, 2003, Defendants caused Parmalat to issue a release detailing its financial performance for 1Q 03, stating:
Today’s meeting of the Board of Directors, chaired by Cav. Lav. Calisto Tanzi, examined and approved the Report on Operations for the first quarter of 2003 (January 1 – March 31).
- 59 - Operating results
(thousands of euros) Q1 2003 Q1 2002 2002 (Jan. 1-March (Jan. 1-March (Jan. 1-Dec. 31) 31) 31) Change Sales 1,622,032 1,847,544 - 12.2% 7,590,014 Other income 13,539 41,101 131,661 Operating costs before (1,438,963) (1,664,109) (6,790,405) amortisation and depreciation Gross operating profit 196,608 224,536 - 12.4% 931,270 (EBITDA) Amortisation, depreciation and (72,037) (84,107) (318,121) write-downs of fixed assets Net operating profit (EBIT) 124,571 140,429 - 11.3% 613,149 EBITDA margin 12.1% 12.1% 12.3% EBIT margin 7.7% 7.6% 8.1%
* * *
The consolidated balance sheet of Parmalat Finanziaria as of March 31, 2003 shows total consolidated shareholders’ equity, after pre-tax income for the period and after deducting dividends for 2002, as approved by the General Meeting of April 30, 2003, of 2,190 million euros (2,250 million as of December 31, 2002). Consolidated shareholders’ equity attributable to the Group amounts to 1,506 million euros compared with the 1,541 million of December 31, 2002.
* * *
The operating performance should enable the Group to maintain the EBITDA margin reported for the first quarter of the year.
119. In June 2003, Parmalat (through Parmalat Finance Corporation BV Netherlands
(“PFC”)), assisted by Morgan Stanley, privately placed €300 million ($378.9 million) in bonds with
Nextra, the asset-management arm of Italy’s Banca Intesa (the “Nextra bonds”). Parmalat sold the
Nextra bonds with a stated coupon rate of 3.05 percentage points over Euribor – a rate reserved only for companies in good financial health. However, Parmalat and Nextra, through Morgan Stanley, secretly agreed in a side letter that the coupon rate Nextra received would vary in accordance with how many times Parmalat’s earnings covered its interest payments, entitling Nextra to a higher coupon rate on the Nextra bonds than the stated coupon rate. Morgan Stanley has stated publicly
- 60 - that it was aware of the structure and that the terms contained in the side letter were disclosed to
Morgan Stanley during its due diligence in conducting the transaction.
120. However, as Morgan Stanley knew, this was false and misleading, as Parmalat in a secret side letter had agreed to pay a higher interest rate. Tanzi has admitted to prosecutors that
Parmalat declared a lower interest rate than it was actually paying so that markets would not figure out that Parmalat was desperate for cash – “If such information had been revealed to the market it would have emerged that we were in a difficult financial situation,” Tanzi has admitted.
121. In order to keep the ruse and the special deal concealed, Defendants took steps to ensure that Nextra would not sell the Nextra bonds to anyone else. They negotiated that Pamalat would receive a right of first refusal should Nextra ever decide to sell the Nextra bonds.
122. In October 2003, when public disclosure of Parmalat’s financial demise was imminent, Intesa, which then had €360 million in credit exposure to Parmalat, sought to dispose of the Nextra bonds. Thus, four months after the Nextra bond offering, Morgan Stanley, as the arranger of the Nextra bond offering, negotiated for a guarantee that any “unsold” bonds would be bought back. Morgan Stanley then facilitated Parmalat’s repurchase of the Nextra bonds at a premium.
123. On or about September 11, 2003, Defendants caused Parmalat to issue its 2003 half year report. The report included Parmalat’s sales and net operating profit for the first six months of
FY 03 of €3.43 billion and €270 million, respectively. The report also stated:
The Group’s Financial Position
The Group’s net debt as of June 30, 2003 is 1,810 euros, down 52 million compared with the net debt of 1,862 million euros posted as of December 31, 2002.
- 61 - An analysis of net debt at the end of the period is provided below:
(millions of euros) June 30, 2003 December 31, 2002 Bank debt and debenture loans Falling due within 12 months 1,245,768 1,155,685 Falling due between 1 and 5 2,852,754 2,980,888 years Falling due beyond 5 years 1,248,636 1,299,237 Total bank debt and debenture 5,347,158 5,435,810 loans Cash and cash equivalents Cash on hand and at banks 866,582 950,620 Short-term financial assets 2,455,610 2,412,945 Other investment securities 214,885 210,134 Total cash and cash 3,537,077 3,573,699 equivalents Total debt net of cash and cash 1,810,081 1,862,111 equivalents
As of June 30, 2003 bank debt and debenture loans include:
(millions of euros) Debt represented by debentures classified as “Debenture 258,229 loans” Debt represented by bonds convertible into Parmalat Finanziaria ordinary shares classified as “Convertible 1,184,400 bonds” Debt represented by bonds classified as “Bank debt” 4,465,985 Bonds bought back and/or subscribed by consolidated subsidiaries and eliminated from “Bank debt” (2,911,000) Total debt represented by debentures and bonds 2,997,614 Bank debt or debt to other lender classified as “Bank debt” 2,349,544 Total bank debt and debenture loans 5,347,158 (footnotes omitted)
As shown in the above chart, the Group has bought back and/or subscribed a part of the bonds issued. Such intercompany transactions have no impact on the consolidated financial position, are economically beneficial and are primarily carried out, at favourable market conditions, in order to invest a portion of the liquidity deriving from financing subject to lower interest rates compared with the financial cost of the bonds bought back.
* * *
The Group’s liquidity is invested in short-term, low-risk financial instruments at the best possible market conditions, before being used to meet the Group’s financial requirements (investment, the repayment of loans on maturity, etc.). The - 62 - financial business plan foresees that liquidity of almost 900 million euros will be used to reduce the Group’s financial debt by the end of 2005.
Current financial assets break down as follows:
(millions of euros) June 30, 2003 Other equity investments 0.004 Bonds 1,315,173 Investment funds 477,807 Promissory notes/Commercial paper 655,880 Other 6,746 Total 2,455,610
124. On or about September 15, 2003, Defendants caused Parmalat to issue a release announcing that together with Deutsche Bank, Defendants had completed the sale of €350 million of
6.125% bonds, stating:
Following approval by the Board of Directors of Parmalat Finanziaria, under the presidency of Cav. Lav. Calisto Tanzi, the Parmalat Group issued today, via a fully owned foreign subsidiary, a seven years bond fully underwritten by Deutsche Bank, with a 6.125% yearly coupon, guaranteed by Parmalat SpA, within the EMTN programme to which Standard & Poor’s assigned a rating of BBB.
Cav. Lav. Calisto Tanzi commented that “this transaction is perfectly in line with what declared in conjunction with the semiannual results of the Group and with the financial policy of the Group. The policy of gross debt reduction will require a partial reimbursement of short term bank debt and the buy back of part of the bonds due to expiry in the next 24 months.”
Deutsche Bank declares that they have assisted the Parmalat Group in completing this transaction which, by type, duration and conditions is considered by both parties as the most adequate to the financial strategies of the Group, and to be assigned, other than to Deutsche Bank, to a restricted number of institutional investors.
The group confirms its own financial debt management policy as shown in the recent press release dated 11th of September and, in particular, that the Group intends to use market opportunities to finance itself at competitive terms in order to refinance in the medium - long term its short term debt. The group confirms also its policy of gross debt reduction using internal resources for € 900 million by 31 December 2005.
- 63 - 125. On or about November 14, 2003, Defendants caused Parmalat to issue a release which detailed Parmalat’s 3Q 03 financial statements, stating:
Parmalat Finanziaria announces results for first nine months of 2003:
- organic sales growth of 4.1% (third quarter also up)
- EBITDA margin improves to 12.4% and EBITDA margin to 8.3%
- second environmental report ready
Today’s meeting of the Board of Directors of Parmalat Finanziaria spa, chaired by Cav. Lav. Calisto Tanzi, examined the report on operations for the third quarter of 2003 (July 1 – September 30).
* * *
Consolidated results for third quarter 2003
(thousands of euros) 3rd quarter 2003 3rd quarter 2002 2003 – 2002 (July 1-September 30) (July 1-September 30) Sales 1,837,698 1,806,316 31,382 Other income 47,847 38,306 9,541 Operating costs excluding (1,647,959) (1,624,437) (23,522) amortisation and depreciation Gross operating profit 237,586 220,185 17,401 (EBITDA) Amortisation, depreciation and (68,701) (63,484) (5,217) write-downs of fixed assets Net operating profit (EBIT) 168,885 156,701 12,184 Amortisation of goodwill (4,362) (4,362) 0 purchased as part of the acquisition of the controlling interest in Parmalat Spa Net interest expense (56,966) (29,013) (27,953) Profit before adjustments to 107,557 123,326 (15,769) financial assets, extraordinary items, taxes and minority interests EBITDA margin 12.9% 12.2% EBIT margin 9.2% 8.7%
* * *
- 64 - Current financial assets break down as follows:
(thousands of euros) September 30, 2003 June 30, 2003 December 31, 2002 Other equity investments 0 4 4 Bonds 1,576,935 1,315,173 853,198 Investment funds 496,533 477,807 504,855 Promissory notes/Commercial 571,686 655,880 1,052,586 paper Other 5,827 6,746 2,302 Total 2,650,891 2,455,610 2,412,945
* * *
Shareholders’ equity
The consolidated balance sheet of Parmalat Finanziaria as of September 30, 2003 shows total consolidated shareholders’ equity, including pre-tax profit for the period January 1 – September 30, 2003, of 2,074 million euros, compared with the 2,100 million euros of June 30, 2003 and the 2,250 million euros of December 31, 2002.
126. Ominously, the November 14, 2003 release also addressed the departure of
Parmalat’s current CFO, stating:
Rationalisation of the functions of the administrative and finance departments
Parmalat has decided to combine the functions of the General Manager Finance and the General Manager Administration and Control, appointing Mr. Luciano Del Soldato to the new post. Until to day Mr. Del Soldato has held the post of General Manager Administration and Control.
Effective today Mr. Alberto M. Ferraris will no longer fulfill his position as Chief Financial Officer of the Parmalat Group. Mr. Ferraris will pursue different personal interests in a new international venture.
127. On November 27, 2003, Parmalat issued a press release/report to the financial community which stated:
PRESS RELEASE
Announcement of liquidation of investment in Epicurum Fund and early termination of currency swap contract entered into with the same fund
Parmalat Finanziaria announces that it has received notification from Epicurum open-ended fund that the general meeting of investors, held in Los Angeles on November 26, has, in accordance with the agreement reached with the - 65 - Parmalat Group, approved the Group’s liquidation of its investment in the fund and the early termination of the currency swap.
128. On December 8, 2003, Parmalat issued a press release/report to the financial community which stated:
Statement in relation to the liquidation of the Epicurum Fund
Parmalat Finanziaria states that the Epicurum Fund did not liquidate Parmalat’s investment in Epicurum on the 4 December 2003 deadline. The fund has explained that this non-fulfillment was as a result of difficulties arising from the liquidation process relating to Parmalat’s stake in the fund owing to contemporary requests for liquidation received from the majority of the fund’s investors.
This has led Epicurum to decide to proceed with the total liquidation of all the fund’s activities. The complexity of the steps necessary to achieve this makes it impossible to respect the deadline previously agreed with Parmalat, and Epicurum has asked Parmalat to accept a delay in final payment.
129. The statements made by Defendants during the Class Period were each false and misleading when made. The true facts, which were then known by or available to each of the
Defendants based upon their access to and/or review of internal Parmalat data, were:
(a) That Parmalat’s sales, net operating profit, assets and shareholder equity as reported for FY 98, FY 99, FY 00, FY 01 and FY 02, as well as the interim periods 1999-2003, were false, as they were artificially inflated by the manipulations detailed in ¶¶160-221, below.
(b) That Defendants had actively participated in the falsification of Parmalat’s accounts for more than a decade.
(c) That the Company’s assets as reported on its balance sheet were overstated by more than $8 billion, including at least $4.9 billion in a fictitious account purportedly held by Bonlat at BankAmerica.
(d) That the Company’s liabilities were understated by at least $3.6 billion based upon Defendants’ representations that Parmalat had repurchased outstanding bonds which it had not, in fact, repurchased.
- 66 - (e) That Grant Thornton’s December 20, 2002 request for confirmation of the
$4.9 billion cash held in the Bonlat account never left Parmalat’s headquarters.
(f) That under the direction of defendant Tonna, a fraudulent BankAmerica response was created in Parmalat’s offices and included in Grant Thornton’s files in connection with its FY 02 audit.
(g) That the March 6, 2003 letter purportedly confirming the existence of $4.9 billions on deposit with BankAmerica was a forgery, and that Grant Thornton had not conferred with and/or independently confirmed the existence of the $4.9 billion that Parmalat, via Bonlat, purportedly had on deposit at BankAmerica.
(h) That Grant Thornton had not conducted adequate confirmation procedures as part of its audit of Bonlat’s statements of accounts in connection with its audits of the financial statements of Parmalat subsidiaries between 1999 and 2003.
(i) That the responses to the January 31, 2003 requests for confirmation sent by
Grant Thornton in connection with its FY 02 audit were forgeries.
(j) That on at least eight occasions Grant Thornton failed to send third-party confirmation-request letters in connection with its audits of Parmalat’s subsidiaries and/or ensure that response letters received in response thereto came directly from the third party.
(k) That Grant Thornton failed to conduct independent audits on the 17 Parmalat subsidiaries which it was engaged to audit for FY 99-FY 03, but rather participated in the falsification of audit confirmation documents.
