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Parmalat Mystery: Got $5 Billion?

Cupboard may be bare for maker of long-life milk. Also: Hanover Compressor settles with SEC; Take-Two put on notice; Symbol Technologies names three outside direcors; and more.
Stephen Taub, CFO.com | US
December 22, 2003

Will Parmalat become the Enron of Europe?

The comparison, invoked by Reuters, might not be as farfetched as it sounds. Italy's largest food company, best known for its long-life milk, admitted on Friday that it had discovered a $4.9 billion shortfall on its books.

According to Parmalat, on December 17 the New York branch of Bank of America (BOA) informed Grant Thornton, the auditor of Bonlat Financing Corp., a Cayman Islands-based Parmalat subsidiary, that it does not have an account in the name of Bonlat.

Parmalat executives said BOA denied the authenticity of a document dated March 6, 2003, that certified the existence of nearly $4.9 billion in Bonlat securities and liquidity as of December 31, 2002. That document was used as a basis for certifying Bonlat's 2002 accounts, according to the company.

BOA's letter informing Parmalat of the shortfall followed a request for information made on the same date by Grant Thornton. The missing money is four times the amount that Dutch retailer Ahold — another European company to attract comparisons to Enron — admitted to in its accounting scandal earlier this year. "It is difficult to see how Parmalat can keep going after this clear indication of extensive financial irregularity," ABN AMRO credit analyst Claire McGuckin said in a note to clients, according to Reuters.

Indeed, Parmalat was already experiencing financial problems when this development came to light. In the previous week, it failed to make a first payment on a required $400 million buyout of minority investors in a Brazilian unit and is desperately trying to reschedule the deal, according to Reuters. The second payment is due today.

Hanover Compressor Settles with SEC
Hanover Compressor, its former temporary finance chief, and two other former executives have settled earnings-manipulation charges with the Securities and Exchange Commission.

The SEC resolved charges against the Houston-based maker of oil field equipment and William Goldberg, who was Hanover's executive vice president until early 2002 and its interim CFO from mid-2000 through January 2002, that they violated record-keeping, reporting, and internal-control provisions of the federal securities laws. Goldberg agreed to pay a civil penalty of $50,000 and not to serve a director or officer of a public company.

The commission also settled charges alleging that Michael McGhan, the company's former chief executive officer, and Charles Erwin, its former chief operating officer, had devised a scheme to inflate Hanover's reported pretax income and meet its 2000 and 2001 earnings goals and estimates. Along with internal-control deficiencies, the scheme spawned an overstatement of Hanover's pretax income in amounts ranging from 4.9 percent to 22.6 percent, the complaint alleges.

The SEC asserts that Erwin and McGhan fraudulently inflated Hanover's earnings during the third and fourth quarters of 2000 to meet Hanover's earnings goals and estimates. Erwin inflated the company's reported pre-tax income during the second and third quarters of 2001, the commission charges.

Erwin and McGhan also failed to inform Hanover's accountants or its auditors, about side agreements that should have precluded Hanover from recognizing revenue on sales of equipment in Nigeria, according to the complaint.

McGhan and Erwin agreed to pay a combined total of $672,171, and also agreed to permanent injunctions against future violations of the securities laws and five-year bans against serving as an officer or director of a publicly held company.

Take-Two Put on Notice
Video-game maker Take-Two, its chairman, an employee, and two former officers of the company received Wells notices informing them that SEC staffers were recommending lawsuits against them.

The proposed charges stem from Take-Two's previously disclosed SEC investigation into a number of accounting matters at the company. The issues included Take-Two's financial statements, reporting, and internal controls, according to the company.

In December 2001, Take-Two said it would restate its 2000 annual results and the results of the first three quarters of 2001 because of certain revenue-recognition missteps.

Last week the company announced that the SEC's probe includes an examination of Take-Two's application of FAS 48, Revenue Recognition When Right of Return Exists, and its impact on the company's revenue recognition policies in its financial statements and earnings guidance.

If Take-Two can't resolve the issue with the SEC, the company reported, would have to change how it timed the recording of revenue in historical, current, and future financial statements.

Symbol Technologies Names Three Outside Directors
Symbol Technologies Inc. has taken another step in rehabilitating its corporate governance. Embroiled in an accounting scandal, the bar code company appointed three independent directors to its board, including two finance pros.

One of the new directors, Sal Iannuzzi, will serve in the newly created post of lead independent director. Along with the other new directors, Robert Chrenc and Melvin Yellin, he will conduct a "thorough review of Symbol's corporate governance practices" and gauge the right size, composition, and committee structure of the board, the company added.


In a further attempt to further improve its governance, Symbol has also hired the headhunting firms Heidrick & Struggles International and DHR International to recruit more independent directors to what is now its nine-member board.

Iannuzzi has held senior executive finance positions at Bankers Trust Company/Deutsche Bank and has served as senior control officer and head of corporate compliance. Chrenc is a retired executive vice president and chief administrative officer of ACNielsen, where he was responsible for finance, human resources, communications, and business development, and is a former CFO of the company. Until recently, Yellin was a lawyer at Skadden, Arps, Slate, Meagher, and Flom.

Currently the subject of ongoing investigations by the Securities and Exchange Commission and the U.S. Attorney's office, Symbol has not filed its annual report for the year ended December 31, 2002, with the SEC and is working to finalize its audit for that year. The company also expressed its intention to file its 10-Q for the first, second, and third quarters of 2003 after the 2002 10-K has been finalized. Symbol management, however, said it couldn't provide a timetable for the quarterly statements.

SEC Probing Wave Systems
The SEC has launched a formal investigation into Wave Systems Corp. as a result of public statements made by the security-software maker and trading in company shares around August 2003, according to the company. Wave executives added that the commission hasn't concluded that there was any wrongdoing and that the company is cooperating fully with the SEC.

In July and August Wave announced that Intel and IBM, respectively, would be using its software in future products. Wave's share price surged during that period on heavy volume. It opened at $1.03 on July 31, closed that day at $2.25, and surged as high as $4.53 on August 5. Wave's share price closed at $1.50 on Friday.




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