Lawyers for Calisto Tanzi, the jailed head of now-bankrupt European food and dairy group Parmalat, claim that he is "depressed" in prison, constantly asking about his family. The lawyers have suggested that Tanzi be released from prison and placed under house arrest. Apparently, Tanzi was well enough in the last few weeks to travel to Ecuador, but the stress of prison is simply too much.
I doubt Parmalat shareholders quite share the same concern about Tanzi's well-being. After all, he stands accused of using the company he founded like his family's private piggy bank. Investigators suggest that the amounts Tanzi diverted from corporate coffers into family accounts run into the hundreds of millions of dollars. What they cannot figure out is how a $10 billion hole in the company's cash accounts went unnoticed for so long. As soon as the fraud was discovered, Parmalat descended into bankruptcy. To date, 10 Parmalat insiders have been arrested on suspicion of being deeply involved in what the Securities and Exchange Commission calls one of the "most brazen financial frauds in history."
Who is all is this costing? Bank of America (NYSE: BAC ) has exposure to the tune of more than $274 million, though the bank claims to be sufficiently positioned to deal with the impact. The scandal erupted late last year when the company disclosed that Bank of America wasn't holding some $4 billion that it had previously claimed in financial documents.
One of the more interesting elements of this case (you know, besides the billions of missing dollars, euro, shekels, dong, and rupees) is the intrigue involving forged bank statement documents that accounting firm Grant Thornton's Italian affiliate is purported to have received in March 2003. These documents said that a Parmalat subsidiary had the $4 billion in cash in a Bank of America account. In December, Bank of America claimed that the account didn't exist, and that the documents were forged.
While it would be easy to believe that Parmalat pulled a fast one on both the auditor and the bank, this would require Parmalat to have access to the documents in the interim. Instead, as Paul Miller, author of Quality Financial Reporting, describes the account confirmation process: "request for confirmation goes straight from the auditor to the bank, which then sends it straight to the auditor. The client's mitts are never supposed to be on it. Therefore, the forgery... must have occurred at the bank or at the audit firm." Arrests of two partners at Grant Thornton's now-former affiliate suggest where investigators believe the culpability of that particular act lies.
Once Bank of America called "shenanigans" on the account, the sham accounting hole quickly widened, swallowing up every penny of equity and a fair amount of debt at Parmalat and providing European and Italian accounting and regulatory authorities a pretty good black eye. I wouldn't expect Tanzi's depressive state to elicit much sympathy.