Great frauds in history: Calisto Tanzi and Parmalat

Calisto Tanzi systematically falsifying dairy company Parmalat’s financial statements, using complex derivatives and subsidiaries to hide the total amount of debt.

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2005 AFP

Calisto Tanzi was born in Collecchio, Italy, in 1938, and went on to found dairy company Parmalat in 1961 after dropping out of university to run the family business. During the next three decades Parmalat would expand into various food-related lines, such as bakeries and processing plants, eventually floating on the Milan Stock Exchange in 1990. Over the next decade it continued to grow strongly by expanding abroad and buying other firms, including television channels and the football club Parma FC. By 2002 the conglomerate was valued at €3.7bn, employed 30,000 people and claimed to have €7.5bn in annual revenue.

What was the scam?

To finance the merger spree, Parmalat borrowed huge sums of money. To ensure that creditors were willing to keep lending the company money, Tanzi began systematically falsifying Parmalat's financial statements, using complex derivatives and subsidiaries to hide the total amount of debt. He also exaggerated the number of assets held. Overall, Parmalat's true financial position was €14bn worse than that implied by its official balance sheet.

What happened next?

The first hint of problems came in early 2003 when the company suddenly announced that it was unexpectedly selling €300m worth of bonds to raise cash. The final nail in the coffin would come later that year when auditors questioned some of Parmalat's transactions with a mutual fund. Within weeks, Tanzi was forced to resign, and then arrested, with the authorities discovering records covering €8bn of hidden transactions on his computer. After the firm missed a bond payment, the Italian government decided to put it into administration immediately in order to minimise the economic fallout.

Lessons for investors

Tanzi was eventually convicted of various counts of fraud in a series of trials between 2008 and 2010, and had 19 works of art confiscated. Parmalat's shareholders were wiped out; the company's workers saw their pensions slashed. After a series of long legal battles, several of the banks advising Parmalat agreed to pay over $1bn in compensation to its administrators. Perhaps the biggest red flag was the huge number of acquisitions during the 1990s, which took Parmalat far away from its core business.

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