Italian Magistrates See Web of Deceit at Parmalat

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Italian magistrates believe they have uncovered a decade of systematic fraud at food giant Parmalat and have placed group founder Calisto Tanzi firmly at the center of a complex web of deceit.

Teams of magistrates are working on parallel investigations in Italy's financial capital Milan and Tanzi's home town Parma, trying to shed light on what U.S. regulators called one of the "most brazen corporate financial frauds in history."

Eleven days into their probe, the magistrates say they have plotted a pattern of market rigging, false auditing, fraud and misappropriation of funds involving current and former top managers, according to legal writs obtained by Reuters over the past 24 hours.

They also accuse two executives of the Italian unit of the Grant Thornton group auditing company of having helped set up off-shore subsidiaries to hide balance sheet irregularities.

Tanzi admitted on Monday that he had misappropriated company funds and falsified company accounts. Grant Thornton has denied any wrongdoing and says it was a victim of fraud.

In a seven-page arrest warrant that empowered authorities to hold Tanzi in custody on Sunday, Milan judge Guido Piffer said Parmalat's founder played a "central role" in the fraud.

"One cannot see how it could be otherwise, considering the enormity of the financial troubles that had to be concealed, and considering that Tanzi himself, and members of his family, were the beneficiaries," the document says.

The writ says he worked with more than five other people to disguise the fact that Parmalat Group finances had been "in crisis" since 1995.

A document drawn up by the Parma magistrates said Tanzi and eight others formed a group to oversee the fraud and created four off-shore companies, including Bonlat and Epicurum in the Cayman Islands, that were used to camouflage group debts.

The magistrates say this inner circle used forged Bank of America documents to create false liquidity flows -- including $4.6 billion in one account in June 2003 that did not exist. Both the Milan and Parma magistrates say Grant Thornton SpA, the Italian unit of the auditing group, helped "devise and organize" Bonlat Financing Corporation.

When another team of accountants, Deloitte & Touche, took over auditing Parmalat accounts, Grant Thornton SpA suggested setting up a new off-shore company that it continued to audit, Milan magistrates say.

The Milan magistrates add that documents relating to Bonlat and the Epicurum fund were recovered from Grant Thornton SpA and "appeared at first sight clearly to be forged."

Judge Piffer says in his conclusions that he accepted the magistrates' accusations that: "Grant Thornton was directly involved in the creation of Bonlat...and therefore in the fraudulent preparation of false reports sent to the main auditors Deloitte & Touche."

The Parma magistrates, who have interrogated a number of Parmalat staff in recent days, accused two Grant Thornton SpA employees of conspiring in the fraud.

"They suggested the fictitious operations necessary to achieve the scope of the operations," the magistrates say in a writ that was used to authorize Tanzi's seizure on Saturday.

The writ also alleges that Tanzi gave Fausto Tonna, who was Parmalat group director general until March 2003, the task of hiding the losses and seeking fresh credit.

They say Tonna and then Luciano Del Soldato, a former group finance director, designed the financial instruments to do so.

Neither Tonna nor Del Soldato could be reached for comment on the writs and neither has issued a public statement on the case.

Besides creating fictitious cash flow, Tanzi also embezzled large sums of money, the two teams of magistrates say.

"He diverted about 800 million euros ($1 billion) to himself and companies that were not part of the group ... and ordered the destruction of accounting documentation ... that proved the group's financial troubles," the Parma magistrates' report says.

Milan magistrates said there had been a "constant drain of liquidity" in Tanzi's favor "for a total amount, between 1992 and 2003, of more than 800 million euros."

They added that Parmalat managers hid losses of more than seven billion euros to enable the company to return to the market for fresh funds. The group now has debts between 10 billion and 13 billion euros, the magistrates say. (Additional reporting by Emilio Parodi)