In Your Face

In Your Face
Thought provoking opinions on topical issues.

Tuesday, March 23, 2004

Parmalat, a Warning to Directors

I recently wrote an article entitled “Parmalat, Europe’s Enron”, about the Italian dairy company which is accused of falsifying its accounts.

Since that article was written the wheels of Italian justice have been set into motion, with a fast track prosecution being initiated.

However, what is of more interest is the action being taken by the creditors of Parmalat. They are not content with waiting for their own country’s legal system to bring them justice, and more importantly compensation, for the money that they claim that they have lost as a result of the alleged fraud.

Instead they have initiated a class action using, not an Italian firm of lawyers, but an American firm Milberg Weiss (details of the class action can be viewed via this link Milberg Weiss). Even more interestingly the class action is citing American law, not Italian law. The rationale being that as Parmalat traded in the USA, and allegedly presented falsified accounts, then USA law has been breached. A case can be made by non US creditors for compensation, using the US legal framework and lawyers who are vastly more experienced at bringing class actions.

This, in my view, is a natural development of the Sarbanes-Oxley legislation (introduced post Enron); which imposes tough reporting requirements on directors of US companies, and those companies that have US subsidiaries or listings in the US.

Directors who believe that they are not affected by the tougher regulatory regime in the US, simply because their company is listed in Europe, are deluding themselves. The less robust legal framework of Europe will no longer protect those who, either deliberately or through incompetence, cause investors and creditors to suffer significant financial losses.

The Parmalat case should be seen as a wake up call to those directors who are in denial about Sarbanes-Oxley. Lax reporting, poor internal controls and weak corporate governance will no longer be tolerated; you have been warned.

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