(l) That Parmalat did not in fact have a $625 million liquid investment in
Epicurum.
- 67 - (m) That, as he has now admitted, Tanzi siphoned off more than $625 million from Parmalat, which transfers were via the Defendants’ use of sham transactions and fictitious investment assets.
(n) That, as defendants Tonna and Tanzi have now admitted, Defendants engaged in a “systematic falsifying” of accounts at Parmalat for at least 15 years.
(o) That the Individual Defendants worked with several investment banks to structure and sell debt securities which were designed to conceal Parmalat’s true capital structure.
(p) That, beginning in December 1999, the Individual Defendants worked with
Citigroup to create a debt financing mechanism that was designed to allow Defendants to artificially inflate Parmalat’s balance sheet and income statement on an ongoing basis by raising $137 million for Parmalat, which Defendants characterized as an investment in a Parmalat subsidiary, instead of as an additional debt obligation.
(q) That Grant Thornton and Zini worked with defendants Tonna and Tanzi to create fictitious business transactions, including transactions with entities such as Camfield Pte. Ltd., whereby, in order to boost Bonlat’s reported assets, Defendants concocted a fictitious $620 million credit for payment of hundreds of thousand tons of powdered milk that Parmalat falsely claimed it sold to a Cuban company.
(r) That Defendants used multiple legal entities to divert hundreds of millions of dollars to the Tanzi family, including Holding Italiana Turismo and two corporations located in the
Dutch Antilles: Curcastle Corp. and Zilpa Corp.
(s) That, in connection with the falsification of Parmalat’s FY 00 results, Tonna refused to disengage from Defendants’ scheme even when apprised by his colleagues that the
- 68 - magnitude of the fictitious milk sales to Cuba was so dramatic that defendants would “drown in it” if they did not stop their pretend sales of powdered milk to Cuba.
(t) That in November 2003, Tonna told executives in Parmalat’s finance department to “clean-up” old financial records related to defendants’ fraudulent scheme, including documents related to Bonlat by taking the paper documents and electronic documents contained on a computer disk “to his home to destroy them,” which conduct was affirmatively endorsed by Gian
Paolo Zini of the Zini law firm.
REVELATIONS OF DEFENDANTS’ FRAUD
130. By the last week of December 2003, it was revealed that almost 40% of Parmalat’s assets were in a bank account at BankAmerica that did not exist; that Parmalat had been declared legally insolvent; that $600 million of Parmalat’s cash that had purportedly been invested in a liquid investment fund could not be retrieved; that the Company’s senior executives had manipulated the
Company’s income statements and balance sheet for more than a decade by using off-shore shell companies, SPEs, forged documents and sham transactions; that the Company’s senior executives destroyed relevant evidence and/or ordered others to destroy relevant evidence by, among other things, taking a hammer to a computer containing data relevant to Defendants’ scheme; and that at least eight of Parmalat’s senior insiders, auditors and lawyers had been taken into custody in connection with one of the largest financial frauds ever perpetrated.
CITIGROUP’S PARTICIPATION IN THE FRAUDULENT SCHEME
131. Citigroup knowingly and actively participated in and facilitated and furthered the fraudulent scheme and course of business that operated as a fraud and deceit on purchasers of
Parmalat’s securities, by taking actions that were key to the continuation of the scheme.
132. Citigroup provided extensive commercial and investment banking services for
Parmalat, including transferring funds between Parmalat entities to further and cover up the - 69 - fraudulent and manipulative accounting practices of Parmalat, by structuring and forming contrived and manipulative transactions to falsify Parmalat’s financial condition by artificially inflating its reported profits and hiding its true debt levels, by selling Parmalat’s securities to investors in the
United States and elsewhere, and by issuing research reports on Parmalat which it knew contained false and misleading information.
133. One major fraudulent contrivance and manipulative transaction facilitated by
Citigroup was known as “Buconero.” In late 1999, Citigroup and Parmalat formed an entity by which they would have Citigroup funnel (loan) money to Parmalat, but disguise the loans as investments in Parmalat subsidiaries. Because of the horrible financial condition of Parmalat and its insatiable need for cash to keep its Ponzi scheme going, the Citigroup and Parmalat personnel involved in these transactions called this entity “Buconero,” which is Italian for “black hole.” The
“Buconero” deal was to run from 1999-2004 and was subject to renewal. During 1999-2001,
Citigroup advanced over €117 million to Buconero, which then upstreamed the money via circuitous means to Parmalat. In fact, the advances were loans by Citigroup to Parmalat and were understood to be so by the participants. However, to conceal the fact that the transactions were loans, i.e.,
Parmalat debt, the advances were falsely structured as an investment by Citigroup in Buconero and the interest payments made to Citigroup on the loan were disguised as “minority interest payments.”
134. From 1995 forward, Citigroup also engaged in the “Eureka Securitization” program by which Citigroup and its Eureka entity facilitated Parmalat obtaining hundreds of millions of dollars in financing based on what Citigroup knew were phony, duplicate supermarket invoices.
Parmalat issued duplicate invoices for products sent to at least 33 distributors and hundreds of supermarkets – then used duplicate “receivables” to get hundreds of millions of dollars of financing from Citigroup. According to testimony given to prosecutors by PricewaterhouseCoopers, “Parmalat
- 70 - artificially created receivables which gave it access to bank financing that it otherwise would have difficulty obtaining.” Claudio Pessina, an internal Parmalat accountant, has told the criminal investigators that Citigroup employees “knew about the double-billion system as early as 1995.”
However, Citigroup avoided any financial risk or loss to itself on these bogus and manipulative transactions by securitizing or “laying-off” its receivable advances on third parties while raking off lucrative fees for itself as part of the deal.
135. Citigroup was also a business partner of Parmalat. Citigroup purchased a 24% interest in Parmalat Canada at an over-inflated price to help artificially inflate Parmalat’s balance sheet, assets and shareholder equity, receiving secret assurances from Tanzi and Tonna that Parmalat would take Citigroup out of the deal later, if necessary or desired by Citigroup. This investment gave Citigroup further information as to the true falsified financial condition of Parmalat. Later,
Citigroup forced Parmalat to repurchase its 24% interest in Parmalat Canada to protect Citigroup from any loss from its participation in this phony non-arm’s-length transaction.
136. A key part of the scheme was for Parmalat to be able to surreptitiously transfer funds between Parmalat, Parmalat subsidiaries and entities secretly controlled by Tanzi so as to facilitate contrived financial transfers, cover up inter-Company debt and to allow the Tanzi family to loot
Parmalat, much of which was accomplished by Zini and Tonna, using the worldwide currency transfer facilities of Citigroup. Citigroup frequently facilitated transfers from Parmalat to Zini’s trust accounts for such purposes and also helped transfer some $375 million of Parmalat’s funds from
Kantonal Bank of Grison di Coita as part of Parmalat secretly providing the “equity” money to the
“buyers” of 18% of Parmalat Brazil in December 1999.
137. In addition, Parmalat’s ADR securities (American Depository Receipts representing
Parmalat’s common shares) were traded here in the U.S. in the over-the-counter market. The price
- 71 - of these ADRs was artificially inflated throughout the Class Period and purchasers thereof were damaged thereby. Citigroup was Parmalat’s ADR agent, responsible for actually issuing those
ADRs – thus purchasing and selling Parmalat’s equity securities on a daily basis.
138. According to one financial analyst, “it fooled a lot of people that Parmalat was able to maintain a New York listing for its American Depository Receipts [as] investors were reassured that
Parmalat was satisfying American regulatory requirements.”
139. It was essential to the continuation of the Parmalat scheme that Parmalat constantly raise new capital to fund the Ponzi scheme since Parmalat’s actual business operations were losing large amounts of money – over €300 million per year – and the Tanzi family was looting the
Company of hundreds of millions of dollars. During the Class Period, Citigroup acted as an underwriter or placement agent of billions in worthless Parmalat debt securities. All during the
Class Period, Citigroup was active in inflating and manipulating the price of Parmalat’s equity securities and marketing new bonds of Parmalat to raise the new capital to keep the Parmalat “Ponzi scheme” going.
140. Key to the success of Parmalat’s fraudulent “Ponzi scheme” and fraudulent course of business was to deceive investors as to the business condition, success and future business prospects and financial condition of the Company so that its equity securities would trade at artificially inflated prices and Parmalat and its fellow schemers could sell billions of dollars of new bonds to keep
Parmalat afloat. In this regard, Citigroup played a key role by constantly issuing false and misleading reports on Parmalat which were widely circulated in the investment community.
Because of its own intimate involvement in falsifying Parmalat’s financial statements, Citigroup knew these reports were false and misleading when issued.
- 72 - BANKAMERICA’S PARTICIPATION IN THE FRAUDULENT SCHEME
141. BankAmerica, knowingly and actively played an indispensable role in the fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Parmalat securities by taking actions that were key to the success and continuance of the scheme. BankAmerica had extensive commercial and investment banking relationships with Parmalat, including lending it money, illicitly transferring its funds, helping it structure contrived bogus transactions to manipulate and falsify Parmalat’s financial statements and selling hundreds of millions of dollars of Parmalat’s securities to investors via false and misleading statements.
142. BankAmerica’s various relationships with Parmalat were conducted through
BankAmerica executives which BankAmerica controlled, including Luca Sala, a corporate financial executive for BankAmerica. Sala worked for BankAmerica for several years and was responsible for the Parmalat account. Sala left BankAmerica in 2003 (due to accusations of dishonest expense reimbursements) to become a highly paid consultant to Parmalat. As the Parmalat scandal exploded, police placed Sala and BankAmerica under suspicion and searched BankAmerica’s offices in Milan,
Italy, as well as Sala’s home on the basis of a search warrant that stated BankAmerica had aided
Parmalat despite knowledge of its true finances – “From the investigation, it has emerged that
BankAmerica employees (including Sala) worked together with Parmalat representatives to support the price of the group’s securities, even while knowing about its grave state of crisis.” Sala has now been arrested for his participation in the fraudulent scheme and admitted that he took $27 million in bribes – monies diverted to him out of BankAmerica/Parmalat deals – i.e., fraudulent sales of
Parmalat securities to investors in the United States and elsewhere, to facilitate and further the fraudulent scheme.
143. BankAmerica furthered and facilitated the scheme by helping Parmalat sell hundreds of millions of dollars of securities based on what BankAmerica knew were falsified financial - 73 - statements. BankAmerica was responsible for arranging the sale of some $750 million in Parmalat debt securities here in the United States to institutional investors. The cash raised by these bonds sales was indispensable to keeping the Parmalat Ponzi scheme afloat. In many instances,
BankAmerica demanded or forced Parmalat to undertake securities sales to raise money to repay commercial loans to BankAmerica. In this way, BankAmerica minimized its own financial exposure to the fraud by controlling the amount of its commercial loan exposure to Parmalat which
BankAmerica knew was grossly falsifying its financial condition. BankAmerica also extracted huge fees for arranging these securities sales while knowingly or recklessly allowing Sala to accept some
$27 million in pay-offs in the form of diverted proceeds from the securities sales themselves.
BankAmerica also took steps to protect itself from the risk of lending to Parmalat by syndicating, insuring or collateralizing portions of its commercial loans to Parmalat.
144. In working with Parmalat to sell its debt securities to investors, BankAmerica manipulated the sales process by which those securities that were sold, with the participation of Zini and Sala, by secretly arranging for Parmalat-controlled and funded entities to “purchase” portions of the securities offerings that could not be legitimately sold to investors. This contrivance created a false impression as to the true amount of capital Parmalat had raised and of the extent of investor demand for Parmalat securities and enabled Parmalat and BankAmerica to sell these securities, defrauding the purchasers.
145. In December 1999, BankAmerica also arranged a contrived bogus transaction that fraudulently inflated and manipulated Parmalat’s financial statements, which involved Parmalat’s
Brazilian subsidiary, Parmalat Brasil Industria de Alimentos SA (“Parmalat Brazil”). Parmalat’s
Brazilian dairy unit was the largest seller of liquid milk and the second-largest buyer of fresh milk in
Brazil. Parmalat Brazil accounted for about 10% of Parmalat’s global sales.
- 74 - 146. However, Parmalat Brazil was incurring substantial losses by the late 1990s and investors became concerned that Parmalat had overpaid for Parmalat Brazil and would have to take a write-down. Parmalat wanted to sell a portion of its Parmalat Brazil unit to investors to raise cash and also to substantiate to the investment community the value of Parmalat Brazil. Other legitimate purchasers willing to buy a stake in Parmalat Brazil had earlier approached Parmalat (Tonna) about an arm’s-length transaction but at a much lower price that, if accepted and made public, would have made it clear that Parmalat had overpaid for the Brazilian operation and that it was much overvalued.
147. Then, in December 1999, BankAmerica worked with Parmalat to arrange the sale of
18% of Parmalat Brazil to “North American” investors for $300 million – an extremely large amount that indicated the Parmalat Brazil was worth much more than investors had thought – and, in turn, that Parmalat itself was undervalued. So Tonna, working with Sala and Zini, arranged for
BankAmerica to put together this bogus, contrived transaction at an inflated price – a transaction in which the economic risk never passed from Parmalat, which, in addition to secretly providing the so- called “equity” money, also guaranteed to buy out the purported buyers at a substantial ($100 million) premium if the Brazilian operations were not “spun-off” via an initial public offering by
December 2003.
148. The market reaction to this sale was immediate and positive. Parmalat’s stock soared
–“limit up” – on the Milan Exchange. Morgan Stanley, on December 21, 1999, issued a report, stating:
x Parmalat’s shares were suspended limit up in Milan on Monday
Parmalat has announced the sale of an 18% stake in its Brazilian unit to North American investors for $300 million.
x Parmalat seems undervalued ....
