The size of the black hole at Parmalat has spooked financial markets and the size of the black hole has led to comparisons with previous scandals at Enron and WorldCom.
Italian police have arrested five top Parmalat officials, as they widen their inquiries into the multi-billion euro fraud at the dairy giant. Former Parmalat chief financial officers Fausto Tonna and Luciano Del Soldato are among those detained. Two executives at the Italian branch of Grant Thornton, the company’s auditors, have been arrested, and one of them, chairman Lorenzo Penca, has resigned. Former Parmalat boss Calisto Tanzi is in custody, but has yet to be charged.
Parmalat, already in the grip of a cash crisis, had previously reassured investors by pointing to investments and cash worth 3.9 billion euros held by its Caymans Islands based Bonlat finance unit.
But it revealed that Bank of America had said that documents certifying the investments were not authentic.
Parmalat shares, which had already lost 60% of their value in the past weeks, fell a further 43% on the Milan stock exchange.
Parmalat’s bonds also fell sharply, while credit rating agency Standard & Poor’s (S&P) lowered its rating to default level after the firm missed a repayment which fell due on Wednesday.
US market watchdog, the Securities and Exchange Commission (SEC), has described the Parmalat scandal as “one of the largest and most brazen corporate financial frauds in history”.
Parmalat was declared insolvent after a web of fictitious offshore funds and bank accounts were found to have hidden the massive losses.
Mr Tanzi has denied responsibility for covering up an 8bn euro (£5.7bn; $10bn) hole in the company’s accounts, saying it was hidden by top Parmalat managers of their own accord.
Two teams of Italian investigators who are probing its books have now been joined by representatives from the SEC, who have arrived in Parma to carry out their own inquiries.
The SEC has laid a complaint before a court in New York accusing Parmalat of over-valuing assets and under-valuing debts in information to US investors.