Parmalat Scandal

Parmalat was seen as a successful Italian dairy company -- until 2003 when it became a sensational fraud case. Behind the bright colored milk cartons -- and even a soccer team -- a financial black hole was growing. As early as 1993, Parmalat officials allegedly began to cook the books. On Dec. 24, 2003, shareholders and bond holders didn't quite receive the Christmas present they were after. Parmalat shares lost 97 percent and was de-listed from the stock exchange. The chief executive officer and five former Parmalat executives were arrested and a fraud investigation began. In 2004, auditors determined that Parmalat had debts of around 14.3 billion euros ($20.9 billion).

Two years after the spills were mopped up, a new Parmalat emerged. Investors weren't buying into the milk or cream business, but the chance to recoup losses through a settlement with the banks and accounting firms accused of helping conceal its dire financial condition. In the meantime, multiple legal skirmishes have been played out in courtrooms in Parma and Milan.

On Tuesday, Jan. 22, proceedings began in Milan against four large international banks -- Citigroup, Deutsche Bank, Morgan Stanley and UBS -- charged with stock manipulation of Parmalat bonds sold in 2003. If the banks are found guilty the banks could face fines of up to 5 million euros and have their profits seized. A guilty ruling could also open the door to civil proceedings by investors.

DW-WORLD.DE talked to Beppe Scienza, a lecturer in financial mathematics at the University of Turin and author of the books "The Cheated Investors" and "Stocks, Policies and Parmalat -- What's the Worst?" He has been following the financial market for over 30 years.

DW-WORLD.DE: Parmalat was not a small or weak company -- it was the eighth largest company in Italy and a global brand. How is it that the so-called Coca Cola of milk production began to go sour?

Beppe Scienza: The interesting thing about Parmalat is that at the industrial level nothing changed. The company continued to produce and so the industrial aspect remained untouched. As for exactly how this happened, no one knows and no one has studied all the factors that led to the collapse. However, these things often begin because someone is trying to cover up some kind of mistake or some kind of loss. Perhaps they invent an excuse to cover up an imbalance. No one knows why this was done or where the money has ended up.

It's interesting to note that the Parmalat dividends weren't very high and this, among other things, gave faith to investors. When a dividend is very high there is usually a high risk, but when the dividend is, as in the case of Parmalat, only a little high then it gives the idea that the company could be in difficulty, but it doesn't indicate that it's going to collapse.

What could have been the role played by international banks, like Deutsche Bank, in the Parmalat scandal?

I don't think it was really that much different from the role of the Italian banks. They helped to sell shares. Some employee of the bank was probably corrupt, but the banks themselves must have known something. Like the Italian banks, they were creditors so they had to replace the money.

How important is what happens in the courtroom in Milan over the next few months?

In order to write an honest history of what happened with Parmalat, it is important because we might be able to understand the dynamics of what caused this to happen. For the bond holders it could be important if there is a guilty verdict, because then it opens the door for civil cases to obtain compensation.

Will investors ever recover everything that they lost?

On a large scale: no. A majority of investors won't recover what they lost. In these cases where there's a collapse and the money disappears, it's better not to have the illusion that you will recover everything.

What impact has the Parmalat scandal had on the food industry in Europe?

I think that it has little impact on the food industry. It wasn't really a bankruptcy in the sense that the company was closed down and assets sold off at auction. The company continued production so from the industry point of view nothing changed.

So it was only the investors who found themselves burnt by this scandal?

Yes, and the creditors and the banks, which lost a big slice of their money.

Is the Parmalat scandal the worst thing that has happened to Italian investors?

The collapse of Parmalat was used by the banks to convince individuals not to not buy shares or bonds but put their money into managed investment funds. It's true that investors lost a lot of money with Parmalat, but if we look at managed investment funds then we discover that the loss to investors is around 20 billion euros. Now, the loss in Italy from the Parmalat scandal is around 3 billion euros. Unfortunately, the worst things that happen to Italian investors are not these company collapses, but rather the mismanagement of managed investment funds.

How new is the new Parmalat -- has anything changed?

The company has maintained the name and the production facilities, but for an investor the past story of Parmalat has nothing to do with buying the stock today since all of the company's debts were wiped out before its re-listing.