* * *
- 75 - x We are raising Parmalat’s price target ....
... We reiterate our Outperform rating.
* * *
Summary and investment conclusion
Parmalat’s shares were suspended limit up in Milan on Monday. This was triggered by the announcement that Parmalat will sell a stake of 18% in its Brazilian operations to a group of North American investors for a potential value of $300 million.
This transaction values Parmalat’s Brazilian business at $1.35 bn, on our estimates ... suggesting that the group is currently significantly undervalued.
Later, in 2000, Morgan Stanley wrote:
Brazilian business is highly valued
Back in December 1999, a group of North American investors led by Bank of America took a stake of just over 18% in Parmalat Administracao ....
The transaction was completed for US$300 million, and it therefore values the total Brazilian business at €1.75 billion.
* * *
What makes the Brazilian business so attractive?
The recent transaction suggests that the Brazilian business must be some kind of hidden jewel since people with access to non-public information put such a high price tag on it.
149. However, the Parmalat Brazil transaction was a contrivance – a sham. There was no independent equity in the transaction from the purchasers’ side. The so-called equity money in the sale came from Parmalat with some $4.5 million secretly funneled to the buyer by Parmalat via
BankAmerica and $3.75 million secretly funneled by other means, using Citigroup.
150. BankAmerica also participated in the fraudulent scheme by acts of money laundering, transferring funds for Parmalat and Tanzi to fund contrived and manipulative transactions to enable
- 76 - the Tanzi family to loot Parmalat, including payments to the Zini law firm totaling millions of dollars.
151. BankAmerica also was reckless in allowing Parmalat to create or use forged
BankAmerica documents to show that Parmalat had €4 billion on deposit with BankAmerica when, in fact, it did not.
DEUTSCHE BANK’S PARTICIPATION IN THE FRAUDULENT SCHEME
152. Deutsche Bank knowingly and actively played an indispensable role in the fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Parmalat’s securities, by taking actions that were key to the success and continuation of the scheme. Deutsche
Bank had extensive commercial and investment banking relationships with Parmalat, including acting as a financial advisor to Tanzi for years, lending Parmalat money, holding and transferring its funds, helping it structure and then facilitate contrived non-arm’s-length transactions to manipulate and falsify Parmalat’s financial statements, selling hundreds of millions of dollars of Parmalat’s securities to investors and helping to manipulate its stock price, while issuing false and misleading reports on Parmalat. Deutsche Bank executives Vincenzo De Bustis and Massimo Armanini were the key Deutsche Bank executives, controlled by Deutsche Bank, that participated in the fraudulent scheme. De Bustis was a close personal friend of Tanzi.
153. Deutsche Bank furthered and facilitated the scheme by helping Parmalat sell hundreds of millions of dollars of securities based on what Deutsche Bank knew were falsified financial statements. The cash raised by these bonds sales was indispensable to keeping the Parmalat Ponzi scheme afloat. In many instances, Deutsche Bank demanded or forced Parmalat to undertake securities sales to raise monies to repay commercial loans to Deutsche Bank. In this way, Deutsche
Bank minimized its own financial exposure to the fraud by controlling the amount of its commercial
- 77 - loan exposure to Parmalat which Deutsche Bank knew was falsifying its financial condition.
Deutsche Bank also extracted huge fees for arranging these securities sales.
154. Key to the continuation of the Parmalat scheme was constantly raising new capital to
fund the Ponzi scheme since Deutsche Bank knew Parmalat’s actual business operations were losing
large amounts of money – over €300 million per year – while the Tanzi family was also looting
Parmalat of hundreds of millions of dollars. During the Class Period, Deutsche Bank acted as an
underwriter or placement agent for billions of dollars in worthless Parmalat debt. All during the
Class Period, Deutsche Bank was active in inflating and manipulating the price of Parmalat’s equity
securities and marketing new bonds of Parmalat to raise the new capital to keep the Parmalat “Ponzi
scheme” going.
155. In the Fall of 2003, when Parmalat was on the edge of collapse, Deutsche Bank took
critical steps to help keep Parmalat afloat – continuing the Parmalat Ponzi scheme. Deutsche Bank
and Parmalat sold €350 million in Parmalat bonds via false and misleading documents, including
falsified financial statements. As this huge and critical bond offering took place, it was very
important that Parmalat’s stock perform well – so it would appear that the market had confidence in
Parmalat. So, during August and September 2003, Deutsche Bank went into the market to purchase millions of shares of Parmalat stock, using, inter alia, discretionary investment funds it controlled.
Deutsche Bank bought so much Parmalat stock that it ended up owning 5% of Parmalat. After the critical offering was completed and while Parmalat stock continued to be artificially inflated, and just before the revelations of December 19, 2003 that Parmalat’s €4 billion account with
BankAmerica was a fiction, Deutsche Bank unloaded the stock it had purchased to support the stock’s price in connection with the September 2003 debt offering.
- 78 - 156. Deutsche Bank participated in the fraudulent scheme by secretly, in mid-2003, arranging a collar/hedge of the Tanzi family’s stock position in Parmalat – in effect, a secret “inside sale” of a substantial portion of the Tanzi family’s stock ownership – to protect them from the collapse in Parmalat’s stock the schemers knew would likely occur when their fraud could no longer be continued or covered up.
157. Then, in late 2003, as rumors circulated of financial troubles at Parmalat and
Parmalat’s stock price fell, Standard & Poor’s became concerned and was considering lowering
Parmalat’s credit rating. A credit downgrade by Standard & Poor’s would quickly cause the
Parmalat “house of cards” to collapse by denying it any further access to the capital markets. So, in connection with the purchase and sale of Parmalat securities, Deutsche Bank and Parmalat worked together to falsely reassure Standard & Poor’s as to the stable financial condition of Parmalat to persuade it to not downgrade Parmalat’s credit rating. Thus, in late November 2003 and early
December 2003, Deutsche Bank submitted written assurances to Standard & Poor’s regarding
Parmalat’s liquidity – extensive and detailed reassurances as to the quality of Parmalat’s financial statements, financial reporting and financial condition that it knew were false.
158. Also to help to continue to inflate Parmalat’s stock, in the Fall of 2003, Deutsche
Bank issued a very strong research report on Parmalat, rating its stock a “Buy” and stressing the strong cash flow generated by its business operations, knowing that the report contained false and misleading information.
159. Key to the success of Parmalat’s fraudulent “Ponzi scheme” and fraudulent course of business was to deceive investors as to the business, success and future business prospects and financial condition of the Company, so that its equity securities would trade at artificially inflated prices and Parmalat and its fellow schemers could sell billions of dollars of new bonds to keep
- 79 - Parmalat afloat. In this regard, Deutsche Bank played a key role by constantly issuing false and misleading reports on Parmalat which were widely circulated in the investment community.
Because of its own intimate involvement in falsifying Parmalat’s financial statements, Deutsche
Bank knew these reports were false and misleading when issued.
DEFENDANTS’ ACCOUNTING FRAUD
160. In order to mask Parmalat’s true financial condition and to cover-up the fraudulent transfer of funds to Defendants, Defendants falsified Parmalat’s financial results and caused
Parmalat to issue false and misleading financial statements during the Class Period. As part of the most shocking corporate financial fraud in history, Defendants engaged in a practice of manipulating
Parmalat’s balance sheet accounts, materially overstating Parmalat’s assets and understating its liabilities, and further by booking nonexistent sales in order to overstate Parmalat’s earnings and meet profit expectations during the Class Period. For example, during 2003, Parmalat understated its net debt by $15.6 billion – nearly 8 times the amount as originally reported. Parmalat further overstated its revenue for the first nine months of 2003 by $1.7 billion and it EBITDA by $663 million. Parmalat’s financial results for the other periods during the Class Period were similarly materially and blatantly false.
161. Parmalat included these results in press releases and in its audited financial statements, including its year-end financial statements for FY 98-FY 02 and its half-year reports for
FY99-FY03. See ¶¶234-247. The Company represented that the financial information was a fair statement of the Company’s financial results and that they conformed with the Italian Accounting
Profession and with established International Accounting Standards (“IAS”).
162. These representations were false and misleading as to the financial information reported, as the information provided was not a fair presentation of the Company’s operations due to
- 80 - the Defendants’ gross manipulation of Parmalat’s financial results, causing the financial statements to be presented in violation of standards set by the Italian Accounting Profession and with IAS.
163. One of the most basic and universal concepts of general accounting standards provides that “Financial statements should present fairly the financial position, financial performance and cash flows of an enterprise.” IAS No. 1 ¶10, Presentation of Financial
Statements. By contrast, Parmalat’s financial statements did not present fairly the Company’s financial position, performance or the cash flows of the organization during the Class Period but rather they were manipulated to grossly understate the Company’s liabilities and to grossly overstate its assets, revenues and overall income in violation of basic IAS.
164. As part of Defendants’ scheme and wrongful course of business, they created a complex global structure which included shell corporations and sophisticated SPEs that enabled them to engage in and cover-up Parmalat’s false financial reporting. Defendants used this network of offshore companies to make it look as if Parmalat had more assets and greater sales than it actually did in order to offset huge liabilities on Parmalat’s balance sheet, as well as to cover-up the fraudulent transfer of funds to Defendants. Parmalat’s insiders and advisors did not simply manipulate accounts in order to overstate assets and revenues from one period to the next, but rather orchestrated an ongoing scheme and wrongful course of business whereby Defendants fashioned bogus documents showing assets that Parmalat did not own and sales that it had never made.
Defendants’ fraudulent scheme allowed Parmalat to meet earnings projections each quarter by booking fictitious sales at the end of each quarter. Many of these fictitious transactions involved
Parmalat’s Cayman Islands-based subsidiary Bonlat, which was created by Tanzi, Tonna, Zini and
Grant Thornton and audited by Grant Thornton.
- 81 - 165. Bonlat was simply “an empty box” which held “worthless credits” created as part of
Defendants’ scheme. According to Bonlat’s financial records, it had many financial dealings with
other Parmalat entities throughout the world. As its auditor, Grant Thornton would often accept the
various transactions as legitimate. In some instances, Grant Thornton used forged documents to
establish proof of different transactions. Grant Thornton utilized these fake documents as legitimate
without independent third-party verification in deciding to attest to the veracity of Bonlat’s and the
other subsidiaries’ financial statements each year.3 Notwithstanding their highly suspicious nature,
Deloitte & Touche accepted Grant Thornton’s opinion concerning these entities without independent
verification in deciding to attest annually to the veracity of Parmalat’s consolidated financial
statements.4
Parmalat’s Admission of Its False Reporting
166. On December 16, 2003, PricewaterhouseCoopers (“PwC”) was engaged to review
Parmalat’s assets and liabilities in order to determine Parmalat’s true financial condition. PwC completed a draft report on the financial and economic condition of Parmalat on January 26, 2004, including estimating revenues, earnings and net indebtedness for 2002 and the first three quarters of
2003. In a press release dated January 26, 2004, the company disclosed select financial data from
3 Grant Thornton’s participation in the fraud was extensive and has resulted in the arrest of two Grant Thornton representatives who worked on the Parmalat audits. On December 31, 2003, Italian authorities arrested Lorezo Penca, chairman of Grant Thornton SpA, and Maurizio Bianchi, a partner in the Milan office, in connection with the scheme alleged herein, based in part upon the extensive involvement of Grant Thornton in creating, suggesting and/or structuring ways Parmalat’s balance sheet could be falsified and then falsely certifying the financial statements as being accurate. Mr. Penca has since resigned from Grant Thornton and Mr. Bianchi has been suspended.
4 Deloitte & Touche’s Milan office is also currently under investigation by US and Italian authorities probing the Parmalat scandal. Two Deloitte & Touche partners, Guiseppe Rovellig and Adolfo Mamoli have been placed under investigation by prosecutors for suspected false accounting and market rigging.
- 82 - the PwC report, admitting that a vast difference existed between the amounts reported by Parmalat in its most recent financial statements and press releases versus the actual amounts. The reported amounts and differences are as follows:
(€ millions) FY02 FY02 As Difference First 3 Q’s First 3 Q’s Difference PwC Reported of 03 PwC of 03 As Report by Report Reported Company by Company
Revenues 6,202 7,722 (1,520) 4,002 5,376 (1,374) EBITDA 286 931 (645) 121 651 (530) Net Debt N/A 1,862 N/A 14,300 1,818 12,482
($ millions) FY02 FY02 As Difference First 3 Q’s First 3 Q’s Difference PwC Reported of 03 PwC of 03 As Report5 by Report Reported Company by Company
Revenues 7,753 9,653 (1,900) 5,003 6,720 (1,718) EBITDA 358 1,164 (806) 151 814 (663) Net Debt6 N/A 2,328 N/A 17,875 2,273 15,603
167. The press release further indicated that PwC’s report showed Parmalat’s “liquid assets” at December 31, 2002 and September 30, 2003 were “negligible.” “Liquid assets” include a company’s cash and cash equivalents and short term investments. For the year ending 2002 and the
5 Given the complex nature of Defendants’ manipulations, PwC is still trying to determine the exact balance of many of Parmalat’s accounts. Accordingly, the discrepancy between Parmalat’s reported results and its actual results is likely even larger than the current estimates.
6 The Net Debt calculation is based upon the Company’s total bank indebtedness and debenture loans less its total cash and cash equivalents for the same period. For year-end 2002, Parmalat reported total net debt of $2,328 million, comprised of liabilities of $6,795 million and assets of $4,468 million. For the quarter ending September 30, 2003, Parmalat reported total net debt of $2,273 million, comprised of liabilities of $7,550 million and assets of $5,278 million.
