What's up guys and welcome back to wall street millennial on this channel, we've covered a lot of high profile frauds such as the fall of enron in the early 2000s and the fall of luck and coffee. In early 2020, cases of fraudulent companies listed on major u.s exchanges tend to get the most media attention, as the u.s has arguably the largest and most developed capital markets in the world, but us-listed companies by no means have a monopoly on fraud. Some of the most shocking cases of fraud come from other countries and we can learn a lot by studying those cases in this video we'll look into the multi-billion euro fraud in italy from the mid-2000s, which is notable both in sophistication and blatancy. We're talking about parmala.

The enron of europe in 1961, a 22 year old italian by the name of callisto tanzi, dropped out of college to start a milk business which he named parmala. He started small with a single facility which he used to pasteurize cow milk and then sell it in the local community over the preceding decades. He slowly built the business into the dominant milk company in italy. They also expanded into fruit juices, bakery, as well as other food and beverage products.

Their products were almost universally popular and people started referring to them as the coca-cola of milk, given how strong their brands were. In 1990, he took the company public and listed it on the milan stock exchange over the next decade. They continued their aggressive expansion and by the early 2000s they were directly operating in 21 countries across the world. At its peak, the company was worth almost 8 billion euros, which propelled founder and ceo callisto tanzi to billionaire status.

Things were looking good for the company and they used their financial firepower to diversify into unrelated businesses like media and travel agencies. They even bought an italian professional football team, called parma fc and had the players wear parmellop branded jerseys, one of the most impressive things about parmala is that they were so profitable and could fund their international expansions primarily by using their retained earnings by 2001. They only had 5.4 billion euros of debt, which was very manageable compared to their revenue and ebitda. The company was generating tremendous free cash flow and with their strong portfolio of brands, they looked like they were poised for many more years of top and bottom line growth.

This is why it came as a big surprise. In 2003, when parmalat's cfo announced the 300 million euro bond issuance at the time they recorded more than 3 billion euros of cash on their balance sheet. If they needed to spend money, it seemed weird that they would try to raise additional funds by selling bonds before they tapped into any of their cash on hand. The announcement caused the company's share price to fall sharply, the fact that they felt the need to issue so much new debt without warning made investors question their financial position in an effort to stop the bleeding tansy told investors that the cfo was stepping out of line And the company didn't need the money he fired, the cfo and canceled the proposed bond issuance.

While this move was intended to reassure investors, it caused even greater suspicion and the stock price fell. Another 30 percent tansy then appointed a young man by the name of alberto ferreiras to be the new cfo. Almost immediately after taking the job ferreira started to notice, some irregularities in the accounting parameter was making interest payments, which seemed way too high compared to their 5.4 billion dollars of debt that they recorded on their balance sheet and even more shockingly, he wasn't given access to Their corporate debt accounts, despite the fact that he was cfo, so he called various accountants and managers across the company to try to come up with his own estimate of the company's total debt load. To a surprise, the grand total was 14 billion euros more than double what they stated on the balance sheet.

He immediately went to tanzania to tell him about this revelation, but tanzi didn't seem to care. It was as if he knew this was the case all along. Not wanting any more involvement in what looked to be a fraudulent company ferraris resigned from his position. Parking lot had an incredible complex corporate structure with 214 subsidiaries in 48 countries, while it's normal for a large multinational corporation to have many subsidiaries in the case of parmala.

Many of them were shell companies designed purely to add layers of complexity, making it easier to fool their auditors. They would use various subsidiaries to borrow money and manipulate their accounting to avoid recognizing this on the parent company's balance sheet. Another gimmick that they implemented was to use complex derivative positions to raise debt financing and erroneously call it equity. For example, they raised capital from deutsche bank by selling them newly issued shares, but they also entered into a complex options arrangement whereby they would make fixed payments to deutsche bank.

Thus their economic exposure was identical to a bond, but because they engineered it with equity derivatives. They classified it as equity and avoided, recording it as debt on their balance sheet. One of their subsidiaries was called bond lat and was registered in the cayman islands. Bond lot handled a lot of the company's financial transactions.

