US embassy cable - 04ROME3283

UNCLAS  ROME 003283 
 
SIPDIS 
 
 
SENSITIVE 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
PARIS ALSO FOR USOECD 
TREASURY FOR OASIA HARLOW, STUART 
DOJ FOR OFFICE OF INTERNATIONAL AFFAIRS, CRIMINAL DIVISION 
DOJ FOR US ATTORNEY'S OFFICE, SOUTHERN DISTRICT OF NEW YORK 
STATE PASS CEA 
STATE PASS SEC 
STATE PASS FRB FOR GUST 
FRANKFURT FOR WALLAR 
USDOC 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
 
E.O. 12958:  N/A 
TAGS: ECON, EFIN, EAGR, IT, KPRP 
SUBJECT: Parmalat Tussles With Major Creditors and Former 
         Auditors 
 
REF: A) Milan 407 B) Milan 367 C) Milan 356 D) Milan 192 
E) Rome 852 F) Rome 687 G) Rome 506 H) Rome 184 
 
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SUMMARY 
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1. Following GOI approval of a restructuring plan based on a 
debt-to-equity swap in late July, Parmalat Commissioner 
Enrico Bondi opened his legal campaign in August against 
some of the world's largest banks for their alleged role in 
helping Parmalat Finanziaria (or "Parmalat," Parmalat's 
holding company) raise USD 14.2 billion debt.  Parmalat has 
sued Citigroup for approximately USD 10 billion; UBS, for 
euro 290 million; and Deutsche Bank, for euro 17 million. A 
similar lawsuit against Bank of America seems likely if 
Parmalat and the bank do not reach a separate agreement out 
of court. On the flip side, Bondi has reportedly rejected 
most claims made against Parmalat by Citigroup, Bank of 
America, UBS, Deutsche Bank, Morgan Stanley, Credit Suisse 
Group, Banca Intesa and Capitalia.  In particular, Bondi 
rejected 99 percent of the euro 539 million claim of 
Citibank, 100 percent of the euro 339 million claim of Bank 
of America, as well as those of Merrill Lynch and Morgan 
Stanley (euro 25.7 and 35.5 million, respectively). 
 
2. Bondi accQted only one percent of U.S. bank claims, 
while accepting almost a fourth of those by European banks, 
and 43 percent of those from Italian banks.  Those creditors 
whose claims were rejected have until September 18 to appeal 
his decision in an Italian court.  If a court denies the 
appeals, creditors cannot convert their debt claim into 
equity of the new Parmalat according to the debt-to-equity 
swap included in Bondi's restructuring plan to help Parmalat 
creditors recover some of their investment. As for the 
agricultural sector/international trade aspects of the post- 
bankruptcy Parmalat, it has been business as usual for 
Italian farmers and international farm trade; however, at 
best, the new Parmalat may not be profitable until at least 
the end of 2005.  End summary. 
 
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INTRODUCTION 
------------ 
 
3. The following report, compiled by Embassy Rome and Congen 
Milan, provides a chronology of events since Ref G report of 
the collapse of Parmalat, reportedly Europe's biggest-ever 
corporate fraud. 
 
--------------------------------------------- ---- 
JULY 21: GOI APPROVES THE PARMALAT RECOVERY PLAN. 
--------------------------------------------- ---- 
 
4. On July 21, Minister of Productive Activities Marzano 
approved Parmalat's recovery plan, prepared by Enrico Bondi, 
Special Commissioner of the insolvent food giant.   Bondi 
was charged with fixing recovery ratios for shareholders and 
bondholders of Parmalat and Parmalat subsidiaries also under 
special administration.  The plan gives creditors the right 
to receive in shares or warrants of the new Parmalat 
company, a certain percentage of their bonds or shares of 
the old Parmalat, but does not set share values, since the 
market will set those once trading begins.  Marzano asked 
and obtained small changes in the debt-for-shares proposal. 
Shareholders will now receive one warrant for each share 
they own, up to a maximum of 650, instead of 500.  Each 
warrant gives the holder the right to buy shares of the new 
Parmalat between 2005 and 2015 at nominal value.  For 85,000 
Parmalat bondholders, the percent reimbursed in shares will 
depend upon which of the sixteen Parmalat companies issued 
 
 
the bond they originally held.  Recovery ratios will vary 
according to which Parmalat entity issued the bond and will 
yield between 7.3 percent (i.e., 73 shares/warrants per 
1,000 Euros owned and 113 shares/warrants per 1,000 euros 
owned).  The workout is more favorable for creditors of some 
smaller Parmalat subsidiaries who will be refunded in shares 
for 100 percent of their credit (in other words, 1,000 
shares/warrants per 1,000 Euros owned). 
 
