Compensation still a long way off for investors in Parmalat

Will those private investors who lost €7 billion of savings in the December 2003 collapse of Parma-based food products company Parmalat recover anything close to their original investment?

The question asked itself in a week when the company's founder, Calisto Tanzi, chief financial officer Fausto Tonna, Mediobanca chairman Cesare Geronzi and more than 60 senior executives were indicted to stand trial next March on charges of fraudulent bankruptcy and criminal association related to the collapse.

Let us do a quick rewind to Christmas 2003. In what was described as "Europe's Enron", Parmalat collapsed, leaving behind it a €14 billion "hole".

Generally viewed as one of Europe's worst bankruptcies, the collapse stunned Italy.

Parmalat, after all, had been seen as a flagship company. Italy's eighth-largest industrial group, it employed 36,400 people at 139 plants in more than 30 countries, generating an estimated annual revenue of €7.6 billion. Some 80,000 Parmalat bond-holders and 40,000 Parmalat shareholders, as well as various corporate investors, took a major hit.

The initial investigation into the collapse appeared to unveil a complex and fraudulent web of back-to-back companies, off-balance-sheet financial transactions, fake inter-company credits and false escrow accounts.

It also seemed to indicate some highly dubious banking and accountancy practices by some of the most famous names in the financial world.

Mr Tanzi's appeal to investors, asking them to forgive him, tended to fall on less than sympathetic ears. On the other hand, his repeated claims that various banks had caused the company's downfall by pushing bond sales were not dismissed out of hand.

Four years later, after a two-year reorganisation and a relisting in 2005, a new, slimmed-down Parmalat appears to be doing well.

Under chief executive Enrico Bondi, the man originally sent in as state-appointed administrator to wipe up the "spilt milk", it has just reported a 3.7 per cent rise in first-half earnings to €163.3 million, with revenue rising 2.8 per cent to €1.81 billion.

One reason for the revival in Parmalat finances has been the fact that, over the past two years, Mr Bondi has filed lawsuits against 70 of the company's former banks, recouping almost €650 million in bank settlements. In essence, he argues that the banks' funding and general behaviour helped sustain a decade of fraud at the former Parmalat.

Intriguingly, last week's ruling, at the end of a year-long preliminary hearing and a two-year investigation, also focused on a banker - Cesare Geronzi, one of Italian finance's most influential players. He and seven other executives at Capitalia Bank stand accused of forcing Parmalat in 2002 to buy Ciapazzi, a mineral water company, for considerably more than its market value as a condition for providing credit lines to Parmalat's tour company, Parmatour.

Just last month, four of the world's largest investment banks - Citigroup, UBS, Deutsche Bank and Morgan Stanley - were indicted in Milan to stand trial for alleged wrongdoing at Parmalat.

Essentially, the accusations against the banks are that they knew, or should have known, something was wrong at the company, but failed to signal its real health to the markets by continuing to help finance it.

All the banks involved have denied any wrongdoing, as have Capitalia and Mr Geronzi.

The Parma preliminary judge, Domenico Truppa, also issued a significant ruling last week when he awarded almost €40 million to 35,000 Parmalat investors who lost money in the 2003 crash.

This was a provisional compensation, awarded for "moral damage" and assessed at 10 per cent of the original investment. Yet this could pave the way for bondholders to seek billions of euro in damages - in the event that the former executives are convicted of wrongdoing.

While the Parmalat collapse has generated a number of court cases, commentators have argued that the Parma trial due to open next March could be the most important one, given the number of people indicted and the serious nature of the charges.

The trial may yet become a maxiprocesso or mega-trial if separate cases involving the Ciappazzi acquisition and the collapse of Parmatour are merged with it.

From the investor's viewpoint, the bad news is that such a mega-trial is likely to run for years. In other words, compensation could still be a long way off.