They also owned. Another cayman island, subsidiary, called epicurum, which was supposedly a hedge fund, that managed money for the company parmela may have been the only milk company in history that also owned a hedge fund epicurum supposedly made highly profitable derivatives trades, which greatly add to parmallot's net income. You probably won't be surprised to hear that their trading profits were all fake and designed to make the company look more profitable than it actually was. The problem with booking fake profits is that you don't actually have the cash to go along with it.

Eventually, the auditors will get suspicious because you're booking all these profits, but your cash balance isn't increasing commensurately to solve this problem. Not only did they book fake profits, but they also created fake cash employees at the bond lat cayman island subsidiary, forged a document from bank of america showing that their account had roughly 4 billion euros. They took their real bank of america, account statement and used white out to remove the decimal places from the account balance, making it appear to be 100 times greater than it actually was. They then used the photocopier to make a copy of this document to remove the traces of the white out.

They handed this doctor document to their auditors to prove their profits were real by the end of 2003. Their fraud was getting so big that they were no longer able to hide it. On december 19th, bank of america finally found out about their 4 billion euro fake account and informed parmalt's auditor that the document was fraudulent. On that news, the share price started falling like a rock and billions of euros were wiped out overnight.

The milan stock exchange halted trading of the shares and on december 24th, the company filed for bankruptcy. A post-mortem analysis showed that their debt was 14.3 billion euros. More than eight times greater than what was reported on their audited balance sheet founder and ceo callisto tanzi was quickly arrested in a police interrogation. He admitted to masterminding the fraud.

He also admitted to siphoning off 800 million dollars from parmala to fund his separate business ventures. Most of which were failures, he also used some of the money to acquire a personal art collection, estimated to be worth over 100 million euros. It included original works by the likes of picasso, monet and van gogh. He ended up being sentenced to 10 years in prison.

The parmela fraud may have been even bigger and more sophisticated than enron. It is estimated that as many as 300 employees knew what was going on, ranging from the ceo down to junior accountants. This shows how powerful a corporate culture can be. It is said that the fish rots from the head down.

If the ceo sets an example, that's okay to lie about financial results, it can become very difficult for lower level employees to stand up and say this is wrong. After the bankruptcy pwc did a thorough forensic audit, they concluded that the fraud started in 1990 and lasted a full 13 years before finally unraveling in 2003.. During this time, parmelat reported positive net income every single year. In reality, they had lost money in 12 out of 13..

One of the reasons that the enron fraud was so shocking is that their auditor arthur anderson, was grossly incompetent and possibly complicit in the fraud, but the parma lot case was far worse. Both their lead auditor grant thornton and their lender bank of america potentially actively conspired with them to perpetrate and conceal the fraud. As early as 1997 grant, thornton saw that there was a multi-billion euro mismatch between parmallot's reported numbers and their economic reality, but inexplicably, they kept quiet about it and continued to sign off on their financial reports. Italian law requires companies to switch auditors every seven years to prevent their relationship from getting too cozy in 1997.

Parmela replaced grant thornton with deloitte as their lead auditor, but grant thornton continued to assist in covering up the fraud from deloitte thornton, probably feared that they could face legal liability if he was exposed that they knew about the fraud and did nothing. Additionally, high-ranking executives in bank of america's italian office likely knew about the fraud, but continued selling parmela's bonds to investors, as the lucrative fees were too much to resist. With the old management team, gone parmela emerged from bankruptcy with the former creditors controlling the company they sued. Deloitte bank of america grant thornton and a number of other financial institutions for aiding and embedding the decade-long fraud under the old management team dilute settled for 149 million dollars.

Bank of america sell for 100 million dollars and shockingly grant thornton was able to settle for just 4.4 million dollars, despite the fact that they probably knew about the fraud for the longest and arguably played the biggest role in actively abetting it. Unlike enron, parma lot had a viable business model and their brands remain popular in many parts of europe. They made something of a comeback in the decade following the scandal and were eventually bought out by the french dairy giant lectalis. Alright, guys that wraps it up.

For this video, what do you think about the parma lot scandal? Do you think it can dethrone enron as the world's most sophisticated scam? Let us know in the comments section below, as always. Thank you so much for watching and we'll see in the next one wall. Street millennial signing out.