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Parmalat Finanziaria SpA has employed a damages claim rarely used in Italy’s civil courts in its latest lawsuit seeking �4.4 billion ($5.5 billion) from local lender UniCredito Italiano SpA and U.S. bank J.P. Morgan Chase & Co. Lawyers say the suit filed by the bankrupt Italian dairy group is based on “deepening insolvency,” a concept largely used by local magistrates in criminal proceedings rather than plaintiffs in civil ones. Parmalat notified UniCredit, Italy’s No. 2 bank by assets, and J.P. Morgan earlier this month it had filed the suit in the northern Italian city of Parma, near where it is based. The claim refers to the banks’ role as co-lead managers in issuing Parmalat bonds from 1997 through 2001, said a person familiar with the matter who asked not to be named. The dairy company, which is still one of Italy’s biggest, with 2005 first-half revenue of �1.9 billion, claims the banks ignored the true financial situation and by arranging bonds for it they allowed Parmalat to continue operation and put it in a worse financial situation when it inevitably went insolvent. Parmalat declined comment. UniCredit said in a statement that the claim is “groundless,” adding the amount requested is superior to the nominal value of the bonds it managed, which it figures at �1.45 billion. The Milan-based bank said it won’t set aside any reserves from this suit apart from legal expenses. A J.P. Morgan spokeswoman said it was “wrong and irresponsible” to claim it was aware of Parmalat’s fraud. The Italian company was removed from the Milan Stock Exchange in December 2003 by the bourse itself when it emerged it had debts of about �14 billion, or about 8 times more than it had previously announced. The government appointed Enrico Bondi administrator to turn Parmalat around. “I am surprised by Parmalat’s suit,” said lawyer Mario Brancadoro of Italian bankruptcy and securities law firm Brancadoro & Bonaccorsi di Patti in Rome, who is not involved in the case. “Obviously it can take such action, but it is usually more common to see it in criminal cases brought forward by public prosecutors than civil ones.” Under Italian law there is very little difference between the burden of proof for criminal proceedings and civil ones. In Parmalat’s Italian deepening insolvency claim for damages the company must show the banks knew of the true financial situation of the dairy and unlawfully helped provide it with credit they shouldn’t have. It must show the lenders didn’t just make a bad banking decision. In other words, it must prove something very similar to what public prosecutors are trying to do in their criminal probe. That isn’t easy, legal experts say, considering the numbers of players involved in the bonds sale, from the auditors and law firms to the regulators approving them and officials at the Italian bourse. “If it were that simple you can be sure a lot of people would be in jail by now,” Brancadoro said. Milan prosecutors at the end of July requested indictments against Deutsche Bank AG, UBS AG, Morgan Stanley, Citigroup Inc., and asset management company Nextra, which is a unit of Italy’s biggest bank, Banca Intesa SpA, in connection with financing Parmalat by allegedly misleading investors. The deepening insolvency theory of liability holds there are times when corporate managers, as well as third-party professionals, either purposefully or negligently help to hide information that shows a company was insolvent when certain actions, such as acquisitions or debt-raising, are undertaken. The result is that the company’s financial distress becomes only more profound. The theory is relatively new in the U.S., unlike most of the federal bankruptcy code, much of which can be traced to 18th century English jurisprudence. This theory “is more prevalent in the last five or six years but there are still difference of opinions on it,” said Christopher S. Snow, counsel at Bingham McCutchen in Hartford, Conn. It isn’t a “settled” issue, he added. Bondi isn’t a novice in this legal theory. The administrator of Parmalat included deepening insolvency among an avalanche of allegations in his $10 billion lawsuit against Bank of America Corp. in the U.S. District Court for the Western District of North Carolina. Bingham McCutchen’s Snow is “not surprised” by Bondi’s decision to extend deepening insolvency to his suits in Italy. “Honestly I don’t believe Parmalat has high chances of success with this claim due to the difficulty in proving it,” said a Rome-based securities lawyer who asked not to be named. “It may just be a tactic to put pressure on the banks to find an out-of-court settlement.” The first hearing is scheduled for May 22, 2006. Parmalat creditors are in the process of voting on a proposed debt-for-equity swap as part of the company’s attempts to return to the stock market this fall. Creditors can vote from June 28 to Aug. 26. Copyright �2005 TDD, LLC. All rights reserved.

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