THE PARMALAT PROBLEM

When Enron launched an era of scandal in 2002, Old Europe had a good sneer about the ugly excesses of American capitalism. Now Europe has a scandal as large as any uncovered in the United States. Between 8 billion and 14 billion euro have gone missing at Parmalat, a global dairy conglomerate based in the northern Italian city of Parma. CEO Calisto Tanzi is now in a Milan jail along with a dozen other executives.

What Italian newspapers are calling "Enron a la Parmigiana" has shocked the markets. The Milan stock market is down 3 percent since the scandal broke Dec. 19, compared with a 1 percent rise in the Europewide Eurostoxx index. Italian banks, owed at least 1 billion euro by Parmalat, were hit especially hard. And just as Enron proved to be the tip of the polluted iceberg, analysts last week began asking whether Parmalat might be a leading indicator of rot at other big, family-run corporations throughout Italy, or even throughout Europe.

The yogurt first hit the fan when a Parmalat document claiming to hold 4.6 billion euro in cash in a Bank of America account on the Cayman Islands was exposed by the bank as a crude forgery. Italian investigators say executives used scissors, glue and a fax machine to create the phony assets. The company also allegedly lied about billions in outstanding debts, hiding them in some 250 different subsidiaries and shell companies with names such as Buconero, Italian for "black hole." Shortly before the scandal erupted, authorities say, management ordered documents shredded and computers smashed. The U.S. Securities and Exchange Commission, which last week filed its own suit against Parmalat in New York, calls the case "one of the largest and most brazen corporate frauds in history."

For now, indications are that the Parmalat saga is as quintessentially Italian as a Camorra tale. Tanzi's dairy giant was one of the classic family-run companies that dominate the Italian economy, like the Agnellis' Fiat, the Berlusconis' Mediaset and the Benettons' clothing empire. Uniquely immune to public scrutiny, these firms benefit from the same laws designed to protect small businesses, exempting them from the strict rules on debt and reporting that govern public corporations. One such exemption, say analysts, was key in enabling Parmalat to spread its huge debts over the 250 subsidiaries without detection.

Though a minority of Parmalat shares were publicly traded, these also escaped any closer look. Italy's stock-market regulator, Consob, is known as a paper tiger actually forbidden by law from enforcing its own rules. As for stock analysts, for 20 years the secretive Parmalat refused to speak to them at all. "Italian law makes it much easier to mislead auditors," says Andrea Paladini, an analyst with the Italian investment house Centrosim. Although investigators admit they've known for years that the company's finances were murky, "Parmalat was given free rein to carry on," Paladini says.

But documents from the investigation suggest that Parmalat's deceptions became more aggressive after Prime Minister Silvio Berlusconi relaxed rules on corporate fraud. Under Berlusconi, himself long suspected of corporate misdealings, Italy has decriminalized phony bookkeeping (it's now just a misdemeanor), cut the statute of limitations for corporate crime and abolished reporting requirements for offshore balances. Witness-protection programs that make it easier for whistle-blowers to come forward have also been cut back. Says Paladini: "The relaxation of corporate ethics has become widespread since Berlusconi came to power in 2001."

There is another reason that the scandal seems unlikely to spread through Europe. Just as Enron led investigators to other U.S. companies caught up in the greed of the 1990s, Parmalat is likely to trigger probes of other Italian giants still scrambling to survive the recent downturn. (Tanzi has said his main aim was to cover setbacks, particularly due to currency swings in Latin America.) Elsewhere in Europe, economic recovery is raising the fortunes of big corporations, so they presumably have less red ink to hide.

What's left is a picture of Italy driving against the European traffic, loosening corporate governance as the rest of the world tightened up, then making up accounts while others recover real earnings. There is talk of a "risk premium" on Italian stocks and bonds, even as Berlusconi hints that he may support a tough new regulator based on U.S. or British models, scrapping Consob. In the long run, that should help make future Parmalats less likely. At least in Italy.

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