SEC INVESTIGATION

Sales of Parmalat bonds probed


Published: Wednesday, January 7, 2004 at 6:01 a.m.
Last Modified: Tuesday, January 6, 2004 at 10:13 p.m.
WASHINGTON - Big investment banks are under renewed federal scrutiny in the multibillion-dollar Parmalat fraud case, as investigators are examining the banks' role in helping the Italian dairy giant sell bonds and questioning whether they turned a blind eye to irregularities in company books.
Following a stunning bankruptcy, the expanding case is being dubbed Europe's Enron. And the regulators' focus on Wall Street banks behind big-money deals recalls the Enron aftermath.
For the banks, "it's still a really competitive business where they're under a lot of pressure to be creative. And sometimes creative turns into illegal," said David Yellen, dean of Hofstra University Law School.
The banks can reap millions of dollars in fees from arranging sales of securities and other financial deals, an incentive that led some investment houses to aid Enron in its dodgy accounting, congressional investigators have found.
The Securities and Exchange Commission, which charged Parmalat SpA with "one of the largest and most brazen corporate financial frauds in history" in a civil lawsuit filed Dec. 29, also is investigating the possible role of U.S. banks in the company's sales of nearly $1.5 billion in bonds and notes to U.S. investors. Parmalat officials misled the investors by "grossly overstating the amount of the liquid assets" in its financial statements, the suit alleges.
SEC officials decline to discuss the Parmalat investigation other than to describe it as active and wide-ranging, and they will not name specific banks that may be under scrutiny.
But Lawrence West, an associate director of enforcement, noted Tuesday that, in general, when a company engages in a large accounting fraud and issues securities at the same time, "we typically look at all of the participants in the securities offerings." West flew to Italy last week to meet with investigators.
Yellen and other legal experts say the SEC could bring actions against investment banks even without evidence that bank officials were aware of Parmalat's fraud.
Already Monday, a pension fund for Alaskan carpenters named Citigroup - which arranged a financial transaction for Parmalat - in its investor suit against Parmalat founder and former chairman Calisto Tanzi (now jailed in Milan) and ex-chief financial officer Fausto Tonna.
The suit alleges that the former company officials, Citigroup and outside auditors and attorneys together hatched a deceptive scheme to raise more than $5 billion in sales of securities.
Specifically, Citigroup is said to have created a complex financial structure dubbed "Buconero," Italian for "black hole," allegedly used by Parmalat executives to hide debt.
Citigroup said Tuesday, "We believe the suit is without merit." The company, which is the largest U.S. financial institution, says the 1999 deal worth 117 million euros was "relatively small and appropriate."
"Regrettably, the legal vehicle associated with this transaction was named Buconero," Citigroup said in a statement.
Other powerhouse investment banks whose names have surfaced include Bank of America, Morgan Stanley and Germany's Deutsche Bank, which were among the institutions that financed Parmalat's bond sales. Merrill Lynch also arranged a financing deal for the company.
Spokesmen for the banks have declined comment. None has been accused of wrongdoing.
The Parmalat scandal was touched off last month after the company acknowledged it didn't have a multibillion-dollar Bank of America account, as it had earlier claimed. The bank says a letter confirming the money was forged.
Amid the wave of corporate scandals in 2002, congressional investigations shone a spotlight on the role its investment banks Citigroup, Merrill and J.P. Morgan Chase played in Enron's complex, deceptive financial schemes.
Last March, Merrill agreed to pay $80 million to resolve the SEC's charges that it helped the big energy company fraudulently inflate profit and mislead investors with two complex transactions. And in July, Citigroup and J.P. Morgan Chase agreed to pay $101 million and $135 million, respectively, in similar settlements related to Enron's fraud. The banks neither admitted to nor denied wrongdoing in the accords.
"Given Citigroup and Merrill Lynch's collaboration with Enron in deceptive accounting practices to make Enron's books look better than they were, I'm obviously suspicious of their transactions with Parmalat," Sen. Carl Levin, D-Mich., who led one of the 2002 investigations, said Tuesday. Levin added, however, that he can't draw any conclusions "until the evidence comes in showing the nature of the transactions, when they took place and how much money was involved."
In the $11 billion WorldCom case, Citigroup's Salomon Smith Barney has come under examination in connection with its bond underwriting for the telecom giant, which filed the biggest corporate bankruptcy in U.S. history in July 2002.

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