Banking & Capital Markets

Caveat Creditor

Enrico Bondi is shining an embarrassingly bright light on Parmalat's bank deals.
Tony McAuleySeptember 29, 2004

Enrico Bondi is fast becoming Europe’s answer to the U.S.’s Eliot Spitzer. Though a government-appointed bankruptcy administrator in Italy and not a state prosecutor, Bondi is following Spitzer’s example by attacking the bankers to Parmalat, the fallen Italian food giant, via the courts. He is pursuing an aggressive, two-pronged strategy on behalf of Parmalat’s (legitimate) creditors: to seek billions of dollars in damages from banks on the grounds that they knowingly hid the true state of Parmalat’s finances, while using the same charge of insider knowledge to revoke billions of euros in debt.

Not surprisingly, the lawsuits have overshadowed Parmalat’s restructuring plan, which was announced in May. The outcome of the lawsuits, apart from having a huge impact on Parmalat’s finances, could influence the way banks do business with corporate customers. The core Bondi team — which includes his successor at Edison, Guido Angiolini, in a COO/CFO role, and Bruno Cova as head legal counsel — set the tone in July with a $10 billion (€8 billion) damages suit against Citibank, filed in the New Jersey Superior Court.

In the other prong of his assault, Bondi is suing in the Parma court, using Italian bankruptcy law, to revoke transactions that he claims were “illegal” or “inappropriate.” At the time of writing, three suits had been filed in Parma — for €290m against UBS; for €17m against Deutsche Bank; and for €248m against CSFB; plus interest.

What and When

There is a lot more to come. In papers filed with the court, Parmalat has indicated about 500 transactions that it may seek to revoke (worth an estimated total of €5 billion), and scores of banks that it may sue for damages, including those already sued in Parma and Bank of America. All the suits boil down to the question: what did the banks know and when did they know it?

At the centre of that Citibank lawsuit, for example, is the charge that its officers knew, from the deal’s inception in 1994, that receivables being securitised and sold to investors — through special purpose companies called Eureka and Archimede — were being counted twice. In 1994, Citibank’s relationship manager was Alberto Ferraris, who joined Parmalat in 1997, becoming CFO from March to November 2003, just before the collapse. The lawsuit claims Ferraris proposed or was aware of many of the transactions, which expanded rapidly under CFO Fausto Tonna from 2000, and continued through 2003. The lawsuit provides Citibank’s due diligence memos, from 1994 and 1995, about how the invoices for the receivables were being counted twice.

Parmalat’s lawsuit claims, “The securitisation programme was intended to, and did, create the false impression that Parmalat was generating nearly twice as much cash flow from its operations.”

The lawsuit against Citibank also claims that bank officials set up the infamous buca nero (black hole) “joint venture,” in which Citibank subsidiaries were “investors,” with the explicit intention of disguising millions of dollars of high-interest debt as equity on Parmalat’s balance sheet.

Citibank has said that it intends to fight this suit vigorously. But precedent suggests the bank may change its mind. In May, Citibank settled a class-action suit with investors in the former WorldCom (now MCI) for $2.65 billion. Last year it settled for $1.4 billion a WorldCom suit brought by Spitzer against its Salomon Brothers unit. In both instances, there was a stream of embarrassing pretrial revelations about what Citibank officials knew and when they knew it.

While the Citibank case could be long and complicated if it doesn’t settle, the first decision on the Parma suits will come much more quickly. On September 18, the Parma judge must decide whether or not to accept Bondi’s proposed creditor list. If he decides, for example, that UBS should be excluded because of the lawsuit, then the Swiss bank will not have creditor status.

And the burden of proof in these cases is with the creditors. UBS must convince the court that it did not have any prior knowledge that Parmalat did not deserve its investment-grade credit rating in spring 2003 when it arranged a €410m bond issue. That may prove difficult, as UBS simultaneously insisted that Parmalat, as part of the deal, purchase €290m of credit notes by Portuguese bank Banca Torres with a credit default swap, effectively guaranteeing that amount to UBS. Why an investment-grade company had to put €290m of collateral against a €410m bond issue, the courts will surely want to know.