VideoIt has been said many times: the multi-billion-euro scandal at Italian food company Parmalat is "Europe's Enron." And as with Enron, one of the most important and closely watched aspects of the saga is whether, and to what extent, Parmalat's banks will be held accountable for the fraudulent "Ponzi scheme" that the company became. As part of their investigation, Italian and US authorities are examining the role played by 20 European and US banks in selling €8 billion of Parmalat bonds over a six-year period, and in setting up the web of special-purpose entities that siphoned off Parmalat money and concealed the true financial state of the company.
However, Parmalat's bondholders and shareholders—the main victims in the scandal—are not looking to regulators to recoup the money they've lost. They are suing through the courts, the main battleground being New York, where a handful of class action suits have already been filed in the district court in Manhattan.
The class action suits—which are not possible in European courts—are effectively the only route open to many investors, says William Lerach, a partner at New York-based Milberg Weiss, the law firm that brought the first class action suit against Parmalat and its advisers, including Citibank, Bank of America, Deutsche Bank and Morgan Stanley. Its clients in the case include the Southern Alaska Carpenters Pension Fund, in addition to Italian and other European investors. So far, says Lerach, the courts have lent a sympathetic ear to investors in such cases, ruling twice that banks can be sued as part of the class actions against the companies. While other European companies—Vivendi, for example—have been subject to investor class action suits in US courts, Parmalat is the first European case in which banks have been named, following the example set by the cases of Enron and WorldCom, whose banks are also being sued.
Regulatory Wreckage
Why have the class action suits naming banks come about now? "Regulatory failure," Lerach asserts. "There has clearly been, on a world-wide basis, a massive regulatory failure. The frenzy of deregulation in the 1990s clawed-back legal protection against conflict of interest. Parmalat, Enron and WorldCom, all three scandals bear that common imprimatur. The coal in the engine of those scandals was that you have billions in commercial loans being made by the corporate banking guys, and then a few floors below, you have the investment guys selling billions in securities to investors."
This line of reasoning seems to be gaining favour among European policymakers. In a February speech to the European Parliament about Parmalat, Frits Bolkestein, European commissioner of internal market (which under the Financial Services Action Plan now has unprecedented powers in setting European company law warned: "The financial services industry had better get its act together, and do so fast. We need some real industry leadership to stand up and take charge: to clear out the crooks, expose their unscrupulous practices and curb excessive greed. If industry leaders are not prepared to do this, then regulators will have to do much more than perhaps they or we would like."
Tough words. So far, the commission has sought to put the main burden of responsibility on the boards of public companies and the external auditors. Bolkestein is pushing for stronger European-wide "corporate governance/company law" (it is not yet clear what form it will take), which will place a more specific liability on board directors for the accuracy of their accounts—Sarbanes- Oxley "lite", you could say. He is also pushing for strengthened laws that will tighten the supervision of outside auditors, with more severe penalties for infringements that will extend to the parent firm, not just the local branch.
But what of the banks? Or more specifically, the "financial conglomerates," the giant financial institutions, like those named in the Parmalat lawsuits, which constantly face the temptation for their right hand to conspire with their left? A tough regulatory line could have the effect of radically altering the relationship between banks and their corporate clients, just as the auditor-client relationship has changed forever.
Bolkestein remains vague on this point. In his speech, the commissioner said the Investment Services Directive, which is expected to come into force in August, "will help deal with some of the major conflicts of interest in the investment services business."
However that is more of a hope than anything else at this point. As one high-level official at the internal market division of the commission explains, "Banks and investment firms will be required by the new Investment Services Directive to provide buyers of securities with all relevant information about the issuer. The precise definition of the 'relevant information' to be given will be defined by the commission in implementing measures to be adopted subsequently." And those "implementing measures" will, of course, be the subject of intense lobbying.
Banks, needless to say, are for the lightest of touches. "The industry is for self-regulation," says Panos Papapaschanis, legal adviser at the Brussels-based European Banking Federation, a lobbying group. "We have always supported [the Committee of European Securities Regulators, advising the commission on capital-markets reform] and we definitely support the [regulatory] process in banking. Why? Because it is a flexible approach; it allows the industry to be heard. The framework we support, but we have to see what comes out of it. But policing our customers? No."
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