- 83 - quarter ending September 30, 2003, Parmalat falsely reported liquid assets of $4.5 billion and $5.3 billion, respectively, materially overstating its assets for the periods.
168. Parmalat’s financial statements for the other periods during the Class Period involved similar large overstatements of the Company’s revenues and earnings and understatements of its net debt in violation of IAS.
169. The makeup of the extreme discrepancies between Parmalat’s actual results and its reported results involves hundreds of different false transactions, all concocted in order to cover up massive losses suffered by the Parmalat Group, as well as to cover-up the fraudulent transfer of funds to Defendants. In fact, despite intensive investigations by Italian authorities, the SEC,
PricewaterhouseCoopers and various other international regulators, the breadth of Defendants’ complex scheme is still unknown today and the full and complete nature of Defendants’ manipulations may never be known. The current known manipulations in violation of IAS to
Parmalat’s financial statements during the Class Period include the transactions discussed below.
Losses
170. Part of Parmalat’s scheme involved covering up losses. The losses began back in the
1970s, when Parmalat grew rapidly by acquiring numerous unprofitable milk processing plants from state entities. Often times, Parmalat was pressured by local politicians to overpay for these loss- making plants and then were required to keep the plants open. These losses grew over the years and were further compounded by substantial losses Parmalat began suffering in its South American operations in the late 1990s.
171. For example, Parmalat lost at least $438 million to $563 million a year from the mid-
1990s through 2001. These losses were not reflected in Parmalat’s financial statements. Instead
Parmalat reported positive earnings each year. From 1996 to 2001, Parmalat reported earnings of
$1,158 million rather than reporting losses anywhere between $2,190 million to $2,815 million for - 84 - the same time period. To hide its losses, Parmalat created false sales, false billings, false inter- company credits and bogus bank accounts.
172. By engaging in a tactic of manipulating its financial statements in order to cover
Parmalat’s operational losses every year, Parmalat’s revenues and earnings were overstated and further its financial statements were not a fair presentation of its financial position during the Class
Period.
Cash Flows
173. In its review of Parmalat’s books, PwC’s main objective was to determine how
Parmalat used funds principally obtained from bond loans between 1997-2003. PwC’s review only included a verification of the accounting books of Parmalat’s main financial companies: Parmalat
Capital Finance Malta, Parmalat Finance Corp BV and partially of Parmalat SpA. According to
PwC’s report, irregular money transfers out of Parmalat totaled $3.1 billion between 1999-2003, of which approximately $748 million related to payments made through Parmalat SpA and Parmalat
Capital Finance Malta. PwC traced the remaining $2.4 billion to Parmalat Finance Corp (which is the parent of Bonlat), but has been unable to obtain accounting records because of the refusal of the
Company's administrator, Ernst and Young.
174. Among the many discrepancies and irregularities noted in its complicated review,
PwC discovered certain transactions involving Parmalat SpA for which there was no justification or any evidence of services being rendered. During the Class Period, undocumented transactions occurred between Parmalat SpA and the following parties: Parmatour,7 Sata Srl, defendant Tanzi,
Coloniale and Cosal (all Tanzi-related entities).
7 Parmatour was formerly known as Holding Italiana Turismo (“HIT”). Parmatour was created in December of 2002 from tourism activities already in Tanzi family hands under the name of HIT.
- 85 - 175. In its review of Parmalat Capital Finance Malta and Parmalat Finance Corp BV, PwC discovered similar transactions arising for which there was no justification or evidence of any services being rendered. PwC noted the following undocumented cash outflows during the Class
Period involving these entities: $138.75 million to Sata Srl, $37.5 million to Zini, $65 million to an unknown Montagu Bank named Monland Ismael and $18.75 million to Tetra Pak.8
176. In addition to the above mentioned transactions, PwC further noted in its report certain other areas that would be subject to further review, including formalities of bond loans issued with Morgan Stanley/Nextra, funding to Parma SpA and sponsorship and consulting contracts.
Additionally, PwC felt further review was needed of the transfer of funds to Parmalat’s South
American subsidiaries. Specifically, PwC noted that units in Venezuela, Argentina and Brazil had received significant amounts of funds, which the final use of required further verification.
177. In sum the report is very telling in that prior to and during the Class Period,
Defendants used Parmalat’s cash flow extensively to transfer funds throughout Parmalat’s intricate web of offshore companies in order to cover-up the Company’s ever increasing losses, as well as to divert corporate resources to non-related entities for the Defendants’ own personal use.
Hidden Debt
178. For the period ending September 30, 2003, Parmalat’s net debt was approximately
$17.9 billion versus the $2.3 billion that was originally reported by the Company. A difference of
$15.6 billion or nearly 8 times more than the amount it had told investors. Parmalat’s net indebtedness is based upon the Company’s total bank indebtedness and debenture loans less its total
8 PwC discovered an $18.75 million payment from Parmalat to Tetra Pak in August of 2003. Nonetheless, PwC was unable to determine the exact nature of the payments. Thereafter, Tetra Pak disclosed that this payment was the repayment of a loan Tetra Pak made to Parmalat Finance Corporation in April of 2003, with Parmalat SpA as the guarantor.
- 86 - cash and cash equivalents for the same period. The gross understatement of Parmalat’s net debt is due to Defendants’ manipulation on both the asset side and the liability side of its balance sheet.
Both Parmalat’s assets were overstated and its liabilities were understated causing a massive understatement in its overall total indebtedness.
179. In some instances, Defendants created shell-entities that were not “affiliated” with
Parmalat and thus would not be included in Parmalat’s consolidation. Thereafter debts of the
Company would be moved onto the books of these newly created entities and thus these liabilities would remain off of Parmalat’s balance sheet.
180. For example, Defendants created one of these entities to cover up the fact that Brazil, which accounted for as much as one-sixth of the group’s total revenues in 2002, had been losing money for years and had been receiving a steady stream of cash infusions from Italy during the Class
Period. Defendants created Carital do Brasil, which is owned by Carital Food Distributions. This entity is not included in Parmalat’s consolidated financials statements. Nonetheless, Parmalat
Participacoes and Parmalat Brasil both pass debts and tax liabilities to the entity. Executives of the local Parmalat units admitted in testimony to Brazil’s Congress at a hearing on February 10, 2004, that the entity was specifically created to receive tax liabilities and other debts from Parmalat’s
Brazilian subsidiaries.
181. As the Company was still legally obligated to pay these liabilities, it was required to include them in Parmalat’s consolidated results. By not including these liabilities in Parmalat’s results, its liabilities were understated during the Class Period and further its financial statements were not a fair presentation of its true financial position.
Sale of Minority Interest in Brazilian Subsidiary
182. As discussed in ¶20, in late 1999, Parmalat reorganized its Brazilian affiliates and created a new holding company for the Group’s industrial activities under the name Parmalat - 87 - Administracao (later reorganized and called Parmalat Empreendimentos e Adminstracao). Shortly thereafter, as part of a complex financial arrangement designed by BankAmerica, Parmalat announced its plans to increase the capital of Parmalat Administracao by offering to “sell” a minority interest in the entity. In December of 1999, Parmalat “sold” an 18.18% interest in the organization to a group of “North American” investors at an inflated price of $300 million. Parmalat retained the remaining 81.82%. Nonetheless, the deal was not the typical sale of stock but instead the deal required Parmalat Administracao to go public within four years, otherwise, Parmalat would be required to reimburse the investors for the amount invested plus pay a premium in line with the group’s return from recent financial operations. BankAmerica coordinated the entire deal, including the group of North American investors.
183. In addition to the above terms, the transaction required the buyers to make a down payment of some $8.25 million. Nonetheless, this so-called equity money component of the transaction did not actually come from the buyers, but rather, it was secretly funneled to the buyers from Parmalat with some $4.5 million funneled via BankAmerica and $3.75 million via Citigroup.
184. In reality, no sale of a minority interest in Parmalat Administracao took place. The transaction was a sham. No economic risk ever passed from Parmalat to the buyers of the stock.
The so-called “equity” money used as the down payment for the transaction did not actually come from the buyers, but rather, came from Parmalat itself, secretly funneled to the buyers, meaning that there was no independent equity provided for this sale from the buyers’ prospective.
185. By including this bogus sale of a minority interest on its balance sheet, Parmalat’s shareholders’ equity was overstated by $300 million from 1999-2003. It further caused Parmalat’s reported financial results to not be a fair presentation of its financial performance during the Class
Period.
- 88 - Using Equity to Understate Parmalat’s Liabilities
186. During the Class Period, Defendants also engaged in a pattern of obtaining much needed debt financing but then treating the proceeds as equity on Parmalat’s balance sheet in complex accounting transactions, causing its liabilities and its net debt to be understated and its financial statements to not be a fair representation of the Company’s financial position.
187. Buconero – As discussed in ¶¶19, 50 and 133, Parmalat’s liabilities were further understated as a result of the creation and utilization by defendants Tanzi, Tonna and Citigroup of
SPEs, including one transaction where Citigroup provided Parmalat a $137 million cash infusion via a Delaware LLC dubbed Buconero, or the “black hole.” The vehicle was used in order to obtain much needed funding from Citigroup. However, the cash obtained from the deal was actually a loan and should have been included as a liability on Parmalat’s financial statements. Nonetheless,
Defendants treated the amount as equity on Parmalat’s financial statements, causing Parmalat’s liabilities to be understated by $137 million.
188. Brazil – On January 18, 2002, Parmalat’s Brazilian subsidiary, Parmalat Participacoes do Brazil Ltda., issued a $625 million convertible bond due in 2008. Unlike standard convertible bonds, the buyer “made an irrevocable commitment to convert” the bond into shares of stock upon maturity. The subsidiary accounted for this bond as “funds for capital increase” on its balance sheet.
However, upon consolidation, this account was rolled into one single account, including minority interests and shareholders equity. At the parent level, this single account was then treated simply as shareholders’ equity. Deloitte & Touche’s Brazilian unit audited Parmalat Participacoe’s financial statements.
BankAmerica Account
189. During the Class Period, Defendants also engaged in a pattern of inflating or inventing assets in order to overstate its assets and thus understate its net debt, as well as to cover up - 89 - Defendants’ fraudulent transfer of funds. The most egregious (and now infamous) of these manipulations was the creation of a $4.9 billion account with Bank of America.
190. On its balance sheet at year-end 2002, Bonlat purported to have $4.9 billion in an account with BankAmerica. Grant Thornton drafted a letter dated December 20, 2002, requesting verification of this amount from BankAmerica. However, it appears that this letter was never actually sent to BankAmerica. Instead, Grant Thornton was willing to accept from Parmalat’s offices a March 6, 2003 BankAmerica letter certifying the existence of the Bonlat account. It was on the basis of this letter that Grant Thornton certified Bonlat’s financial statements.
191. Ultimately, on December 19, 2003, amidst growing rumors concerning financial troubles at Parmalat, the Company issued a press release, stunning the corporate community, wherein it admitted that BankAmerica expressly denied having a $4.9 billion account in the name of Bonlat. According to Parmalat, BankAmerica further denied the authenticity of the March 6,
2003 letter used by Grant Thornton in its audit. By including this fictitious asset in its financial statements, Parmalat’s financial statements were overstated by $4.9 billion, its net debt was understated and further its financial statements were not a fair presentation of its assets during the
Class Period.
Epicurum
192. Some of Parmalat’s assets were diverted to entities outside of the Parmalat Group to
Tanzi-family companies. In some instances, the illegal transfers were made through fictitious investments, such as Epicurum. According to Gianfranco Biocchi, a former member of the finance department, the creation of Epicurum by defendants Tanzi, Tonna, Zini and Grant Thornton was undertaken simply as part of Defendants’ efforts to effectuate transfers of money to Tanzi-family companies.
- 90 - 193. Defendants’ fraudulent transfer of funds to Epicurum and the ensuing cover-up caused Parmalat’s assets to be overstated, its overall net debt to be understated, and further caused
Parmalat’s financial statements to not be a fair representation of its assets during the Class Period.
194. In addition, not only did Defendants use Epicurum to effectuate fraudulent transfer of funds to themselves, they also used Epicurum to overstate Parmalat’s earnings for the first half of
2003. In Parmalat’s half-year report for 2003, Parmalat reported pre-tax earnings for the consolidated group of $157.5 million. The report concealed all details about the break-down of this amount and no mention was made of any derivative financial contract Parmalat had entered into with
Epicurum. However, Deloitte & Touche qualified its review letter submitted with the 2003 half-year report in part because it could not obtain independent “fair value” valuation of a derivative financial contract Parmalat had entered into with an “overseas mutual investment fund.” Thereafter, in a conference call to analysts on November 16, 2003, Defendants disclosed that Parmalat had, in fact, made $152.5 million in the first half by engaging in a currency swap with Epicurum, meaning that
97% of Parmalat’s net profit for the first half of 2003 was derived from this one transaction with
Epicurum. Defendants further admitted that this gain had been included in ordinary income, along with the earnings from its milk operations, but refused to separate the earnings from its normal operations as a milk producer from its earnings made from the currency swap.
195. The treatment of this transaction is in violation of IAS. Under IAS, the net profit or loss of a company is comprised of two components: net profit and loss from ordinary activities and extraordinary items. Ordinary income includes items of income and expense that are derived from the company’s ordinary activities (i.e., the activities that the company engages in as part of its normal business operations). Extraordinary items include transactions that do not frequently or regularly occur. Even if an item falls under the category of ordinary activities but it involves a
- 91 - transaction that given its size, nature or incidence disclosure is relevant and necessary to explain the performance of the enterprise, then disclosure should be made separately. IAS No. 8 ¶¶10-18. Here, as a milk producer, money earned from a currency swap is not part of Parmalat’s normal course of business. By including the money in Parmalat’s ordinary income and further by failing to disclose that 97% of the Company’s income was actually derived from this transaction, Parmalat’s financial statements were misleading in that they masked Parmalat’s true operating performance for the period.
