The PARMALAT story Corporate Governance Instructor Team Members

The PARMALAT story Corporate Governance Instructor: Team Members (FT 13): Prof. S. Lioukas • Angeliki , AVLONITI • Nikolina, STAMELATOU • Kalliopi Aikaterini, VELONA 1

The Parmalat Case • 1961 Calisto Tanzi, a 22 year-old college dropout, founded a small pasteurisation unit in Parma, Italy • 1990’s Parmalat is one of Italy’s biggest success stories, with a global presence in over 30 countries. • 2003 Parmalat is one of Europe’s biggest scandal’s, dubbed as “Europe’s Enron”. 2

The Company Ø Parmalat Group is one of the major players worldwide in the production and distribution of food and beverages ØThe range of products include: ÊMilk ÊMainstream dairy products (yoghurt, cream-based white sauces, desserts and cheeses) ÊFruit-based drinks 3

The Brands ü 4

The Company Ø Family owned business based in Parma Ø 50% market share in the Italian milk and milk-derivative market Ø 1. 5% of the Italian GNP Ø 8 th largest industry in Italy Ø Personnel: 36. 000 Ø Activities in 32 Countries and 36 companies Ø Dozens of associated companies (estimated up to 200) Ø Listed in the NYSE Ø Strong CSR policy (donations to Catholic causes , rebuilt Cathedral) Ø (260 offshore speculative entities…) 5

Expansion • Paternalistic approach of Mr. Tanzi to business. • Advertising: "milk of champions“ (CSR, racing, agreements with Ferrari). • Over-expansion start of fraud through off-shore operations Presence through Manufacturing Presence through Licences 6

Real story Ø Family business corporate governance Ø Acquisition of companies with unrelated scope (tourism, football) Ø No transparency, arrogance, fraud, tax evasion, secret financing of family choices. Ø Acquisition of Odeon TV in order to compete Berlusconi sell at a loss of € 45 Million Ø Dubitable financial data Ø Poor and distorted economic results Ø Political connections (financing politicians) Ø Major shareholder with 51% ! Ø Complex schema of companies 7

Real story Ø Used offshore companies in Cayman Islands to hide debts Ø Uncollected amounts were transferred to these companies Ø Overstated assets and income to cover debts Ø Various amounts were transferred to family accounts for personal investments Ø Recorded non existent recovery of a bond loan Ø False trading transactions & double records for the same amounts Ø Didn’t record loans or didn’t record real numbers Ø The CFO received a € 3 million bonus from an offshore company in Luxemburg Ø Continuous changes in company’s Chief Financial Officers (scandals, lack of trust) 8

Timeline [1/2] 1961 Calisto Tanzi forms Parmalat after inheriting a small, family-run shop in Parma at the age of 22. 90’s Aggressive acquisitions era, diversification of portfolio, expansion abroad, stock price sky rocketed. Enters Tourism &Sports industry • From 1998 to 2002 it acquires 25 companies • More than 200 companies in 50 countries by 2002 Resulting in red figures The company sets up off-shore subsidiary Bonlat in the Cayman Islands 1999 Parmalat's share price reaches a record 2002 (firm valuation: 3. 7 bn euros)! 9

Timeline [2/2] October 2002 150 million € bond issue November 2002 200 million € bond issue. Balance sheet shows 3. 5 billion € liquidity and high proportion of debt February 2003 Corporate bond issue is rejected due to lack of formation CFO resigns but remains in the BOD Stock price fell 45% (from November 2002) Italian Stock Market April 2003 Commission runs an investigation! November 2003 Bank of America asks info on Parmalat’s liquidity! Deloitte raises doubts on the accuracy of the financial statements! The Fall!! December 2003 10

Timeline Year 2003 [1/2] Calisto Tanzi, CEO resigns Enrico Bondi runs now the company 8/12 • Epicurum cannot repay 15/12 the expiring bond loan • S&P downgrades Parmalat’s bonds into junk. • Company reveals it never recovered $589. 9 million from the Epicurum hedge fund it had financed in Cayman Islands. 17/12 Parmalat shares hit their lowest level, losing 97% of their Parmalat discloses value, and are that Bonalat suspended account in Cayman (company’s value Islands is fake. 20/12 under 90 m euros) Bank of America reveals that Parmalat had forged a € 3. 95 billion account. 19/12 Italy's prime 22/12 minister, Silvio Berlusconi, says that the government will not allow the bankruptcy of Parmalat 23/12 Italian investigators assert $11 billion in liabilities in over a decade 11

Timeline Year 2003 [2/2] Parmalat files for bankruptcy under a new government decree passed hastily by Berlusconi. The decree allows the company to survive as a legal entity rather than have its assets liquefied on creditors’ benefit. 24/12 29/12 The Securities and Exchange Commission sues Parmalat, claiming the company tricked U. S. investors into buying more than $1. 5 billion worth of bonds and other securities. Seven more executives and advisers are under investigation 31/12 7/01 Investigation includes Italian and foreign banks suspected of involvement in the fraud. 12

