Parmalat Scam


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Corporate Ethics

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Parmalat Scam

  1. 1. PARMALAT: How the Milk Spilled <ul><li>Presented by: </li></ul><ul><li>Anupam Kumar </li></ul>
  2. 2. Introduction <ul><li>Italy's biggest food company </li></ul><ul><li>Italy’s eighth largest industrial company </li></ul><ul><li>One of the world’s largest independent milk and dairy producer </li></ul><ul><li>At age 22, Calisto Tanzi inherited the family business in 1961 </li></ul><ul><li>By 2002, Parmalat had more than $8 billion a year in sales with 36,000 employees in 30 countries </li></ul>
  3. 3. FUNDING THE BLACK HOLE <ul><li>The 66-year-old founder was an almost legendary figure in Italy, viewed as a classic entrepreneur who built a world-class company from scratch </li></ul><ul><li>Quick to embrace a new pasteurization technology that allowed milk to stay fresh for months without refrigeration </li></ul><ul><li>Parmalat's distinctive cartons soon became a fixture in stores across Italy, and ultimately conquered Europe and much of the world </li></ul><ul><li>Tanzi also discovered the power of sports marketing, and plastered the Parmalat name on events from World Cup skiing to Formula One racing </li></ul>
  4. 4. Contd… <ul><li>Behind his company's facade of success, however, a hole kept growing. </li></ul><ul><li>Parmalat's finances were in poor shape by the late 1980s as a result of a disastrous foray into television, according to the testimony of top executives </li></ul><ul><li>In 1987, it spent €130 million on a station called Odeon TV that it hoped to build into Italy's third major network, but which collapsed after three years. </li></ul>
  5. 5. Contd… <ul><li>To save from bankruptcy: </li></ul><ul><li>Tanzi engineered a so-called reverse merger, under which it sold itself to a dormant holding company already listed on the Milan stock exchange. </li></ul><ul><li>The combined firm then raised about €150 million from outside investors. </li></ul><ul><li>It enabled Parmalat to go public in 1990, and plug some of the gaps in its accounts; at the time it had a market value of around €300 million </li></ul>
  6. 6. Contd… <ul><li>Early 1993, Parmalat allegedly began to invent financial transactions to pad its balance sheet. </li></ul><ul><li>It posted profits, masking its problems with a mixture of fictitious transactions and aggressive acquisition. </li></ul><ul><li>Starting in 1992, the group began snapping up dairy and other companies in Italy, Brazil, Argentina, Hungary and the U.S. </li></ul><ul><li>It was a reversal of logic as they had to grow to hide the debt </li></ul>
  7. 7. The core of the fraud <ul><li>Was a system of double billing to Italian supermarkets and other retail customers. </li></ul><ul><li>Simply put, by billing twice for the same shipment of merchandise, Parmalat could create the impression that its accounts receivable were much larger than they really were. </li></ul>
  8. 8. CRUDE FORGERY <ul><li>From about 1990 to 2003 </li></ul><ul><li>Parmalat borrowed money from global banks and justified those loans by inflating its revenues through fictitious sales to retailers </li></ul><ul><li>All scheme was devised and executed by Tanzi, the firm's outside lawyer, Gian Paolo Zini, and two outside auditors, Maurizio Bianchi and Lorenzo Penca, it would then cook its books some more to make the debt vanish, by transferring it to shell companies based in offshore tax havens. </li></ul>
  9. 9. Contd… <ul><li>Parmalat's most audacious invention: </li></ul><ul><li>A bogus milk producer in Singapore that supposedly supplied 300,000 tons of nonexistent milk powder to a Cuban importer via Bonlat, a Cayman Islands subsidiary that held the fake Bank of America account </li></ul>
  10. 10. A Huge Mystery <ul><li>For years, Parmalat dealt with the world's largest banks, its most sophisticated investors and its most reputable auditors </li></ul><ul><li>How did they miss the signals that the company was cheating? </li></ul><ul><li>If Parmalat had gone bust in 1995, when it could no longer fill all its funding needs in Italy, it would have been a mid-sized Italian failure with debts of about €560 million. </li></ul>
  11. 11. Contd… <ul><li>Parmalat took its warped finances global </li></ul><ul><li>It owed its investors €14 billion. </li></ul><ul><li>Bank of America alone, beginning in 1997, arranged $1.7 billion in financing through bonds and private placements for U.S. investors, and received more than $30 million in fees and commissions. </li></ul><ul><li>Citigroup systematically packaged and resold the firm's receivables, even installing its own software at Parmalat headquarters to help track them; between 1999 and 2003, it earned $35 million </li></ul><ul><li>Grant Thornton and Deloitte & Touche signed off on its increasingly surreal accounts and booked millions of dollars in fees for doing so </li></ul>
  12. 12. Contd… <ul><li>Deutsche Bank took on the assignment of helping it work with Standard & Poor's, which kept its &quot;investment grade&quot; rating on the firm until 10 days before the collapse. </li></ul><ul><li>Analysts worldwide encouraged investors to keep buying its stocks and bonds. According to one study, 75% of the analysts covering Parmalat had a &quot;buy&quot; or &quot;neutral&quot; rating on the stock three months before it collapsed. </li></ul>
  13. 13. Were these financial stalwarts victims of Parmalat's deceptions? <ul><li>These Banks were more like well-paid enablers, looking the other way while helping Parmalat hobble toward ruin </li></ul>
  14. 14. Highlights of the Case <ul><li>Cayman Island issues </li></ul><ul><li>Bank of America Issue </li></ul><ul><li>Liquidity Issues </li></ul><ul><li>Destroying Evidence Issue </li></ul><ul><li>Local Govt. Issues </li></ul>
  15. 15. Highlights of the Case <ul><li>A strong blow to those Analysts who believed European Counterparts as American Counterparts </li></ul><ul><li>Second the role of Auditors were Questioned as the role of Deloitte & Touché </li></ul><ul><li>Thirdly it exposed the peculiarities of the Italian business environment as the companies in Italy were mainly held by families and things were kept in trusted circle of a few insiders. </li></ul>
  16. 16. <ul><li>Thank You! </li></ul>