196. Additionally, in light of the fact that the existence of this very fund has been called into doubt, as well as the fact that Parmalat’s auditors could not obtain independent verification of this gain, Parmalat’s earnings in the first half of 2003 were materially overstated by $152.5 million due to this improper transaction. Moreover, Parmalat’s financial statements were not a fair presentation of the Company’s financial condition nor did they provide investors with sufficient information concerning the Company’s central operation as a milk producer.
Parmalat’s False Sales
197. Parmalat’s False Billing Scheme – In an effort to overstate Parmalat’s assets and its operating results, Defendants engaged in a scheme of double-billing in the Company’s milk distribution business, enabling them to obtain $5 billion in bank financing. In Italy, Parmalat sold its food through a network of at least 33 distributors – controlled by the Tanzi family. Parmalat issued duplicate invoices to these distributors and hundreds of supermarkets in Italy for the same goods.
The duplicate invoices were then falsely booked as sales and included in Parmalat’s earnings and included as account receivables on its balance sheet. In turn, these extra invoices were then used to obtain bank credit from around 40 Italian banks backed by the fictitious invoices.
198. Parmalat obtained $348 million of funding from Citigroup backed by its supermarket billing, through Eureka Securitization, a Citigroup finance company. The Citigroup finance unit - 92 - then sold securities backed by these billings. According to Claudio Pessina, one of Parmalat’s internal accountants now in jail, Citigroup employees knew about the double-billing scheme as early as 1995. Pessina told investigators “Citigroup did a due diligence that certified in detail the way
[Parmalat’s] billing system worked.”
199. By engaging in this scheme of double-billing, Parmalat’s assets, revenues and income were materially overstated and were not a fair presentation of its financial position and performance during the Class Period.
200. Parmalat’s False Sales – During the Class Period, Defendants created non-existent sales in order to meet earnings projections each period. For example, at year-end 1999, Bonlat claimed to have sold 300,000 tons of milk worth $620 million to Empresa Cuba, a Cuban state- owned importer, through Singapore-based Camfield Pte. Ltd. Bonlat “acquired” milk from Camfield and then resold the non-existent milk to the Cuban importer. Thereafter, Bonlat’s financial statements reflected a sale and corresponding receivable from Empresa. The credit due from the
Cuban importer was carried on Bonlat’s balance sheet as an asset and later to be paid off with imaginary cash. Nonetheless, this sale did not actually take place. Accordingly, Bonlat’s, and in turn Parmalat’s, revenues and assets were overstated during the Class Period by $620 million due to this phony sale.
201. As for Camfield, it is a Singapore-based holding company, which was set up approximately five years ago. Although it is not listed in Parmalat’s financial statements as an affiliated company (and thus, not included in Parmalat’s consolidated financial statements),
Camfield is connected to Parmalat. Claudio Pessina, who worked in Parmalat’s finance department and is currently in police custody due to Parmalat’s collapse, is one of the firm’s two directors and signed the company’s most recent financial reports. Angelo Ugolotti, a switchboard operator at
- 93 - Parmalat headquarters, was unknowingly made the CEO of Camfield by Defendants. Furthermore, as discussed below, Parmalat instructed Tetra Pak to make payments to Camfield for sums owed to
Parmalat.
202. Camfield also has ties to Grant Thornton. The Singapore address and phone number for Camfield are the same as Grant Thornton’s Singapore affiliate (and Camfield’s auditors), Foo
Kan Tan Grant Thornton. Additionally, Camfield’s company secretary, Lawrence Kwan, is an employee of Kon Choon Kooi, which is an affiliate of Grant Thornton’s Singapore affiliate.
203. The President of the Cuban company has said that Parmalat’s claims that the
Communist-run nation owes it tens of millions of dollars is false. The President further added that it does have a contract with Parmalat’s Chilean operation for $700,000/mo. worth of powdered milk,
(around 7,000-8,000 tons of milk annually), rather than the 300,000 tons it allegedly bought.
However, the nation is current on this account and does not have any debts outstanding with
Parmalat. In fact, the President of Empresa Cuba quipped that if it had purchased the amount of milk claimed by Parmalat, Cuba would be literally “swimming in milk,” as it would have purchased almost 60 gallons of milk annually for every human being in Cuba.
204. Here once again, Grant Thornton purported to utilize account confirmation which never reached its intended recipient. Instead Grant Thornton’s reliance in certifying the account came from forged documents.
205. This phony sale, as well as others that occurred during the Class Period, caused
Parmalat’s revenue, earnings and assets to be overstated and thus not a fair presentation of
Parmalat’s finances during the Class Period.
206. Tetra Pak – Tetra Pak, a Swedish-based drinks packaging company, was a major supplier to Parmalat. Average sales between Tetra Pak and Parmalat were $280.5 million per year
- 94 - for the years 1995 through 2003. As Tetra Pak’s third-largest customer, Tetra Pak provided
Parmalat with discounts for buying its products and advertising its brand. These discounts were provided by way of reimbursement payments back to Parmalat. These payments averaged $15.25 million per year from 1995-2003. Nonetheless, rather than making the payments back to Parmalat directly, Tetra Pak would make the payments to different entities as instructed by Parmalat.
207. Over the years, Tetra Pak made payments to five entities – four of which are offshore
– Parmalat USA, Camfield in Singapore, Carital Food Distribution in the Dutch Antilles, Parmalat
Capital Finance and Parmalat Trading also in Malta.9 In 2001, Tetra Pak became concerned about the lack of documentation from Parmalat surrounding its marketing activities and an internal investigation led to suspicion about the ownership of Carital. On August 27, 2001, a meeting took place between Tetra Pak’s CEO and Tonna concerning the documentation issue and regarding clarification of which companies were to be paid. Thereafter, Parmalat provided Tetra Pak with documentation and written confirmation about the companies which were to receive Parmalat’s reimbursements. As for Carital, Tetra Pak was instead directed to make payments to Parmalat
Capital Financing and the inquiry was dropped.
208. By requiring Tetra Pak to pay money owed to Parmalat to entities not affiliated with the Company, Defendants were able to funnel money outside of the group to non-related entities.
Defendants’ fraudulent transfers caused Parmalat’s assets to be overstated and further caused
Parmalat’s financial statements to not be a fair representation of its assets during the Class Period.
9 Neither Camfield or Carital are listed in Parmalat’s financial statements as affiliated companies and thus, are not included in Parmalat’s consolidated financial statements.
- 95 - Receivables from Tanzi Companies
209. Tanzi has admitted to regulators that Defendants diverted at least $625 million from
Parmalat during the Class Period, funneling the money into Tanzi family-owned operations such as
Parmatour and SATA. Nonetheless, these funds remained on Parmalat’s balance sheet, thus, overstating Parmalat’s assets for the period.
210. In some instances, the shortfalls created by these illegal transfers were covered up by the creation of fictitious credits to make it appear as if these Tanzi-family companies owed Parmalat money and appeared on Parmalat’s books as account receivables. These receivables were “paid off” via payments from fake bank accounts and held on Parmalat’s books as being invested in bogus bank accounts at Parmalat subsidiaries, including Bonlat. It further allowed Parmalat to funnel money outside of the group to non-related entities.
211. Defendants’ fraudulent transfers, including those detailed above, and the ensuing cover-up caused Parmalat’s assets to be overstated and further caused Parmalat’s financial statements to not be a fair representation of its assets during the Class Period.
False Bond Buy Back
212. In the Fall of 2003, Parmalat offered $100 million of unsecured Senior Guarantee
Notes to US investors.10 Parmalat falsely told prospective US investors that it had used its “excess cash balances” to repurchase corporate debt security worth approximately $3.6 billion. The truth was that Parmalat did not have an “excess cash balance” and further that Parmalat did not actually repurchase these bonds and instead they remained outstanding. Parmalat’s financial statements falsely reflected that these bonds had been repurchased. Del Soldato admitted this fact during his
10 The $100 million offering ultimately failed after revelations came to light about Parmalat’s investment in Epicurum.
- 96 - meeting in New York in early December with representatives from a New York City-based private equity and financial advisory firm.
213. By fraudulently representing that it had repurchased bonds, Defendants caused
Parmalat’s liabilities to be understated by more than $3.6 billion and further caused Parmalat’s financial statements to not be a fair representation of its liabilities during the Class Period.
Fraudulent Transfer of $1.125 Million (€900 Mil) to Parmatour
214. Parmatour, the Tanzi family owned tourism company, was not part of the Parmalat
Group and thus was not consolidated into Parmalat’s financials. Despite it being a separate entity,
Parmatour, run by Francesca Tanzi – the daughter of Calisto – received as much as $1.125 million from Parmalat in fraudulent transfers. Tanzi has already admitted to regulators that Defendants diverted at least $625 million from Parmalat during the Class Period, funneling the money into
Parmatour to help cover losses. Nonetheless, these funds, fraudulently transferred, remain on
Parmalat’s balance sheet, thus, overstating Parmalat’s assets for the period.
215. Under Italian Accounting Standards, as set forth in CONSOB circulars No. 97001574 dated February 20, 1997, No. 98015375 dated February 27, 1998, and No. 2064231 dated September
30, 2002, and IAS, as set forth in IAS 24, a company is required to disclose its related-party transactions. According to Parmalat, it complied with these standards. This statement was false.
216. During the Class Period, in its financial statements, Parmalat reported transactions with Parmatour every period. Additionally, Parmalat reported having transactions with Carital Food
Distributors in FY00 and Cosal Srl in FY02-FY03. Parmalat reported having the following transactions with Parmatour:
- 97 - (Mil. of lire until Year End ’01 Receivables Payables Income Expenses then € thousands) Year End 1999 4,419 14,871 1,148 3,351 Half Year 2000 4,867 12,354 872 1,986 Year End 2000 6,245 7,881 1,935 4,142 Half Year 2001 6,812 2,197 857 4,188 Year End 2001 3,436 2,260 9,603 2,052 Half Year 2002 3,591 1,993 329 774 Year End 2002 3,969 3,272 632 4,334 Half Year 2003 2,005 3,842 52 1,162
217. Parmalat’s transactions with Parmatour were described as follows in its half-year
report for 2003:
Transactions with the Parmatour Group (formerly HIT), which operates in the travel and tourism sector, are all trade related. Income mainly concerns the supply of our products to hotels belonging to the Parmatour Group, whereas expenses relate to costs incurred from travel and trips on the part of staff of consolidated companies.
218. Parmalat’s statements concerning its related-party transactions were false and misleading and violated CONSOB regulations and IAS for the following reasons: (a) the transactions with Parmatour were not legitimate transactions; (b) Parmalat did not fully disclose the nature of and the amount of money transferred to Parmatour; (b) Parmalat did not fully disclose the nature of and the amount of money transferred to Carital; (c) Parmalat did not fully disclose the nature of and the amount of money transferred to Cosal; and (d) Parmalat failed to disclose all of its related-party transactions during the Class Period, including its transactions with Sata Srl, and
directly with Tanzi.
219. By fraudulently transfering funds to Defendants, by engaging in a cover-up by
falsifying Parmalat’s financial records and by failing to disclose the true nature and amounts of
Parmalat’s related-party transactions, Defendants violated CONSOB regulations and IAS by causing
- 98 - Parmalat’s assets to be overstated by more than $1.1 billion and by causing Parmalat’s financial statements to not be a fair representation of its assets during the Class Period.
220. Due to all of the above mentioned accounting improprieties, the Company presented its financial results and statements in a manner which violated IAS, including violation of the following fundamental accounting principles:
(a) The principle that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions. (IASB Framework ¶¶9-10);
(b) The principle that financial reporting should provide information about the enterprise’s financial position, performance and changes in its financial position. This information is useful to present and potential investors and creditors and other users in evaluating an enterprises ability to generate cash and cash equivalents and in predicting the enterprise’s future financial position and performance. (IASB Framework ¶¶15-20 and 28);
(c) The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it. (IASB Framework ¶14);
(d) The principle that financial reporting should be reliable in that it represents what it purports to represent. That information should be reliable as well as relevant, is a notion that is central to accounting. (IASB Framework ¶¶26 and 31);
(e) The principle of completeness, which means that nothing is left out of the information that may be necessary to insure that it validly represents underlying events and conditions. (IASB Framework ¶38); and
- 99 - (f) The principle that prudence be used in reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered. Prudence is the inclusion of a degree of caution in the exercise of judgment to insure that assets and income are not overstated and liabilities are not understated. (IASB Framework ¶37).
221. Further, the undisclosed adverse information concealed by Defendants during the
Class Period is the type of information which, because of standards set by the Italian Accounting
Profession, IAS and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed.
DELOITTE & TOUCHE’S AND GRANT THORTON’S PARTICIPATION IN THE FRAUD
222. From 1990-1999, Grant Thornton was Parmalat’s chief auditor. However,
Defendants knew that applicable law required Parmalat to rotate its auditor for FY 99. Thereafter,
Parmalat retained Deloitte & Touche, as its main auditor. Thus in 1998, Parmalat, per Grant
Thornton’s suggestion, created a new Cayman Islands-based subsidiary, Bonlat. Given that Bonlat was a new entity, Parmalat was able to retain Grant Thornton as its auditor.
223. Over the next four years, Bonlat became the clearing house for many of Defendants’ fraudulent transactions. While Parmalat describes Bonlat as a treasury center in its financial statements, prosecutors have deemed the Cayman Islands-based entity as a “virtual garbage dump.”