Starring. . . q Tanzi family, CEO, CFO, Bo. D, employees q Auditors: Grant Thornton, Deloitte q Banks (Bank of America, Citicorp. Citibank, Deutsche Bank, Bank of Italy) q Milan Stock Exchange q Capital Market Commission q And of course…the Italian Government! 13

Board of Directors! q Calisto Tanzi: Founder, CEO and member of Bo. Ds q Stefano Tanzi (son) q Giovanni Tanzi (brother) q Paola Visconti (niece) q Fausto Tonna (CFO) 8 members in total q Three Executive members: q Lucianno del Soldato, q Alberto Ferrari (new CFO by April 2003), q Francesco Giufreddi Bo. D stuffed with family members and friends! No shareholder representation! 14

“Independent” members of Bo. Ds! q Paolo Sciume (Tanzi family lawyer) q Luciano Silingrandi (Friend and former accountant of Callisto Tanzi, member of various Bo. Ds and President of the Cassa di Risparmio di Parma) q Enrico Baranchini (Member of various Bo. Ds, member of the Bo. D of Banca Popolare di Lodi, second in cooperation with Parmalat) Lack of Independence!! “Independent” members were related to Tanzi familly!! 15

Internal Audit Committee! q 3 people out of which 1 was the CFO ! q The other two were Francesco Giufreddi and Luciano Silingrandi Lack of Independence of Internal Audit Committee!! 16

Auditors! • Grant Thornton: until 1999 3 yrs & 2 renewals (Italian law). GT were also auditors of Cirio’s company! GT said that it received a confirmation of Parmalat’s cash account existence → forged. GT relied on internal mail rather than write independently to banks for confirmation of cash balances!! • Deloitte & Touche Tohmatsu (1999 -2003): a Brazilian auditor who was removed from Parmalat’s account when he doubted of his cooperator’s (GT) financial elements. • The Capital Market Committee (CMC) obliged GT to refer its doubts regarding Parmalat’s liquidity ( April 2003) Ineffective Auditing!! Failed to detect fraud OR were they also engaged? 17

Other stakeholders Banks Milan Stock Exchange Italian Capital Market Commission Central Bank of Italy Italian Government 18

CG Failures in Sum • Lack of Transparency and Disclosure of information • Ineffective Bo. Ds: • Familly members and friends • Lack of Independence of independent non-executive members • No representation of shareholders • Chair = CEO • No Auditing Efficiency and Independence • Banks engaged in fraud • No Investor Protection – No or misleading information concerning Parmalat bonds • Lack of sufficient Regulation 19

Videos • http: //www. reuters. com/news/video? video. Channel=2602&video. Id=78138 • http: //www. youtube. com/watch? v=m 6 EJ_5 l. L 7 I 8 Ashley Mote speaks at the European Parliament on organised crime; specifically the collapse of the giant Italian Dairy company, Parmalat, and the deaths of a former member of the City Bank board and a former President of the European Central Bank. • http: //news. bbc. co. uk/player/nol/newsid_4290000/newsid_4291600/4291682. stm? bw=nb&m p=wm&news=1&bbcws=1 • http: //www. cnbc. com/id/15840232? video=626569885 20

Consequences. . . • Parmalat bonds are classified as junk • Parmalat share price fall by 40% • Government Intervention • Investors lured away by the banks had worthless paper in their hands… • Employees uncertain about their future • Banks’ role questioned 21

Stock Performance 22

Articles

Latest Updates [1/2] ü US Jury finds Parmalat Defrauded Citigroup (21/10/ 2008) ü Citigroup awarded $364 m in Parmalat fraud case (22/10/ 2008) ü Parmalat Spa stock plummets even further (24/10/ 2008) ü Prosecutors seek 13 -Year sentence for Calisto Tanzi ü September 2009: 3 lawsuits by Parmalat Capital Finance Ltd. and Enrico Bondi, CEO of Parmalat, against Bank of America and auditors Grant Thornton are dismissed 24

Latest Updates [2/2] ü Parmalat is in administration - quarantine! ü Protection from its creditors ü Had to sell off many of the companies (foreign subsidiaries) ü Had to reduce its workforce as part of financial restructuring plan ü Had to decrease the product portfolio ü Weaker bargaining power ü Danone and Nestle most likely to pick up the pieces… ü Today is surviving in shrunken form although with very good financial numbers ü Its market credibility is reformed and gained back day by day 25

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“How we govern Parmalat” “We worked hard since Parmalat came back to the Stock Market to be able to comply with the general principles of good corporate governance, and in particular with the Italian Corporate Governance Code. ” Parmalat’s corporate organization is based on the so -called Italian “conventional” model. 27

“How we govern Parmalat” Parmalat’s corporate organization is based on the so-called Italian “conventional” model The Model consists the following CG bodies: Ê Shareholders’ Meeting ÊBoard of Directors ÊBoard of Statutory Auditors Ê Independent Auditors. 28

Parmalat Vs Enron Parmalat (“Europe’s Enron”) Enron Still operates with growing profits Closed Proportionally larger than the combined ratio of the Enron and World. Com bankruptcies to the U. S. GNP 29

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