Citigroup Inc.’s role in the spectacular collapse of Italian dairy giant Parmalat in 2003 finally went to trial on Monday. Proving the bank helped hide a €14 billion (Rs87,780 crore) balance sheet hole would normally be a difficult task. After all, it’s a lot to expect jurors to grasp the finer points of securitization. The defence would be easier if it hadn’t funnelled cash to Parmalat though a vehicle it called “Buconero”.
For those not fluent in Italian, it means “black hole”.
The suit alleges that Citigroup knew about Parmalat’s precarious financial position and concealed the truth from investors during nearly a decade when it advised, financed and co-invested alongside Parmalat, enabling the company’s schemes to continue. Plaintiffs are seeking several billion dollars in damages.
The bank claims it was a victim, not a perpetrator. As a big lender, it lost big when the company went bust. Citigroup says it neither knew, nor hid, a thing about Parmalat’s true state.
Yet the bank certainly had reason to be suspicious. Parmalat claimed to have billions of cash on its books. Nonetheless, it went back to the bond markets time and again to borrow huge sums through convoluted and costly investment vehicles.
This didn’t make sense for a company with steady cash flows. It’s like having $1 million (Rs4 crore) sitting in a checking account while carrying a giant credit-card balance.
As a result, the trial could hinge on something as simple as a name. Buconero was a complex vehicle that the plaintiffs claim was used to give a credit line the appearance of equity. Citi claims it was simply tax-efficient financing. It has reportedly claimed the banker had a love for astronomy.
But plaintiffs’ lawyers will do their best to suggest the name “black hole” was a sign of intent—that Citi knew the company’s state wasn’t solid and that it helped hide this fact. Whichever way the jurors in Hackensack, New Jersey go, Citi’s bankers would be well advised in future to pick boring names for complicated investment vehicles.