How It Went Sour

For

a hard-charging executive like Alberto Ferraris, being named chief financial officer of an $8.7 billion company was a career-making moment — and he wasn't going to let a few nagging doubts stand in his way. Since the company was Parmalat, the Italian dairy-and-food conglomerate that the U.S. Securities and Exchange Commission has charged with perpetrating "one of the largest and most brazen corporate frauds in history," and since Ferraris, 46, now faces charges of market rigging and issuing false information, he may wish he had heeded those doubts. But back in March 2003, he says, he knew the company had some financial problems but had no idea how bad things were about to get.

Ferraris was brought aboard in the spring of 2003 to calm investors, who had been rattled when the outgoing CFO, Fausto Tonna, announced an unexpected new bond issue, sending Parmalat stock into a nose dive. The issue was quickly canceled. Within a few days of taking over, Ferraris made a presentation to financial analysts in Milan, stressing the company's rosy outlook: sales and earnings were up, debt was under control, and the company was awash in cash. "It was my job to patch up relations with the market," Ferraris told TIME in his lawyer's Milan office.

But as time passed, Ferraris had second thoughts. He couldn't understand why the company's interest payments on its debt were so high. Nor could he grasp why his boss wouldn't give him free access to the accounts. So over the summer, Ferraris asked two members of his staff to investigate discreetly. They came back several weeks later with a total debt estimate of �14 billion, or $18.2 billion — more than double the amount shown on the balance sheet. Ferraris went to see Calisto Tanzi, the Parmalat founder and chief executive, whom he viewed as "an excellent person, a real entrepreneur," a charismatic but steady leader who was so proficient at mathematics that he spotted calculation errors in presentations. "I expected him to say, 'Your numbers are wrong,'" Ferraris recalls. "Instead, he said, 'Eight billion, 11 billion, 14 billion — it's all the same.'" Stunned, Ferraris urged Tanzi to call a meeting with the company's banks to explain the debt problem. Tanzi refused, Ferraris quit, and a few weeks later, on Dec. 19, Europe's biggest corporate scam was exposed. Parmalat confirmed that an account it had claimed to have at Bank of America with $4.9 billion in cash did not, in fact, exist.

This was the first revelation in the scandal that turned Parmalat into Europe's Enron, a morass of fraud and financial failure made all the more dramatic by the fact that the company had established itself as a recognized global brand. In the past year three teams of forensic accountants have combed through the company's books, and dozens of executives have made detailed confessions to magistrates in Parma and Milan. Using documents obtained by TIME, it's possible to piece together the inside story of how the company that wanted to be the Coca-Cola of milk went sour.

The company's tactics were so brazen they were "almost banal," says Francesco Greco, the senior magistrate on the case in Milan. For well over a decade, it seems, Parmalat borrowed money on the basis of fictitious or double invoices to retailers and then made the debt vanish through transfers to shell companies based in offshore tax havens. When the hole grew too large to hide, the company came up with its most audacious invention, but one that ultimately proved to be its undoing: a fictitious milk producer in Singapore that supposedly supplied 300,000 tons of milk powder to a Cuban importer via a Cayman Islands subsidiary. By the time the whole house of cards came tumbling down, the company had lost $15.6 billion. So far, 29 people have been indicted in Milan, and others will be charged in coming weeks.