224. During the four year period from 1999-2002, Grant Thornton’s share of the audit process rose substantially, Defendants’ fraud expanded, and the importance of Bonlat grew. It jumped to 49% of the Company’s assets in 2002 from 22% in 1999, despite the fact that Grant
Thornton audited only 17 of Parmalat’s 137 units. Fees from the Parmalat audit engagement comprised 2% of Grant Thornton SpA’s entire audit revenues in 2002.
- 100 - 225. As Parmalat’s chief auditor, Deloitte & Touche simply relied upon Grant Thornton’s word in conducting its audit and preparing its opinion on Parmalat’s overall consolidated performance, despite explicit warnings Grant Thornton gave Deloitte & Touche about Parmalat’s financial condition and despite the close ties Grant Thornton had had with Parmalat in the past and the suspiciousness of the size and nature of the subsidiaries audited by Grant Thornton, including huge and mysterious offshore accounts held by those subsidiaries. For example, Bonlat claimed to have a $4.9 billion account with BankAmerica as of year-end 2002, while Parmalat’s consolidated financial statements for year end showed a total of only $12.85 billion in assets. Although liquidity was of great importance to Parmalat and despite this single account making up a large portion of the
Company’s overall assets, Deloitte & Touche intentionally refused to verify Grant Thornton’s assurances regarding the veracity of Bonlat’s assets in the preparation of its audit and the issuance of its report.
226. A January 19, 2004 Financial Times article explained that Grant Thornton gave
Deloitte & Touche specific warnings about problem areas:
Deloitte, the main auditor of Parmalat, did not raise an alarm over the food multinational’s accounts for 2002, despite questions being raised by fellow auditor Grant Thornton SpA over a lack of documentation regarding Bonlat, a subsidiary that also falsely claimed to have Euros 3.95bn (Dollars 4.9m) in a US bank account.
Grant Thornton SpA, the Italian arm of the global accountancy federation, claims to have officially raised concerns with Deloitte over Bonlat, a Cayman Island subsidiary of Parmalat, in a memorandum dated April 8 2003. It says it repeated these concerns in a meeting two days later with Deloitte and Parmalat’s internal audit committee.
In addition, according to Grant Thornton SpA executives, Deloitte decided not to signal two other accounting entries in Parmalat’s first-half 2003 balance sheet, which Grant Thornton SpA also claims to have signalled as irregular.
* * *
- 101 - Deloitte has claimed that it was first to raise the alarm – in November – about Bonlat’s accounts, in particular a purported Euros 496.5m cash investment in Epicurum, an unknown Cayman Islands mutual fund.
Grant Thornton SpA executives, however, insisted that they had first raised material doubts about Bonlat in February and March, when the two auditing firms were working side by side at Parmalat’s headquarters.
The Grant Thornton SpA executives also said that both auditing teams saw a fax dated March 6 purporting to be from Bank of America and indicating that Bonlat had Euros 3.95bn in cash and cash equivalents at its branch in New York. They said the fax was also supported by an account statement of about 20 pages.
* * *
Grant Thornton SpA said it continued to raise doubts about Bonlat’s accounts when it made a “limited review” of first-half 2003 results, including Bonlat’s questionable accounting of Dollars 6.3m in one-time gains on a currency swap transaction.
It also questioned a lack of documentation concerning the Epicurum investment, why Parmalat removed sales figures for Santal, a unit Parmalat claimed to have sold, and the treatment of Dollars 4.3m in unpaid credits.
* * *
In October, Grant Thornton SpA said it sent Deloitte its review report for first-half 2003 results signalling all its questions. On October 22, Grant Thornton SpA met with Deloitte and Parmalat’s internal auditors at Parmalat’s Milan offices where the Epicurum investment was “amply debated.”
227. Deloitte & Touche had been on notice of the problems at Parmalat concerning its asset valuations as early as May of 2000. Deloitte & Touche SA, the Luxembourg arm of the global firm, qualified the financial statements of Parmalat Soparfi, S.A (“Soparfi”). Soparfi, a wholly owned subsidiary of Parmalat, is a financial vehicle for the group. Tonna and three other senior executives served on the Board of Directors of Soparfi.
228. Deloitte & Touche qualified Soparfi’s financial statements for the three-year period from 1999-2001. The problems related to Soparfi’s valuation of its holdings in two other Parmalat units: Parmalat Paraguay and Parmalat Food Industries South Africa Ltd. Deloitte & Touche
- 102 - qualified its opinion due to a lack of information to back up the asset valuations provided to these two units by the directors.
229. Nonetheless, the qualification was not noted in Parmalat’s consolidated financial statements for FY99-FY01, nor was it mentioned by Deloitte & Touche in its audit opinion certifying those statements. Deloitte & Touche claims the qualification of the Soparfi’s statements were not relevant to the group as a whole because a lower valuation was used for Parmalat Paraguay and Parmalat Food Industries South Africa Ltd. in preparing the consolidated statements than was used in the preparation of Soparfi’s financial statements.
230. Despite this qualification, Soparfi was able to raise $308 million in an equity-linked bond offering in December of 2002. Morgan Stanley managed this issuance. In fact, it was not until this prospectus that the information concerning Deloitte & Touche’s qualification was publicly disseminated. In the prospectus, Defendants disclosed:
Deloitte & Touche S.A. have audited the financial statements of the Issuer for the years 2001, 2000 and 1999. The following tables present the financial information for the Issuer as at and for the years ended 31 December 2001, 2000 and 1999. This information is derived from and should be read in conjunction with, and is qualified in its entirety by, the audited financial statements of the Issuer as at and for the years ended 31 December 2001, 2000 and 1999 which are included in this Offering Memorandum. The audit opinion of Deloitte & Touche S.A. for the financial statements of Parmalat SOPARFI S.A. as at and for the years ended 31 December 2001, 2000 and 1999 contained a qualification on the book value of a participation in Parmalat Paraguay. Such participation in Parmalat Paraguay was sold to a Group company in 2002. The audit opinion of Deloitte & Touche S.A. for the financial statements of Parmalat SOPARFI S.A. as at and for the years ended 31 December 2000 and 1999 contained a qualification on the book value of a participation in Parmalat Food Industries South Africa Ltd. Such participation in Parmalat Food Industries South Africa Ltd was sold to a Group company in 2001. Management believes that these qualifications do not affect the true and fair representation of the financial condition of the Issuer provided in such financial statements because Deloitte & Touche S.A. did not and do not take into consideration the actual commercial value of those participations.
231. The lack of information surrounding the valuation of Soparfi’s holdings in other group entities should have raised some serious concerns to Deloitte & Touche about the quality of - 103 - Parmalat’s overall financial statements. Moreover, the fact that the two units, Parmalat Paraguay and Parmalat Food Industries South Africa, were simply sold directly or indirectly to Parmalat SpA in 2002 and 2001, respectively, should have also raised some concerns and led to further questioning. Merely shifting the over-valued entities to another entities’ books does not make the problem simply disappear.
232. The qualification of the financial statements of one of Parmalat’s subsidiaries included in the group’s financial statements should have raised a serious red flag about the quality and correctness of Parmalat’s consolidated financial statements during the Class Period.
233. Deloitte & Touche and Grant Thornton had a responsibility to perform their services in an ethical and independent manner. As stated in IAS, AU §8200:
.04 The auditor should comply with the “Code of Ethics for Professional Accountants” issued by the International Federation of Accountants. Ethical principles governing the auditor’s professional responsibilities are:
(a) independence; (b) integrity; (c) objectivity; (d) professional competence and due care; (e) confidentiality; (f) professional behavior; and (g) technical standards.
* * *
.06 The auditor should plan and perform the audit with an attitude of professional skepticism recognizing that circumstances may exist which cause the financial statements to be materially misstated. For example, the auditor would ordinarily expect to find evidence to support management representations and not assume they are necessarily correct.
- 104 - The Auditors’ False Statements as to Parmalat’s FY 98-FY 03 Financial Statements
234. Deloitte & Touche and Grant Thornton issued materially false reports on Parmalat’s
1998-2002 year-end financial statements and on Parmalat’s 1999-2003 half-year reports during the
Class Period.
235. With respect to Parmalat’s consolidated financial statements for FY 98, Grant
Thornton represented, in a report dated May 13, 1999 (erroneously marked 1998), the following:
We conducted our audit in accordance with the auditing standards recommended by CONSOB (National Commission for Listed Companies and the Stock Exchange) which included such tests we considered necessary for the purposes of our engagement. With respect to the opinion expressed on the previous year’s consolidated financial statements, as required by law, reference is made to our audit report thereon dated 12th June 1998. The financial statements of a number of subsidiaries which represent respectively 30% of aggregate total assets and 22% of aggregate sales, were examined by other auditors who furnished us with their reports. Our opinion, expressed in this report, with respect to the values relating to these companies included in the consolidation, are also based on the work performed by other auditors.
In our opinion, the consolidated financial statements referred to above have been clearly drawn up and give a true and fair view of the state of affairs and of the results of operations of the company and its subsidiaries, in conformity with generally accepted accounting principles concerning consolidated financial statements. Consequently we issue our auditors’ certificate on the consolidated financial statements of PARMALAT FINANZIARIA S.p.A. Group as at 31st December 1998.
236. With respect to Parmalat’s consolidated financial statements for FY 99, Deloitte &
Touche represented, in a report dated May 10, 2000, the following:
We conducted our audit in accordance with the Auditing Standards recommended by Consob, the Italian Stock Exchange Commission. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. The financial statements of certain subsidiary companies representing 22% of consolidated total assets and 16% of consolidated revenues respectively have been examined by other auditors who - 105 - provided us with copies of their reports. Our opinion, expressed in this report, as regards the figures relating to such companies included in the consolidation, is also based on the work carried out by these other auditors. We believe our audit provides a reasonable basis for our opinion.
* * *
In our opinion, the consolidated financial statements present fairly the financial position of the Company as of December 31, 1999, and the results of its operations for the year then ended, and comply with the principles which regulate the preparation of consolidated financial statements in Italy.
237. With respect to Parmalat’s consolidated financial statements for FY 00, Deloitte &
Touche represented, in a report dated April 13, 2001, the following:
We conducted our audit in accordance with the Auditing Standards recommended by Consob, the Italian Stock Exchange Commission. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. The financial statements of certain subsidiary companies representing 40% of consolidated total assets and 23% of consolidated revenues respectively have been examined by other auditors who provided us with copies of their reports. Our opinion, expressed in this report, as regards the figures relating to such companies included in the consolidation, is also based on the work carried out by these other auditors. We believe our audit provides a reasonable basis for our opinion.
* * *
In our opinion, the consolidated financial statements present fairly the financial position of the Company as of December 31, 2000, and the results of its operations for the year then ended, and comply with the principles which regulate the preparation of consolidated financial statements in Italy.
238. With respect to Parmalat’s consolidated financial statements for FY 01, Deloitte &
Touche represented, in a report dated April 11, 2002, the following:
We conducted our audit in accordance with the Auditing Standards recommended by Consob, the Italian Stock Exchange Commission. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
- 106 - disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. The financial statements of certain subsidiary companies representing 42% of consolidated total assets and 23% of consolidated revenues respectively have been examined by other auditors who provided us with copies of their reports. Our opinion, expressed in this report, as regards the figures relating to such companies included in the consolidation, is also based on the work carried out by these other auditors. We believe our audit provides a reasonable basis for our opinion.
* * *
In our opinion, the consolidated financial statements present fairly the financial position of the Company as of December 31, 2001, and the results of its operations for the year then ended, and comply with the principles which regulate the preparation of consolidated financial statements in Italy.
239. With respect to Parmalat’s consolidated financial statements for FY 02, Deloitte &
Touche represented, in a report dated April 14, 2003, the following:
We conducted our audit in accordance with the Auditing Standards recommended by Consob, the Italian Stock Exchange Commission. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. The financial statements of certain subsidiary companies representing 49% of consolidated total assets and 30% of consolidated revenues respectively have been examined by other auditors who provided us with copies of their reports. Our opinion, expressed in this report, as regards the figures relating to such companies included in the consolidation, is also based on the work carried out by these other auditors. We believe our audit provides a reasonable basis for our opinion.
* * *
In our opinion, the consolidated financial statements present fairly the financial position of the Company as of December 31, 2002, and the results of its operations for the year then ended, and comply with the principles which regulate the preparation of consolidated financial statements in Italy.
240. With respect to Parmalat’s interim financial information for FY 99, Grant Thornton represented, in a report dated October 14, 1999, the following:
- 107 - We have reviewed the six-months Report of Parmalat Finanziaria S.p.A as of June 30, 1999, consisting of the balance sheets, the related statements of income, the accounting and financial footnotes and the group consolidated accounts. We have also reviewed the accounting and financial reporting matters for the sole purpose of checking the remaining data given in the rest of the interim report.
* * *
On the above basis, we did not acquire knowledge of any significant variations or alterations that should be added to the statements and financial information as identified in paragraph 1 of the present report, in order to achieve conformity with the criteria as set out in Consob regulations, for the preparation of six-month reports as approved in decree no. 8195 dated June 30, 1994 and subsequent modifications.
241. With respect to Parmalat’s interim financial information for FY 00, Deloitte &
Touche represented, in a report dated October 6, 2000, the following:
We have reviewed the accompanying interim financial information for the six months ended June 30, 2000, made up of the consolidated accounting schedules and related notes of Parmalat Finanziaria S.p.A. In addition, we have verified the consistency of the notes with the related information contained in the above accounting schedules.
