Four Banks Charged in Parmalat Case

Citigroup Inc., UBS AG, Deutsche Bank AG and Morgan Stanley, face criminal charges in a Milan court for their alleged role in the circumstances that led to the bankruptcy of Parmalat.

Four banking giants were indicted in Milan for their role in the 2003 failure of Parmalat, Europe’s largest corporate bankruptcy, according to the Associated Press.

Citigroup Inc., UBS AG, Deutsche Bank AG and Morgan Stanley, as well as 13 managers, were charged with failure to take measures that would have prevented the crimes that led to the company’s failure, according to the report.

“It’s good news that the case goes to a criminal trial,” said Umberto Mosetti, head of the Italian unit of Brussels-based Deminor, according to Bloomberg. He is representing over 6,000 investors including a number of bondholders in a U.S. class action suit. “The issue now is that there were 10 billion euros of losses suffered by investors and debt holders, who thus far haven’t been reimbursed anything,” he added.

According to Bloomberg, Milan magistrates allege that the banks knew about Parmalat’s shaky finances when they carried out transactions including bond sales on its behalf, helping the company hide its true position from investors.

According to Bloomberg, non-Italian banks underwrote more than 80 percent of the 7.5 billion euros of bonds and private placements sold by Parmalat after 1990.

The Parmalat case alleges fraudulent bankruptcy and, in some cases, criminal association, according to the AP. It carries penalties of up to 15 years in prison, according to the report.

The wire service also points out that in another Milan trial, Parmalat founder Calisto Tanzi and 15 others, including external auditors, face charges of market-rigging, providing false accounting information and misleading Italy’s stock market regulator. They are facing as much as five years in jail.

While the Parmalat banks now face criminal charges, the issue of whether shareholders can hold so-called secondary actors, such as banks, liable for a company’s fraud also has attracted a lot of recent attention in the United States, where federal courts have been divided on the issue.

This fall, the Supreme Court is scheduled to decide whether vendors of Charter Communications that were involved in an alleged sham transaction involving behind-the-scenes dealings could be considered primary violators of securities rules. The SEC was pressured to weigh in on the issue, which was characterized by the Wall Street Journal as a “litmus test” of whether chairman Christopher Cox favored investors or business interests. The SEC ultimately did ask the U.S. solicitor general to file an amicus brief in favor of investors, but a spokesman for the Department of Justice, which oversees the solicitor general’s office confirmed to CFO.com on Tuesday that the solicitor general did not file a brief before the deadline.

According to the Associated Press, President Bush weighed in on the case personally. According to the AP, Bush’s chief economic adviser, Al Hubbard, said the president asked Deputy White House counsel Bill Kelley to convey to the solicitor general his opinion that it was important to reduce unnecessary lawsuits, and his concern that the cases before the Supreme Court could open up new avenues of litigation for plaintiff’s lawyers.

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