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In Parmalat Imbroglio, Citigroup Makes a Counterclaim

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NEW YORK (–Citigroup Inc. announced that it has filed an answer and counterclaims to a lawsuit brought against it in August 2004 by Enrico Bondi, the man Italy has designated the “extraordinary commissioner of Parmalat.”

While Dr. Bondi’s lawsuit contends that Citigroup assisted the now-insolvent dairy giant in cooking its books, Citigroup asserts that it is among the victims of that fraud and that its damages amount to 500 million euros (US$660 million).

These are among the fraudulent activities of Parmalat that Citigroup invokes in its counterclaims:

?? 1/2 The invention of assets in a fictitious Cayman Islands hedge fund;

?? 1/2 Forgery of documents to make it appear Parmalat had US$4.9 billion in a Bank of America Account;

?? 1/2 Recording of a fictitious sale of 300,000 tons of powdered milk to Cuba;

?? 1/2 Booking of false bond buy-backs; and

?? 1/2 Manipulation of the goodwill attributable to subsidiaries and the value of trademarks.

“Citigroup had nothing to do with these frauds and was not aware of them,” said the chief executive of Citigroup’s corporate and investment bank in Europe, the Middle East and Africa, William J. Mills, in a statement on the day of the filing, in a New Jersey court, March 17.

Parmalat Finanziaria S.p.A, the holding company for the Parmalat group, is a joint stock company incorporated under Italian law in June 1972. It was in 1997 that Parmalat jumped into the world markets in a big way, financing several international acquisitions, especially in the Western Hemisphere, with debt. By 2001, many of the new divisions were producing losses, and the company shifted to derivatives, apparently to some degree to hide this fact.

There are several lawsuits pending–such as one by the South Alaskan Miners’ Pension Fund–against not only Parmalat but Bank of America and Citicorp, which focuses on the activities of a Parmalat subsidiary known appropriately as buconero, the black hole.

Parmalat’s dramatic collapse began Oct. 31, 2003, when Deloitte & Touche sent Parmalat an audit report questioning the value assigned on the court’s books to the company’s investment in a Cayman Island hedge fund called Epicurum Ltd. It subsequently has become clear that this was more than a bit of dubious valuation. Epicurum didn’t exist. Parmalat’s management had gone so far as to fabricate a 30-page placement memorandum for the phantom fund. (Deloitte & Touche also is among the defendants in Dr. Bondi’s lawsuit.)

That December, Parmalat defaulted on a 150 million euro (US$198 million) bond. At first it blamed this on tardy payments due from “Epicurum.” The following day, Standard & Poor’s downgraded Parmalat’s bonds to junk status. Soon thereafter, Bank of America announced that an account Parmalat claimed to have with it, with allegedly US$3.9 billion in cash, was a fiction. Parmalat’s former financial manager, Fausto Tonna, apparently had manufactured the documentation for that spectral account.

On Dec. 22, Italy’s legislature passed a bill aimed at creating quick bankruptcy proceedings for Parmalat. The government appointed Mr. Bondi to present a reorganization plan. On Dec. 24, Parmalat availed itself of the new law and filed.

But the tangle of claims and contentions is far too vast to be confined to Italy.

On Jan. 20, 2004, the provisional liquidators of three Parmalat affiliates with bankruptcy proceedings pending in the Caymans filed a 308 petition in the southern district of New York. One month later, Feb. 24, three U.S. affiliates of Parmalat did likewise.

The U.S. law firm Bingham McCutchen LLP, Boston, represents the bondholder committee in the U.S. proceedings. A Bingham McCutcheon partner, Evan D. Flaschen of the Hartford, Conn., office, said recently that the committee includes more than 110 institutional investors, hedge funds and money managers from around the world, but he declined to name names.

Indeed, there is an understandable tight-lipped quality to the pronouncements of Parmalat creditors and their service providers. “It’s become so bitter that no one wants to be involved in it,” explained one hedge fund industry source.

Jaap Dutry, the head of special assets for Bank of America in Europe, told the Financial Times that he hopes the reorganized company will settle the various pending lawsuits expeditiously. “The litigation will distract the new board from running the business” otherwise, he said.

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Contact Bob Keane with questions or comments at: [email protected].


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