----------------------------------- 
JULY 28: PARMALAT DEAL WITH THE SEC 
----------------------------------- 
 
5. In releasing news of the settlement July 28, the SEC said 
Parmalat "engaged in one of the biggest financial frauds in 
history" from at least 1997 to the end of 2003. The SEC said 
it had not yet brought any cases against individuals, but 
underscored that its investigation of fraud was continuing. 
(The SEC has oversight of Parmalat because its shares are 
listed in the U.S. and because the food giant offered and 
sold debt securities in the U.S.) 
 
6.  On July 28, Parmalat agreed to a sweeping overhaul of 
its corporate governance as part of a deal with U.S. 
regulators. The agreement requires Parmalat, after 
restructuring, to implement good governance changes in line 
with high-level U.S. standards; but some changes will go 
further than the rules mandate.  SEC announced, in turn, 
that it had settled its civil lawsuit against Parmalat for 
alleged wrongdoing in offering more than USD one billion in 
bonds to U.S. investors and thereby increasing Parmalat debt 
by that aount when its financial state would not have 
ordiarily supported such new debt.  Parmalat, without 
admitting or denying wrongdoing as is usual in SE cases, 
agreed to the governance plan, as well a to a permanent 
injunction against future breachs of securities laws. 
 
7. Parmalat will have new bylaws after re-organisation to 
ensure that shareholders elect all directors and that a 
majority of directors are independent of company management. 
The board must review and approve all strategic and 
financial plans and al transactions with a material effect 
on operatins.  In addition, the roles of chairman and chief 
executive will be split.  Finally, there must be a code of 
conduct that all directors must follow; and an internal 
control and governance committee must report at least twice 
a year to the board.  Parmalat has also agreed, subject to 
some legal protection, to make available for investigation, 
all officers and employees upon request and without 
subpoena. 
 
---------------------------------------- 
Bondi's Legal Campaign Against the Banks 
---------------------------------------- 
 
8.  In late July after GOI approval of his restructuring 
plan based on a debt-to-equity swap, Bondi began his legal 
campaign against some of the world largest banks for their 
alleged role in helping Parmalat raise USD 14.2 billion in 
debt. On August 7, Parmalat Finanziaria S.p.A. (the Parmalat 
holding company, or "old Parmalat") through Bondi rejected 
some of the claims (to convert their debt into equity) made 
by Citigroup, Bank of America (BOA), UBS, Deutsche Bank, 
Morgan Stanley, Credit Suisse Group, Banca Intesa and 
Capitalia.  In particular, Bondi rejected 99 percent of the 
Citibank's euro 539 million claim, 100 percent of BOA's euro 
339 million claim, and those of Merrill Lynch and Morgan 
Stanley (euro 25.7 and 35.5 million, respectively).  In sum, 
Bondi accepted only one percent of U.S. bank claims, while 
accepting almost a fourth of those by European banks, and 43 
percent of those from Italian banks.  Creditors whose claims 
 
 
were rejected have until September 18 to appeal Bondi's 
decision in an Italian court.  If a court denies the appeal, 
creditors cannot convert their debt claim into equity of the 
new Parmalat, according to the debt-to-equity swap ratio 
included in Bondi's plan to help Parmalat creditors to 
recover some of their losses. 
 
Deutsche Bank and UBS 
--------------------- 
 
9.  On August 9, Bondi filed suit against Deutsche Bank AG 
to recoup euro 17 million related to bond issues it 
arranged for Parmalat in 2003.  This suit is very similar to 
that filed against Union Bank of Switzerland (UBS) AG on 
August 6 to recoup euro 290 billion that allegedly UBS 
received in connection with a euro 420 million private 
placement arranged for Parmalat in July 2003.  The two 
lawsuits were filed in an Italian court and are based on 
Italy bankruptcy law that allows a company to revoke deals 
that occurred within two years of the company being declared 
insolvent. 
 
Citigroup 
--------- 
 
10.  Two weeks ago, Bondi filed a law suit against Citigroup 
in New Jersey seeking at least USD 10 billion in damages for 
reportedly helping Parmalat's former managers hide the true 
status of the company's financial situation, allegedly to 
benefit Citigroup at other creditors' expense. 
 
