U.S. authorities have escalated their involvement in the investigation of Parmalat Finanziaria, the Italian food group known mostly for its boxed milk, and the role of U.S. banks that helped sell the company's bonds and lent it money.
Manhattan District Attorney Robert Morgenthau is collaborating in a joint inquiry between U.S. and Italian authorities into what has become one of Europe's biggest corporate scandals, a source familiar with the probe said on Saturday.
Parmalat is being dubbed Europe's Enron because of the size of the accounting scandal. It has been forced to seek protection from creditors since its new management revealed a hole of 4 billion euros in its accounts more than two weeks ago.
The U.S. Securities and Exchange Commission, which filed a complaint last week alleging that Parmalat committed fraud in the United States, is working with other U.S. authorities as it broadens its own probe of more than $1.5 billion of bond sales over the last seven years. Lawrence West, the associate director of the SEC's enforcement division, returned to the United States late last week after meeting with judicial authorities in Italy.
The U.S. Attorney's office in Manhattan, headed by interim U.S. Attorney General for the Southern District of New York David Kelley, is also involved with the investigation, according to the source.
U.S. authorities are interested in the allegations because more than half of Parmalat's revenues are generated in North American and South America, and U.S. investors bought more than $1.5 billion of its bonds.
As part of the probe, Morgenthau's office is examining the role of Giampaolo Zini, a lawyer for Parmalat founder Calisto Tanzi who kept an office in New York, according to the source. Police in New York have already searched Zini's Manhattan apartment and office, according to judicial sources in Italy.
A spokeswoman at the District Attorney's office in Manhattan would not confirm or deny whether it had opened in investigation.
A representative for the U.S. Attorney for the Southern District of New York, which often works jointly with the Securities and Exchange Commission, was not available for comment.
A spokesman for New York Attorney General Eliot Spitzer said his office is not involved in the investigation.
In a separate development on Sunday, the former head of Parmalat's Venezuela operations Giovanni Bonici told Reuters he had no part in the scandal and that he planned to return to Italy after his attorney spoke with magistrates there. Bonici, who is wanted for questioning by Italian prosecutors, spoke to Reuters by telephone from a friend's home outside Caracas.
Closer look at investment banks
Legal experts say the investment banks that helped Parmalat sell bonds to U.S. investors could be liable for losses if there was reason to suspect that the company's accounting was fraudulent.
The SEC's West said the way that the banks sold billions of euros of bonds was being examined, according to Italian newspaper Corriere della Sera.
Banks that have underwritten Parmalat debt sales include Bank of America Corp., J.P. Morgan Chase & Co., Morgan Stanley and Deutsche Bank, according to industry tracker Dealogic. However, the SEC is investigating a series of privately placed sales made in the United States, and has not yet made public the details of the sales or the investment banks involved.
"We need to understand if they acted in a way that was negligent or reckless or otherwise," West was quoted as saying in the Italian newspaper.
Efforts to reach West for comment were not successful.
Melvyn Weiss, whose law firm is leading a massive suit that claims that 55 Wall Street banks committed fraud while selling initial public offerings during the late 1990s market boom, said the early evidence suggests there was reason for Parmalat's investment banks to be suspicious of its finances.
One red flag, he said, was that Parmalat retained Grant Thornton SpA as its auditor for many of its international units while changing its domestic auditor to Deloitte.
Parmalat contracted a new primary auditor in accordance with Italian law, which requires that auditors be changed every nine years. However, it should have raised eyebrows that the company increased the amount of assets that Grant Thornton was responsible for auditing in units that were based in places like the Cayman Islands, Weiss said.
"If I'm an underwriter and see those circumstances, I should want to know more," Weiss told Reuters. "Underwriters have liability under federal securities laws for failing to do proper due diligence."
Still, other securities lawyers said that liability would be difficult to prove because investment banks are protected against misrepresentations and omissions in their clients' financial accounts.
The structure of the bond sales will also be important, said one lawyer, who regularly works for major investment banks.
The SEC's investigation is looking at more than $1.5 billion of bond sales made over the last seven years. Most were private placements of debt sold directly to sophisticated investors like insurance companies.
If the debt sales were made under federal securities Rule 144A, the investment bank has due diligence responsibilities similar to if it were a registered public offering, the lawyer said.
However, there are structures where the investment bank simply acts as a placement agent, finding buyers that are sophisticated enough to negotiate their own terms and do their own due diligence.
In those cases, this lawyer said he has never seen an investor successfully bring action against an investment bank.