How It Went Sour

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For years Tanzi hid his company's difficulties by expanding. Following a disastrous foray into television in the 1980s, he staved off bankruptcy by engineering a reverse merger with a dormant holding company listed on the Milan stock exchange and followed up with a big capital increase. That enabled Parmalat to go public in 1990 and plug some of the gaps in its accounts. As early as 1993, according to evidence given to magistrates in Parma, Parmalat allegedly began to play fast and loose with its balance sheet. Starting in 1992, the group began buying up dairy and other companies in Italy, Brazil, Argentina, Hungary and the U.S. "It was a reversal of logic," says Vito Zincani, the chief investigating magistrate in Parma. Usually, companies take on debt in order to grow. But in Parmalat's case, "they had to grow to hide the debt," Zincani says.

The company seemed so attractive that foreign banks, with Citibank at the head of the line, were clamoring to get a piece of the business. Ferraris, who worked at Citibank in Milan for seven years before joining Parmalat in 1997 as an executive in Canada and Australia, remembers making regular sales calls on CFO Tonna. "There was big competition for Parmalat business," Ferraris recalls. "You needed to come up with a product that really interested them." On Ferraris' watch, Citibank scored two coups, first setting up a securitization program, then advising Parmalat on its acquisition of Beatrice Foods in Canada.

Though he claims to have been shocked when he learned of Parmalat's shaky finances soon after he joined the company, Ferraris in 1995-96 had laid the groundwork for a complex financing scheme through a Delaware company audaciously named Buco Nero, Italian for black hole. Citigroup later set it up for Parmalat in 1999. Bondi, who has filed a lawsuit against Citigroup seeking $10 billion in damages, says the firm must have known about Parmalat's true financial situation and alleges that Buco Nero was used to dress up debt as an equity infusion. Citibank denies such a setup and says the deal was not a disguised loan but fully disclosed and perfectly legal. "Similar structures have been used by other leading Italian companies to obtain low-cost financing," Citigroup said in a Nov. 1 court filing.

At around the same time, red flags were popping up elsewhere in the Parmalat empire. At the end of 1999, Esteban Pedro Villar, an accountant in Buenos Aires with Deloitte Touche, filed an internal "early warning report" highlighting serious concerns about Parmalat's Latin American operations. He peppered Parmalat executives with so many questions that Tonna lost his temper. The requests for information were "offensive and ridiculous," Tonna wrote in a June 9, 2000, fax to Adolf Mamoli, the Deloitte partner in Milan who was the company's lead contact. "I am revoking with immediate effect the mandate conferred on Deloitte Touche in Argentina." Instead of investigating further, Deloitte, which had taken over as Parmalat's worldwide auditor the previous year, quickly backed off. The accounts were certified, and Mamoli sent a terse email to his colleague Villar. "For the future," he wrote, before contacting Parmalat on any issue, "you should contact me in advance to discuss possible solutions." Deloitte insists that it behaved properly and in accordance with Italian standards in force at the time. It points out that the investigation of Parmalat began only after Deloitte Italy, in its October 2003 midyear review, drew attention to irregularities in Parmalat's financial dealings. Mamoli has denied any wrongdoing, and Deloitte is defending him.