Parmalat used to be a successful dairy products company, or so everyone thought. In 2003 it became a sensational fraud case, Europe's Enron. Two years later, after the spills were mopped up, the new Parmalat emerged. But investors aren't just buying a portfolio of cheese and long-life milk; they're buying a play on the settlements from the banks and accounting firms accused of helping to conceal its dire financial condition.
Sadly for Parmalat and the new management team, led by CEO Enrico Bondi, the play seems to be going against them. This time last year, Parmalat shares, which trade in Milan, were riding high on profits boosted by the early settlements. In the summer, the shares fell off a cliff and have stayed low since then. Yesterday, they closed at €2.52 ($3.76), down about 37 per cent from last year's peak. Investors clearly expect Mr. Bondi to come up short on the settlements front. He is seeking billions.
Investors will get a better idea of potential litigation receipts to come later this month, when Citigroup, Morgan Stanley, Deutsche Bank, Bank of America and UBS answer to the market-rigging accusations against them at a trial in Milan. The banks are expected to argue they had no idea the company, then under the control of Parmalat founder Calisto Tanzi, who is the subject of a separate trial, was headed into the toilet.
After all, Parmalat's collapse cost them money too because many were creditors. About a year after Parmalat's collapse, Bank of America said: "The bank is the second-largest creditor of the Parmalat group and therefore one of the subjects most damaged by the fraud. The theory that the bank continued to extend credit of hundreds of millions of dollars to a company while being aware of the insolvency simply in order to gain commissions, makes no economic sense."
If the prosecutors score victories, Parmalat's treasury will fill and the shares will rise. Something else will happen too - the nature of European banking might change. Unambiguous victories will mean banks failed in a role they didn't know they had: as watchdogs for investors. Any bank that has to behave as watchdog as well as creditor is unlikely to do either.
Parmalat's downfall was a global story because its products - it is the leader in long-life milk and is also big in yogurt, cheese, butter and ice cream - are sold throughout Europe, Latin America and Canada. (Canada, where it owns the Black Diamond and Beatrice brands, accounts for a quarter of its sales.) The company joined the stock market in 1992 and reported a profit every year. Investors bought its shares, banks stuffed it with bonds and accounting firms like Deloitte, one of the company's main auditors, approved the numbers.
Either they were all duped (meaning they were gullible) or were part of the scam (meaning they were crooks) - that's up to the courts to decide. By the end of 2003, Parmalat had collapsed under the weight of €14-billion in debt. The actual reported debt was about one-eighth that amount. In reality, Parmalat had made no money at all since its market listing.
Banks and accounting firms hate being dragged through trials, where all their grubby laundry is exposed. Some settlements have been reached. About a year ago, Deloitte settled for $149-million (U.S.), without admitting wrongdoing. Last month, Italy's Banca Intesa Sanpaolo, Europe's third-largest bank, settled for the equivalent of $470-million, again without admitting wrongdoing. The figure, though, was only about a 10th of what Parmalat had been seeking, a smaller relative amount than it had won from previous settlements. No wonder the shares have been sinking.
Meanwhile, Citigroup and the other big Wall Street and European banks have shown no interest in settling, though that could change as the Milan trial approaches, especially if the prosecutors turn up evidence that certain bank employees had received payoffs from Parmalat. The British and German authorities have gone easier on the banks. Prosecutors in Parmalat's home town of Parma have admitted, to their embarrassment, that they considered investigating Parmalat but didn't follow through. The banks must love the prosecutors' oversight - if they couldn't spot the fraud, how could we?
Mr. Bondi is just doing his job, which is to try to extract painful settlements from the banks and enrich his shareholders. To be sure, he will get some settlements. But judging from the settlements so far and the slumping Parmalat share price, his victory will not be complete. But even if he fails to win big cheques, he will get some satisfaction in proving the banks embarrassingly incompetent.
Eric Reguly