Enron, Italian Style

By Peter Gumbel

From Milan boardrooms to Parma dairy farms, Calisto Tanzi was long viewed as a model Italian entrepreneur--modest, hardworking and, above all, generous. Over four decades, as he built Parmalat, the food company he founded in Parma in 1961, into a worldwide giant with annual sales of $9.6 billion, he showered the town with his philanthropy. A pious Catholic, Tanzi helped pay for a major restoration of Parma's 11th century basilica. He poured cash into the local pro-soccer team, restored the theater and financed programs for the poor, AIDS patients and drug addicts. "He has got that impulse in him to just say yes," says Monsignor Franco Grisenti, who oversaw the restoration of the basilica and is a close friend of Tanzi's.

Now it turns out that Tanzi might have had some far less noble impulses too. On Dec. 27, Tanzi was arrested, and he is confined in a Milan jail while Italian prosecutors, joined by the U.S. Securities and Exchange Commission, probe his role in an alleged $8.8 billion fraud that could implicate Parmalat in Europe's biggest corporate scandal ever, easily on a par with those of Enron and WorldCom in the U.S. Parmalat has filed for bankruptcy, and corporate-turnaround expert Enrico Bondi is trying to salvage what he can of the firm, which has 36,000 employees in 30 countries, including 7,300 in North America. Among its holdings is Archway Cookies, now on the block. Along with Tanzi, seven others connected with Parmalat were arrested last week.

Prosecutors allege that Parmalat created an elaborate house of milk cartons, using opaque subsidiaries (including one called Buconero, which means "black hole") in tax havens such as the Cayman Islands and Luxembourg to hide the declining state of its finances. Tanzi has reportedly admitted shifting some $630 million from the company to other businesses but insists some underlings devised the accounting fraud. Former chief financial officer Fausto Tonna has given prosecutors crucial details about the firm's labyrinthine bookkeeping.

Parmalat unraveled quickly--and seemingly out of nowhere--after it had trouble meeting a routine bond-interest payment in November, prompting tougher scrutiny of its books by Italian regulators and its own auditors. A follow-up audit produced a stunner: an account held by the company at Bank of America in New York City that supposedly contained about $5 billion turned out not to exist. All the paperwork, including written confirmation from the bank to Parmalat's auditors, had been forged, Bank of America said. "What is shocking here is that it appears the assets were just plain fabricated," says Evan D. Flaschen, an attorney at the U.S. law firm Bingham McCutchen, who represents institutional holders of Parmalat bonds.

Why wasn't such an amateurish fraud detected earlier? Grant Thornton, Parmalat's primary auditor for most of the 1990s and still auditor of some of its subsidiaries, initially said it too had been duped. But on New Year's Eve, Grant Thornton suspended the head of its Italian affiliate and another partner after the two were arrested as part of the investigation. The men have denied any wrongdoing.

The scandal has rocked Italy and is prompting calls for more reform in a country famous for family entrepreneurs and infamous for the chaotic structure of their companies. The latter keeps the taxman at bay, but it's one reason Italian companies have had difficulty attracting foreign capital. Parmalat was supposed to be different. Tanzi got his start in business as a 21-year-old, when his father died and he took over the family's small prosciutto-ham factory. On a trip to Sweden, he noticed milk packaged in cartons and brought the concept to Italy. Later he adopted a process for making shelf-stable, nonrefrigerated milk and introduced it to Italy, eventually expanding globally. According to Tonna's testimony and bankers familiar with the company's operations, Parmalat started running into trouble after a big, costly international expansion into Latin America and the U.S. in the 1990s. Consumers didn't convert to long-life milk in the numbers Parmalat expected. Economic and currency crises in countries such as Argentina and Brazil added to the company's woes. Its debt has risen to some $7 billion, and more than half of it comes due this year and next.

Shortly before his arrest, Tanzi and his wife visited Fatima, the Portuguese town to which Catholics make pilgrimages seeking miraculous interventions. His trip symbolized the pious Tanzi that Parma natives know. Indeed, upon his arrival at San Vittore prison in Milan, one of the first things Tanzi did was attend a prison Mass. He had better keep praying, because he may need a miracle to extricate himself and his company from the mess they are in. --With reporting by Jeff Israely/Parma

With reporting by Jeff Israely/Parma