* * *
Based on our review we are not aware of any material modifications that should be made to the interim financial information mentioned in the first paragraph above in order for it to be in conformity with the criteria provided by CONSOB regulations for the preparation of interim financial information approved with Resolution N. 11971 of May 14, 1999 as subsequently amended and supplemented.
242. With respect to Parmalat’s interim financial information for FY 01, Deloitte &
Touche represented, in a report dated October 15, 2001, the following:
We have reviewed the accompanying interim financial information for the six months ended June 30, 2001, made up of the consolidated accounting schedules and related notes of Parmalat Finanziaria S.p.A. In addition, we have verified the consistency of the notes with the related information contained in the above accounting schedules.
* * *
Based on our review we are not aware of any material modifications that should be made to the interim financial information mentioned in the first paragraph above in order for it to be in conformity with the criteria provided by CONSOB - 108 - regulations for the preparation of interim financial information approved in Resolution N. 11971 of May 14, 1999 as subsequently amended and supplemented.
243. With respect to Parmalat’s interim financial information for FY 02, Deloitte &
Touche represented, in a report dated October 15, 2002, the following:
We have reviewed the accompanying interim financial information for the six months ended June 30, 2002, made up of the consolidated accounting schedules and related notes of Parmalat Finanziaria S.p.A. In addition, we have verified the consistency of the notes with the related information contained in the above accounting schedules.
* * *
Based on our review we are not aware of any material modifications that should be made to the interim financial information mentioned in the first paragraph above in order for it to be in conformity with the criteria provided by CONSOB regulations for the preparation of interim financial information approved in Resolution N. 11971 of May 14, 1999 as subsequently amended and supplemented.
244. These reports were materially false and misleading due to the concealment, in
Parmalat’s financial statements, of billions of dollars in debt and other financial manipulations described herein. The statements were also false as Deloitte & Touche’s and Grant Thornton’s audits were not performed in accordance with IAS nor with Auditing Standards approved by
CONSOB, due to Deloitte & Touche’s and Grant Thornton’s failure to gather sufficient competent evidential matter to support the amounts in the financial statements.
245. After ignoring Bonlat for the entire Class Period, on October 31, 2003, Deloitte &
Touche finally issued a statement of limitation regarding its own assessment of Parmalat’s finances in connection with Parmalat’s half-year report for 2003. With respect to Parmalat’s interim financial information for FY 03, Deloitte & Touche represented, in a report dated October 31, 2003, the following:
1. We have reviewed the accompanying interim financial information for the six months ended June 30, 2003, made up of the consolidated accounting schedules and related notes of Parmalat Finanziaria S.p.A. In addition, we have verified the
- 109 - consistency of the notes with the related information contained in the above accounting schedules.
2. Our review was made in accordance with the criteria for reviews recommended by CONSOB, the Italian Commission for listed Companies and the Stock Exchange, under Resolution n. 10867 of July 31, 1997. The review of the six- month data of certain subsidiaries representing approximately 15% of consolidated assets and approximately 13% of consolidated income was carried out by other auditors who have provided us with a copy of their reports. In addition, we availed of the review performed by other auditors, who provided us with their report, in relation to a subsidiary company performing prevalently financial activities representing a significant part of the consolidated total assets. Our review consisted principally of applying analytical procedures to the underlying financial data, assessing whether accounting policies have been consistently applied and making enquiries of management responsible for financial and accounting matters. The review did not include audit procedures such as tests of controls and verification of assets and liabilities and was therefore substantially less in scope than an audit performed in accordance with auditing standards. Accordingly, unlike our reports on the statutory and consolidated financial statements for the year ended December 31, 2002, we do not express an audit opinion on the interim financial information. In our review on the interim financial information for the six month data as of June 30, 2003 we have encountered the following limitations:
– Group subsidiary holds a quota in an overseas mutual investment fund as of June 30, 2003 amounting to approximately Euro 477.7 million. The investment is carried out at subscription value and classified under current financial assets. At June 30, 2003 complete and detailed information is not available on the performance in the period and on the general situation of the fund, necessary to support the return matured and the valuation of the investment at that date.
– The Company informed us that the first financial statements available regarding this fund will be those as of December 31, 2003, the period end of its first financial statements. Therefore, in the absence of this documentation, it was not possible to support the carrying value of these financial assets and the effects of the operations made by the fund in the consolidated interim financial information of the Group for the six-months period ended June 30, 2003. Among these operations are those described in the following paragraph, to which the aforementioned subsidiary was a counterparty.
– In March 2003 a Group subsidiary signed a derivative financial contract with the investment fund mentioned in the preceding paragraph in which the parties are committed to settling on a quarterly basis, until 2007, with reference to a notional amount of Euro 850 million, the USD/Euro exchange differences matured compared to an initial agreed upon exchange rate. The Group received an initial amount of approximately USD 45 million (approximately Euro 40 million) on the signing of the contract, that was
- 110 - entirely credited to the income statement in the period under other revenues and income. In addition, the income statement for the period includes financial income of approximately USD 90 million (approximately Euro 81.7 million) as a consequence of favorable exchange rate fluctuations for the Group in the first quarter of the contract. In the absence of national accounting standards regarding these circumstances, it was considered appropriate to make reference to international accounting standards that will be shortly introduced for listed companies for the analysis of this treatment. In accordance with these standards the up-front payment recognized by the contract under consideration must be initially recorded as a liability; at the end of each subsequent period, the derivative contracts in course must be valued at “fair value” and, based on this assessment, the initial recorded value must be adjusted. Consequently, in the absence of an independent “fair value” valuation of this contract as of June 30, 2003, we are unable to confirm the correct accounting treatment of the up-front amount received by the Group.
* * *
4. The consolidated financial statements as of June 30, 2003 include the reporting package of Parma AC S.p.A. which includes, under intangible assets, a write-down relating to the long-term rights for the services of professional sports persons. The amount of the write-down, net of amortization in the period, amounts to approximately Euro 215 million and was determined on the basis of a sworn expert’s appraisal. This accounting treatment is permitted as per article 18 bis of law no. 19 of March 23, 1981, introduced with law no. 27 of February 21, 2003, in departure of recording the entire charge to the income statement for the period, as required by the regulations on the preparation of financial statements in the Civil Code and relevant accounting principles. The Group did not show in the notes to the consolidated interim financial statements ended June 30, 2003 the aforesaid effect of the application of the above-mentioned law.
5. Based on our review, except for the possible effects, if any, related to the limitations mentioned in paragraph 2 and the lack of information indicated in the preceding paragraph 4, we are not aware of any material modifications that should be made to the interim financial information mentioned in the first paragraph above in order for it to be in conformity with the criteria provided by CONSOB regulations for the preparation of interim financial information approved with Resolution NA 1971 of May 14, 1999 as subsequently amended and supplemented.
246. Despite having been put on notice of the fraudulent accounting at Bonlat, Deloitte &
Touche still claimed in the issuance of this opinion that it was not aware of significant alterations that should be made to Parmalat’s financial statements, except for its express limitations surrounding the Epicurum asset and the Company’s accounting for its soccer club. However, shortly thereafter,
- 111 - on November 12, 2003 (after regulators announced they were launching an investigation into
Parmalat’s accounting on November 10, 2003), Deloitte & Touche did state that it would not certify
Bonlat’s first half 2003 results.
247. Deloitte & Touche’s and Grant Thornton’s reports for FY 98-FY 03 were false and misleading due to their failure to obtain reasonable assurance about whether Parmalat’s financial statements were free of material misstatement. Given that Parmalat was a close family-controlled business, utilizing a large, complex global structure and continual borrowing of large amounts of money when it purportedly had large amounts of cash on hand, Deloitte & Touche and Grant
Thornton knew of, or were on notice of, the manipulations detailed herein and knowingly failed to design their audits to obtain reasonable assurances concerning Parmalat’s accounts. Throughout the
Class Period, Deloitte & Touche and Grant Thornton knew or, absent gross recklessness especially in light of the nature and the amount of Parmalat’s fraud, should have known that Parmalat’s financial results were materially false and misleading in that they overstated earnings and assets and understated liabilities by billions of dollars.
Auditor’s Participation in the Dissemination of Parmalat’s False Financial Statements
248. During the Class Period, Deloitte & Touche and Grant Thornton were actively involved in the preparation, examination and/or review of Parmalat’s consolidated financial statements for FY 98-FY 03. Deloitte & Touche and Grant Thornton knew that the information contained in the financial statements would be disseminated to and relied upon by investors in the
United States, including the plaintiffs, and around the world. Deloitte & Touche and Grant Thornton further knew that this information would be contained in offering memoranda and other selling documents used by Defendants to raise over $5 billion during the Class Period via the sale of
Parmalat securities.
- 112 - 249. As the auditors for Parmalat and its subsidiaries, Deloitte & Touche and Grant
Thornton were intimately familiar with Parmalat’s business, given their continual access to
Parmalat’s confidential financial information. As a result, Deloitte & Touche and Grant Thornton knew or, absent gross recklessness, should have known about Parmalat’s true financial condition.
Despite this knowledge, Deloitte & Touche and Grant Thornton participated in the presentation, review and issuance of Parmalat’s false financial statements to the detriment of the investing public.
250. Due to Deloitte & Touche’s and Grant Thornton’s false statements and failure to identify and modify its reports to identify Parmalat’s false financial reporting, Deloitte & Touche and Grant Thornton violated the following basic auditing standards:
(a) That the audit should be performed by persons having adequate technical training and proficiency as auditors;
(b) That the auditors should maintain an independence in mental attitude in all matters relating to the engagement;
(c) That due professional care is to be exercised in the performance of the audit and preparation of the report;
(d) That the audit is to be adequately planned and that assistants should be properly supervised;
(e) That the auditor should obtain a sufficient understanding of internal controls so as to plan the audit and determine the nature, timing and extent of tests to be performed;
(f) That sufficient, competent, evidential matter is to be obtained to afford a reasonable basis for an opinion on the financial statements under audit; and
(g) That informative disclosures are regarded as reasonably adequate unless otherwise stated in the report.
- 113 - APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE MARKET DOCTRINE
251. At all relevant times, the market for Parmalat’s securities was an efficient market for the following reasons, among others:
(a) Parmalat’s securities have met the requirements for listing, and were listed and actively traded on the Mercado Telematico Azionario, a highly efficient, screen-based automated market, the Luxemborg Stock Exchange and the Milan Stock Exchange and/or traded as
ADRs in the United States;
(b) Parmalat regularly communicated with public investors via established market communication mechanisms, including through regular disseminations of releases on major newswire services and other wide-ranging public disclosures, and other communications with the financial press and other similar reporting services as well as via Internet postings directed to investor in the United States; and
(c) Parmalat was followed by securities analysts employed by major brokerage firms worldwide who wrote reports based upon information disseminated by the Individual
Defendants which were distributed to the sales force and certain customers of their respective brokerage firms. These reports were publicly available and entered the public marketplace.
252. As a result of the foregoing, the market for Parmalat securities promptly digested current information regarding Parmalat from all publicly available sources and reflected such information in Parmalat’s share price. Under these circumstances, purchasers of Parmalat’s securities during the Class Period suffered similar injury through their purchase of Parmalat’s securities at artificially inflated prices and a presumption of reliance applies.
- 114 - FIRST CLAIM FOR RELIEF
Violation of §10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants
253. Plaintiffs repeat and reallege each and every allegation contained above as if fully set forth herein.
254. During the Class Period, Defendants carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including plaintiffs and other Class members, as alleged herein; (ii) enable defendants and Parmalat to sell more than $5 billion of Parmalat securities; and (iii) cause plaintiffs and other members of the
Class to purchase Parmalat’s securities at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, Defendants, and each of them, took the actions set forth herein.
255. Defendants: (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to maintain artificially high market prices for Parmalat securities in violation of §10(b) of the Exchange Act and Rule l0b-5. All
Defendants are sued either as primary participants in the wrongful and illegal conduct charged herein or as controlling persons as alleged below.
256. Defendants, individually and in concert, directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the financial performance and business operations of Parmalat as specified herein.
257. These defendants employed devices, schemes and artifices to defraud while in possession of material adverse non-public information and engaged in acts, practices, and a course of
- 115 - conduct as alleged herein in an effort to assure investors of Parmalat’s value and performance, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about Parmalat and its business operations and future prospects in the light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of Parmalat securities during the Class Period.
258. Each of the Individual Defendants’ primary liability, and controlling person liability, arises from the following facts: (i) the Individual Defendants were high-level executives and/or directors at the Company during the Class Period and members of the Company’s management team or had control thereof; (ii) each of these defendants, by virtue of his responsibilities and activities as a senior officer and/or director of the Company was privy to and participated in the creation, development and reporting of the Company’s financial statements; and (iii) each of these defendants was aware of the Company’s dissemination of information to the investing public which they knew or recklessly disregarded was materially false and misleading.
259. The Defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Such
Defendants’ material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose of concealing the true status of Parmalat’s operations and financial statements from the investing public and selling newly issued securities and/or supporting artificially inflated trading prices of securities. As demonstrated by Defendants’ overstatements and misstatements of the
Company’s business, operations and earnings throughout the Class Period, Defendants, if they did
- 116 - not have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing
to obtain such knowledge by deliberately refraining from taking those steps necessary to discover
whether those statements were false or misleading.
260. As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of Parmalat securities was
artificially inflated during the Class Period. In ignorance of the fact that market prices of Parmalat’s
securities were artificially inflated, and relying directly or indirectly on the false and misleading
statements made by Defendants, or upon the integrity of the market in which the securities trade,
and/or on the absence of material adverse information that was known to or recklessly disregarded
by Defendants but not disclosed in public statements by Defendants during the Class Period,
plaintiffs and the other members of the Class acquired Parmalat securities during the Class Period at
artificially high prices and were damaged thereby.