Bank of America 
--------------- 
 
11.  With the prospect that Bondi may be preparing another 
suit against them, BOA has reportedly been negotiating with 
him to avoid the suit.  So far, the Bank's public stance has 
been cautious.  "We participated in transactions with 
Parmalat because we believed Parmalat, with an investment- 
grade rating, was strong, honest, and respectable, and also 
since these transactions were used for legitimate business 
goals.  We do not believe that a lawsuit against us would be 
sustained by the facts." 
 
12.  In fact, however, the Bank of America involvement is 
complicated.  Two credits Bondi rejected in the debt-for- 
equity swap were the result of an earlier restructuring in 
1999 of loans Bank of America extended to Parmalat Brazil 
through a complicated arrangement.  After having created two 
companies in the Cayman Islands -- Food Holding and Dairy 
Holding - to which Bank of American provided USD 300 million 
(funded by U.S. pension funds and insurance companies), both 
companies purchased eighteen percent of Parmalat Brazil. In 
this transaction, what was initially a loan/credit to a 
Cayman Island middleman was carried on the books of Parmalat 
Brazil as equity.  (Note: Brazilian courts have recently 
awarded Parmalat's Brazilian operations -- Parma at Brazil - 
an opportunity to avoid bankruptcy by granting the firm two 
years to repay creditors.) 
 
13.  BOA also managed all private placements for Parmalat 
bonds from 1993 to 2002 (some euro 1.4 billion), and also 
cashed an 80 million dollar guarantee several days before 
Parmalat's declaration of insolvency.  These two facts might 
suggest BOA indirect complicity; but on the other hand, BOA 
helped bring to light Parmalat's  mismanagement/fraud in 
December 2003 by publicly revealing that a BOA account 
allegedly opened by a fictitious Parmalat affiliate -- 
Bonlat - did not, in fact, exist - nor did the four billion 
dollars in that account. 
 
 
Credit Suisse First Boston (CSFB) 
--------------------------------- 
 
14.  Bondi filed a euro 248.3 million lawsuit August 19 
against Credit Suisse First Boston (CSFB) at the Parma 
court.  In 2002, CSFB fully subscribed a euro 500 billion 
convertible stock loan to Parmalat Partecipacoes (Brazil) 
(which CSFB, in turn, sold to other creditors/financial 
institutions) in return for Parmalat's payment of euro 248.3 
million at some future date.  Bondi's suit calls for 
repayment of this sum, and he has announced further possible 
actions against the bank for additional damages.  Bondi 
recently rejected CSFB's petition to swap euro 324 million 
of Parmalat debt into equity in the new company. 
 
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Bondi's Legal Campaign Against the Auditors 
------------------------------------------- 
 
Grant Thornton and Deloitte & Touche 
------------------------------------ 
 
15.  On August 18, Parmalat brought suit at Cook County 
Court in Illinois against the auditing firms Grant Thornton 
and Deloitte & Touche, the Italian food group's former 
auditors, who had provided auditing services prior to the 
company's collapse.  The suit seeks damages of about USD 10 
billion.  Grant Thornton is accused of having helped 
Parmalat's former management create non-existent firms and 
of having falsified transactions "to misappropriate billions 
of dollars to Parmalat."  Deloitte & Touche is accused of 
negligent auditing of Parmalat accounts that helped its 
former management misappropriate some USD 11.7 to 16.3 
billion.  According to the two auditing firms, Bondi's 
lawsuit is "unjustified" and "illegitimate." 
 
16. Comment: A successful suit against both firms will 
likely hinge on whether Parmalat can convince the U.S. court 
to breach the structural barriers of both accounting firms, 
whose Italian operations are insulated from U.S. operations 
to limit potential liability. End comment. 
 
--------------------------------------------- ---------- 
Farmers and International Farm Trade: Business as Usual 
--------------------------------------------- ---------- 
 
17. The impact of Parmalat's financial collapse on Italian 
farmers has been much less than expected.  Even after its 
financial collapse, Parmalat controls about 30 percent of 
Italian fluid milk market; purchases dairy products from 
5,000 suppliers here; and delivers 2.8 million liters of 
milk daily.  The firm also processes and sells fruit juice. 
One reason business has continued is that after the January 
2004 declaration of insolvency, Commissioner Bondi promised 
farmers delivering milk and other products to Parmalat would 
be the first paid from liquidated assets.  As a result, 
foodprocessing activities have continued; and, surprisingly, 
sales have grown since January. 
 
