The gloves come off

Enrico Bondi's battle with Parmalat's banks is getting ugly

UNTIL recently, the big banks that did dozens of deals with Parmalat before the Italian dairy-products group collapsed last December were quietly dismissive of Enrico Bondi. Not any more: the special administrator who is trying to rescue a viable business from a fraud-riddled mess has already proved himself a formidable operator. His case against Parmalat's banks and advisers has been steadily gathering momentum. So the banks are fighting back.

Mr Bondi has been persistent in his move against the banks, which include Citigroup, Bank of America (BofA), J.P. Morgan, Deutsche Bank and several others. On October 7th Bank of America became the latest bank to be sued as part of Mr Bondi's effort to reclaim $10 billion that he says was illegally siphoned out of Parmalat by its owners and bankers. BofA responded that it would defend itself vigorously.

Like an earlier suit against Citigroup, the case against BofA includes details further demonstrating just how close a relationship existed between bank officials and the top Parmalat managers who were allegedly running the fraud. So important a customer had Parmalat become that in June 2003 it received a visit from Kenneth Lewis, BofA's boss, who flew to Parma in his executive jet. Also on board was Luca Sala, a BofA employee who shortly afterwards was sacked for allegedly fiddling his petrol expenses. Mr Sala seems to have retained a close relationship with BofA despite his dismissal. E-mails seen by The Economist show that by July 2nd Mr Sala was working for Parmalat where he became the group's chief liaison officer with his former employer (in a curious echo of the switch, around the same time, by Alberto Ferraris, a Citigroup relationship manager who became Parmalat's chief financial officer). A joint BofA/Parmalat roadshow that planned to sell $300m of bonds to American investors was abandoned that month.

Among the allegations made by Mr Bondi is that BofA has “directly impeded” his investigation into the bank's role in Parmalat's collapse. Mr Bondi will have to prove in court that, as he alleges, the bank has hidden documents and blocked his access to important information about transactions in some offshore-banking centres. But a feature of the lawsuit is that even before there has been legal discovery, a process which normally allows a fuller reconstruction of what took place, Mr Bondi has shone light on areas of banking that normally remain obscure.

The lawsuit against BofA followed Mr Bondi's biggest success to date. On October 6th Nextra, the fund-management arm of Italy's Banca Intesa, agreed to pay €160m ($197m) to Parmalat. The sum represents its settlement of prospective charges that it bought and sold €300m of Parmalat bonds in the months before the collapse, knowing that there was fraud at the company. Banca Intesa said that it wanted to avoid protracted litigation, but maintained that its dealings with Parmalat had been “absolutely correct”.

That settlement creates two nasty problems for the rest of the banks. The first is simple precedent: Mr Bondi has reckoned for months that an effort led by BofA to agree a collective settlement has been largely intended to stall his legal proceedings - no money has ever been offered. Now he has shown that he is prepared to deal reasonably with the banks one at a time. The second worry is that Nextra was only one party to the €300m bond sale: the other was Morgan Stanley, and it is under intense pressure. It is thought to have offered Mr Bondi €70m, which he has rejected as insufficient. Discussions are still going on, but if Morgan Stanley decides to settle too, then the remaining banks' claims that they acted properly will look pretty untenable.

Citigroup is leading a fightback. On October 8th it sued the Italian government, claiming that it was allowing the administration of Parmalat under Mr Bondi to treat creditors unfairly. This was a surprise. Only days earlier Charles Prince, boss of Citigroup, had paid a fence-mending visit to Carlo Ciampi, Italy's president. He was apologising for a recent controversy over trading activity by Citigroup in London that had disrupted government-bond markets, including Italy's. To enhance his charm offensive, Mr Prince wheeled out some of Citigroup's heaviest hitters, including Renato Ruggiero, a former Italian foreign minister who advises the bank. If Mr Ciampi was impressed, presumably it was only until he learned of Citigroup's lawsuit against the government.

Essentially Citigroup is contesting a decision made by Mr Bondi to exclude it from the list of Parmalat's creditors, a step that would, if upheld, keep the bank out of a future debt-for-equity swap prior to Parmalat's re-flotation on the stockmarket. Mr Bondi excluded around one-quarter of Parmalat's €22 billion-23 billion of credits, including all of Citigroup's and BofA'S. A judge in Parma will rule on November 18th whether it was legal for him to do so.

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