updated 12/29/2003 6:45:53 PM ET 2003-12-29T23:45:53

Prosecutors looking into the financial troubles of Parmalat argued Monday that the dairy company’s founder was fully aware of a multibillion dollar fraud, urging a judge to keep the onetime business baron behind bars during the investigation.

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Securities regulators in the United States also accused the company of fraud in a lawsuit filed Monday.

After revelations of the huge hole in the company’s balance sheet, Parmalat entered bankruptcy protection last week and founder and former CEO Calisto Tanzi left the country. He returned on Saturday, and police promptly detained him.

Legal officials questioned Tanzi in Milan’s San Vittore prison Monday, while a judge considered whether to keep him in jail or just under house arrest.

Tanzi’s lawyers argued that the 65-year-old was in poor health and posed no flight risk. “He’s a man who’s had a heart attack and wears a pacemaker, and who needs to be treated,” attorney Michele Ributti told reporters afterward.

Judge Guido Salvini in Milan did not issue a ruling as expected after the four-hour interrogation, but was expected to do so on Tuesday.

“I can only tell you that the questioning took place in a calm atmosphere,” Salvini said. “Tanzi replied to the questions posed to him by the prosecutors and by others. He offered his version of the deficit that is in question.”

Also Monday, the U.S. Securities and Exchange Commission filed suit in New York against the company, alleging that “Parmalat engaged in one of the largest and most brazen corporate financial frauds in history.”

The suit says Parmalat officials sold nearly $1.5 billion in bonds and notes to U.S. investors and misled them by “grossly overstating the amount of the liquid assets” in its financial statements. Regulators are seeking civil penalties, repayment of ill-gotten gains with interest and permanent injunctions against future fraud.

The Parmalat scandal exploded Dec. 19, when the company revealed that Bank of America Corp. wasn’t holding about $4.9 billion of its funds, as the Italian company had reported in September.

Since then, the estimated amount missing from its balance sheet has ballooned, with Italian reports saying as much as $12 billion could be missing after what may have been 15 years of false accounting.

Parmalat’s shares, which have lost more than 90 percent of their value since the company acknowledged earlier this month that it had misrepresented its financial position, were suspended indefinitely by the Italian Stock Exchange late Sunday. They last traded at 11 euro cents (13 U.S. cents).

The company, which has annual sales of around $9.2 billion, produces and sells milk, yogurt, juice and other food products in Europe, the United States and around the world. It employs 36,000 people in 29 countries.

At least 20 people, including Parmalat’s former financial officers, have been placed under investigation for alleged fraud and other charges concerning the suspected falsification of company documents.

Prosecutors claim Tanzi ordered the destruction of documents when the company’s situation deteriorated this month, Milan’s Corriere della Sera newspaper reported Monday.

Italian news reports also said prosecutors believe Tanzi himself misappropriated some $990 million. Ributti, asked Sunday about missing money, told reporters there was no money missing but at most there were “nonexistent assets” listed on Parmalat’s balance sheet.

Parma prosecutors accuse Tanzi of fraudulent bankruptcy — committing fraud that resulted in the bankruptcy of a company — as well as false accounting. Prosecutors in Milan added a charge of market manipulation and making false statements to auditors.

A market-rigging charge could bring up to five years in prison, while fraudulent bankruptcy could bring three to 20 years in prison, Italian reports said.

Police continued their investigation Monday, searching the Milan offices of Parmalat as well as of the Tanzi family’s holding company.

The case also has raised questions about one of Parmalat’s auditors, Grant Thornton. The company denies wrongdoing and discounts reports that its president, Lorenzo Penca, and partner Maurizio Bianchi were under investigation. The company said Monday that the two had asked to appear before Parma prosecutors.

Parmalat filed for bankruptcy protection last week and entered insolvency status Saturday, which allows it to pay any new debts and keep operating rather than having to deal with outstanding creditors.

Turnaround expert Enrico Bondi, who was named Parmalat CEO after Tanzi was ousted earlier this month, has been named commissioner to run the restructuring.

On Monday, prosecutors disclosed that Bondi said Parmalat had a gross debt of $10 billion at the end of 2002. When the company presented its full-year results to investors last April, it claimed to have had a total debt of $6.7 billion at the end of 2002. The ANSA news agency said the debt is expected to total about $12 billion at the end of this year.

Copyright 2003 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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