18. The GOI also passed a decree law to protect livestock 
farmers involved in Parmalat's collapse, with preferential- 
rate loans guaranteed by the Interbank Guarantee Fund and a 
twelve-month suspension of social-insurance tax payments for 
farms affected by the Parmalat collapse.  The EU Commission 
approved this "state aid" in July 2004 as conforming to EU 
state aid rules. 
 
19. So far, Parmalat's domestic and international sales of 
its products have continued without interruption.  (Although 
Bondi predicts 2004 sales of some euro 3.6 billion and a 
loss of euro 108 million, he hopes for a marginal profit in 
 
 
2005.)  Some agricultural cooperatives and Parmalat 
competitors are interested in acquiring parts of the firm; 
however, the GOI, main farmers' organizations, and labor 
unions support maintaining Italian ownership of the parent 
company (though seem open to selling some foreign 
subsidiaries). 
 
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THE UNIONS 
---------- 
 
20. Just after Parmalat was declared insolvent, the unions 
joined forces with new Parmalat management to "defend the 
Parmalat trademark and image" and to guarantee the job 
security of its 4,000 employees.  To date, as Productive 
Activities (Industry) Minister Marzano instructed Bondi, the 
insolvency/restructuring has meant no job loss in Italy 
(though there may be some in foreign 
subsidiaries/affiliates).  Nonetheless, unions continue to 
be vigilant. 
 
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NEXT STEPS 
---------- 
 
21.  As reported reftel B, the workout process will continue 
through January 2005.  By October, all creditors wishing to 
participate in the workout must have filed at the Court of 
Parma; they will then vote on the plan in December 2004. 
(Note: the fact that the voting system has net yet been 
decided upon concerns foreign bondholders who might not be 
in Italy at that time to vote. End note).  If creditors 
approve the plan, the Court of Parma must then approve the 
plan in January 2005.  Should Bondi fail to secure approval 
for the plan, Parmalat will be forced into bankruptcy 
according to the provisions of Italian law. 
 
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Comment 
------- 
 
22.  Bondi has tried to juggle demands of both creditors and 
regulators to help Parmalat emerge from restructuring in 
2005.  While some of the restructuring is solid and 
controversial, other parts are controversial for U.S. 
interests. 
 
23. First, the good news. Bondi has been intent on keeping 
day-to-day Parmalat operations going to lay the groundwork 
for the firm's continuing viability.  In addition, his 
agreement with SEC on instituting state-of-the-art good 
governance rules could help regain investor confidence.  His 
workout tries to win over creditors-turned-investors by 
pledging them 50 percent of restructured Parmalat profits 
over the next 15 years, including revenues derived from 
legal actions against the banks. And, while there are no 
Parmalat subsidiary sales here providing opportunities for 
other would-be U.S. investors, there might be opportunities 
in the sale of Parmalat's fourteen U.S. subsidiaries. 
 
24.  Now, the bad news.  It is hard to say how the workout 
will affect foreign and, especially, U.S. investment in 
Italy.  First, Bondi seems to have taken advantage of 
provisions of Italian bankruptcy law allowing a firm to 
revoke agreements reached within two years of the firm's 
declaration of insolvency.  Secondly, creditors-turned- 
investors under workout plan terms are not fully supportive 
of the different ratios assigned for the conversion of debt- 
to-shares plan.  Although U.S. banks can appeal Bondi's 
rejection of their claims to convert old Parmalat debt into 
new Parmalat equity, it is not clear any appeals will be 
 
 
won: his acceptance of only one percent of U.S. bank claims 
might suggest less-than-equal treatment for U.S. banks, 
compared to Italian and other European banks.  Finally, 
Bondi has sown the seeds of discontent with some banks first 
by a rejection of their claims, and then a lawsuit against 
them (e.g., on Citigroup, Bondi will honor only one percent 
of the banking group's claims, and will also sue the firm 
for USD ten billion.)  How this workout will affect long- 
term bank and other investor views of Italy as a good and 
safe place to do business, remains to be seen.  End Comment. 
 
SKODON 
 
 
NOTE: SVC FOR MISSING PARA MARKINGS 
NNNN 
	2004ROME03283 - Classification: UNCLASSIFIED