261. At the time of said misrepresentations and omissions, plaintiffs and other members of
the Class were ignorant of their falsity, and believed them to be true. Had plaintiffs and the other
members of the Class and the marketplace known the truth regarding the problems that Parmalat was
experiencing, which were not disclosed by Defendants, plaintiffs and other members of the Class
would not have purchased or otherwise acquired their Parmalat securities, or, if they had acquired
such securities during the Class Period, they would not have done so at the artificially inflated prices
which they paid.
262. By virtue of the foregoing, Defendants have violated §10(b) of the Exchange Act, and
Rule l0b-5 promulgated thereunder.
- 117 - 263. As a direct and proximate result of Defendants’ wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their respective purchases of the
Company’s securities during the Class Period.
SECOND CLAIM FOR RELIEF
Violation of §20(a) of the Exchange Act Against Defendants Tanzi, Tonna, Coloniale, Deloitte Touche Tohmatsu Grant Thornton International, Citigroup, BankAmerica and Deutsche Bank
264. Plaintiffs repeat and reallege each and every allegation contained above as if fully set forth herein.
265. Defendants Tanzi, Tonna and Coloniale acted as controlling persons of Parmalat within the meaning of §20(a) of the Exchange Act. By reason of their positions as directors, officers and/or controlling shareholders of Parmalat they had the power and authority to cause Parmalat to engage in the wrongful conduct complained of herein.
266. Tanzi controls 50.68% of the equity interest in Parmalat via his and his family’s equity ownership and control over Coloniale, the Tanzi family holding corporation. Tonna is the
Chairman of the Board of Coloniale. All strategic decisions for Parmalat were made by or required the approval of Coloniale, Tanzi and/or Tonna. As a result of their equity ownership and executive positions at Coloniale and their positions as senior executives at Parmalat, Tanzi and Tonna exercised complete and total control over Parmalat. Similarly, Coloniale possessed and exercised control over Parmalat as a result of its majority equity interest in Parmalat and the fact that
Coloniale’s controlling shareholder (Tanzi) and its Chairman (Tonna) were also senior executives and/or directors of Parmalat. Defendant Citigroup acted as a controlling person of Buconero within the meaning of §20(a) of the Exchange Act. By reason its controlling ownership interest, Citigroup
- 118 - and its employees had the power and authority to cause and did cause Buconero to engage in the scheme and wrongful conduct complained of herein.
267. Defendant Citigroup owns a majority of the equity interest in Buconero and possesses and exercised control and dominion over these defendants as the direct or indirect owner of a controlling equity interest therein. All strategic decisions for Buconero were made by or required the approval of Citigroup and its senior executives. Defendant Citigroup possessed and exercised the power and authority to cause Buconero to engage in the unlawful conduct asserted herein.
268. Defendants Citigroup, BankAmerica and Deutsche Bank each controlled their subsidiaries and employees that participated in the scheme to defraud.
269. Defendant Grant Thornton International acted as a controlling person of defendant
Grant Thornton SpA and the individual Grant Thornton employees who participated in the scheme alleged herein. Grant Thornton International oversaw and approved the processes and procedures used by Grant Thornton SpA during the Class Period by, among other things, utilizing mandatory internal inspections to ensure compliance with the standards established by Grant Thornton
International.
270. Defendant Deloitte Touche Tohmatsu acted as a controlling person of defendant
Deloitte & Touche SpA and the individual Deloitte & Touche employees who participated in the scheme alleged herein as detailed in above.
271. By reason of such wrongful conduct, the defendants named in this Second Claim for
Relief are liable pursuant to §20(a) of the Exchange Act. As a direct and proximate result of these defendants’ wrongful conduct, plaintiffs and other members of the Class suffered damages in connection with their purchases of Parmalat securities during the Class Period.
- 119 - PRAYER FOR RELIEF
WHEREFORE, plaintiffs pray for relief and judgment, including preliminary and permanent injunctive relief, as follows:
A. Determining that this action is a proper class action, and certifying plaintiffs as class representatives under Rule 23 of the Federal Rules of Civil Procedure;
B. Awarding preliminary and permanent injunctive relief in favor of plaintiffs and the
Class against Defendants and their agents and all persons acting under, in concert with, or for them, including an accounting for and the imposition of a constructive trust and/or an asset freeze on
Defendants’ ill-gotten gains;
C. Ordering an accounting of Defendants’ ill-gotten gains;
D. Ordering disgorgement of Defendants’ ill-gotten gains;
E. Awarding compensatory damages in favor of plaintiffs and the other Class members against all Defendants, jointly and severally, for all damages sustained as a result of Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;
F. Awarding plaintiffs and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and
G. Such other and further relief as the Court may deem just and proper.
JURY DEMAND
Plaintiffs hereby demand a trial by jury.
DATED: March 5, 2004 LAW OFFICES OF CURTIS V. TRINKO, LLP CURTIS V. TRINKO (CT-1838)
S/ CURTIS V. TRINKO
- 120 - 16 West 46th Street, 7th Floor New York, NY 10036 Telephone: 212/490-9550 212/986-0158 (fax)
MILBERG WEISS BERSHAD HYNES & LERACH LLP WILLIAM S. LERACH DARREN J. ROBBINS TRAVIS E. DOWNS III
WILLIAM S. LERACH
401 B Street, Suite 1700 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax)
MILBERG WEISS BERSHAD HYNES & LERACH LLP PATRICK J. COUGHLIN JOHN K. GRANT DENNIS J. HERMAN WILLOW E. RADCLIFFE 100 Pine Street, Suite 2600 San Francisco, CA 94111 Telephone: 415/288-4545 415/288-4534 (fax)
Attorneys for Plaintiffs S:\PleadingsSD\Parmalat\First Amended Cpt.doc
- 121 - CEaICA"ir= OP KAWW PLAM I
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"im"T SCHEDULE A
SECURITIES TRANSACTIONS
Acquisitions
Date Type/Amount of Acquired Securities Acquired Price
6 .25% note due 2/2005 XS010658357 7
3/15/2000 € 1,000,000 100,159 4/17/2001 € 169,000 101,02 11/27/2001 € 500,000 99,9 5
Coupon 2 .5313 due 4118105 XS0086752748
9/4/2001 € 926,000 99 11/28/2001 € 1,000,000 98,09 5/20/2003 € 250,000 98,15 CFRTtFICATION OF NAMED PLAINTIFF =UAW TO FEDER&„SSCLR11IES LAW'S
RENATO ESPOSITO ("Plaintiff') declares; I . Plarndff has reviewed a complaint and authorized its filing . 2. PLairnif did not acquire the secwity that is the subject of this action at di e direction of plaintiW s counsel or in order to participate in this private action or any other litigation under the federal securities laws . 3. Plaintiff is willing to serve as a represontstive pm#y on behalf of the class, ineludiag providing testimony at deposition and vial, if accvasary . 4. Plaintiffhas made the following t ctio, a) during the Class Period in the securities that are the subject of this action :
Suety T ui FW Edgc per Sbw
See atabied Schedule A.
5. During the tie years prior to the date of this Certificate, Plaintiff has not sought to serve or served as a reprvsentactivc party for a class in an action filed under the federal securities laws except as detailed below :
6. The Plaintiffwill not accept any payment for serving as a Mmssentativc party on behalf of the class beyond the Plaintiff` s pro rate share of any recovery ,
ARMAL T except such reasonable east : and expenses (Including bit wages) directly relating to the repre antation of the class as ordered of approved by the count I declare under penalty of peuty to the foregoing is true and correct Executed this 10 day of l E M V ~41f I: 2Oo4.
RENATO SPOSITO
-2- PARMALAT
L; w ,l,~s . ~, . . ~ . ,. :. u,Ar .. ., : s~riy• ...... L ~ . - . .. .•tiRY .TC ~ . + . c, , .~ .~7 ~~t: SCHEDULE A
SECURITIES TRANSACTION S
Acquisitions
Date Type/Amount of Acquired Notes Acquired Pric e
7.00% note due 1012007 XS0118659688 11/20/2002 25,000 € 99,269 1/14/2003 35,000 € 100,82 0 11/10/2003 100,000 € 100,50 0 0.00% note due 2/2028 XS0083921881 9/9/2003 600,000,000 L . 13,91 6
0.00% note due 1212004 XS0158370121 11/12/2003 30,000 € 101,35 1
1 .00% note due 121200 5 XS0084903847 11/27/2003 100,000 € 103,103
Ordinary Shares Acquisition s
Date Type/Amount of Acquisition Price Acquired Securities Ac uired Per Share
11/11/2003 5,000 € 2,360 11/20/2003 5,000 € 2,135 11/24/2003 3,000 € 2,080 11/25/2003 5,000 € 2,240 12/11/2003 13,000 € 1,150
Sales
Date Type/Amount of Sale Price Sold Securities Sold Per Share
11/25/2003 5,000 € 2,245 DECLARATION OF SERVICE BY MAIL
I, the undersigned, declare:
1. That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Diego, over the age of 18 years, and not a party to or interest in the within action; that declarant’s business address is 401 B Street, Suite 1700, San Diego, California
92101.
2. That on March 5, 2004, declarant served the FIRST AMENDED CLASS ACTION
COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS by depositing a true copy thereof in a United States mailbox at San Diego, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List.
3. That there is a regular communication by mail between the place of mailing and the places so addressed.
I declare under penalty of perjury that the foregoing is true and correct. Executed this 5th day of March, 2004, at San Diego, California.
CORINNE N. SWEAT Unrepresented Defendants and Counsel for Defendants
Domenico Barili General Counsel 10 Str. Del Consorzio Coloniale SPA 43110 Parma, Italy Piazza Erculea 9 20122 Milano, Italy +39-02 8068801 +39-02 8693863 (Fax)
Luciano Del Soldato Francesco Giufreddi 21 Str. Nazionale Ovest 3 Via Varra Inferiore 43044 Collecchio, Italy 43044 Collecchio, Italy
Bonlat Financing Corp. General Counsel c/o M&C Corporate Services Limited Parmalat Finanziaria S.p.A. Ugland House, Georgetown Piazza Erculia 9 Grand Cayman, Cayman Islands 20122 Milano, Italy +39-02 8068801 +39-02 8693863 (Fax)
Calisto Tanzi Giovani Tanzi Via Delle Chiaviche 3 Via Tomasicchio 43100 Parma, Italy 43100 Parma, Italy - and - - and - c/o Carcere di Via Burla c/o Carcere di San Vittore Via Burla #3 Piazza San Gataeno Filangieri #2 43110 Parma, Italy Milano, Italy
Stefano Tanzi Fausto Tonna c/o Carcere di San Vittore Via Pier Franco Carreza Collechio Piazza San Gataeno Filangieri #2 43044 Parma, Italy Milano, Italy - and - c/o Carcere di Via Burla Via Burla #3 43110 Parma, Italy
General Counsel General Counsel Buconero LLC Grant Thornton SPA CT Corporation Largo Augusto, 7 111 Eighth Avenue 20122 Milano, Italy New York, NY 10011 Brian M. Cogan Mark A. Kirsch STROOCK & STROOCK & LAVAN CLIFFORD CHANCE US LLP 180 Maiden Lane 200 Park Avenue, Suite 5200 New York, NY 10038-4982 New York, NY 10166-0153 212/806-5400 212/878-8000 212/806-6006 (Fax) 212/878-8375 (Fax)
Representing Grant Thornton International Representing CitiGroup, Inc.
Robert I. Bodian Richard A. Martin MINTZ LEVIN COHN FERRIS HELLER EHRMAN WHITE GLOVSKY & POPEO, P.C. & McAULIFFE LLP One Financial Center 120 West 45th Street Boston, MA 02111 New York, NY 10036-4041 617/542-6000 212/832-8300 617/542-2241 (Fax) 212/763-7600 (Fax) - and - Representing Zini & Associates, P.C. Douglas M. Schwab HELLER, EHRMAN, WHITE & McAULIFFE 333 Bush Street, Suite 3100 San Francisco, CA 94104-2878 415/772-6000 415/772-6268 (Fax)
Representing Deloitte Touche Tohmatsu and Deloitte & Touche S.p.A. Counsel for Plaintiffs
Curtis V. Trinko David A. Rosenfeld LAW OFFICES OF CURTIS V. Samuel H. Rudman TRINKO, LLP CAULEY, GELLER, BOWMAN 16 West 46th Street & RUDMAN, LLP Seventh Floor 200 Broadhollow Road, Suite 406 New York, NY 10036 Melville, NY 11747 212/490-9550 631/367-7100 212/986-0158 (Fax) 631/367-1173 (Fax)
William S. Lerach Mark A. Topaz Darren J. Robbins Richard A. Maniskas MILBERG WEISS BERSHAD SCHIFFRIN & BARROWAY, LLP HYNES & LERACH LLP Three Bala Plaza East, Suite 400 401 B Street, Suite 1700 Bala Cynwyd, PA 19004 San Diego, CA 92101 610/667-7706 619/231-1058 610/667-7056 (Fax) 619/231-7423 (Fax) - and - Representing Robert McQueen Patrick J. Coughlin John K. Grant Dennis J. Herman MILBERG WEISS BERSHAD HYNES & LERACH LLP 100 Pine Street, Suite 2600 San Francisco, CA 94111 415/288-4545 415/288-4534 (Fax)
Representing Southern Alaska Carpenters Retirement Trust
Brian Philip Murray RABIN, MURRAY & FRANK LLP 275 Madison Avenue, 34th Floor New York, NY 10016 212/682-1818 212/682-1892 (Fax)
Representing Ferri Giampolo