Calisto Tanzi was detained in Italy's financial capital, Milan, on the order of prosecutors probing for fraud at Parmalat, engulfed in one of Europe's biggest corporate scandals after revealing a multi-billion-euro hole in its accounts.
The scandal has raised far-reaching questions about the conduct of the group's managers, auditors and banks. It threatens billions of euros of investments by holders of shares and bonds, as well as two billion more of bank loans.
The judicial sources said finance police seized Tanzi, 65, who stepped down as Parmalat CEO earlier this month days before the crisis erupted, on a street in the centre of Milan.
Detained hours after Parmalat was declared insolvent, Tanzi was held on suspicion of committing fraudulent bankruptcy and criminal association, but he was not charged, the sources said.
Magistrates searched Tanzi's home near Parma on Wednesday and tried to question him the same day, only to find he had left Italy for an undisclosed foreign country.
The judicial sources said the media-shy Tanzi would spend the night in custody and be questioned in Milan on Sunday.
'Web of deceit'
Tanzi who took over a dairy plant in 1961 and built it into a global brand was the first person detained in the investigation into fraudulent bankruptcy, fraud, false accounting and market rigging.
If Parmalat goes down it could
take many small investors with it
Although Tanzi no longer heads Parmalat, his family's holding company controls the group.
The scandal exploded last week when Parmalat, with 35,000 employees in some 30 countries, revealed a hole in its accounts that investigators said could exceed 10 billion euros.
Public prosecutors have named about 20 people in the fraud probe, including current and former employees of the group as well as unnamed outside auditors.
Parmalat was declared insolvent earlier on Saturday, three days after the government rushed into effect an emergency decree shielding Italy's eighth largest industrial group from creditors while a new administrator drafts a restructuring plan.
A bankruptcy court in Parma ruled that Parmalat's main operating arm was insolvent in a decision that will allow the global group to continue operations while restructuring and sorting out debts, judicial sources said.
Parmalat says it has six billion euros of debt on its books but analysts have questioned the figure.
"We are working, I hope for the best. We will see if it turns out this way," Parmalat's new administrator Enrico Bondi told reporters on Saturday.
Investigators said people questioned earlier this week have told of a complex web of offshore shell companies hiding losses for more than a decade.
US auditor Grant Thornton on Friday rejected allegations it had falsified accounts at a Parmalat unit at the heart of the investigation. The Bank of America has filed a criminal suit over the Parmalat case.
Parmalat is one of the world's biggest producers of long-life milk
Judicial sources said that with Parmalat declared insolvent, prosecutors are forced by law to probe for fraudulent bankruptcy, which can carry a penalty of up to 10 years in jail.
Bondi is keen to keep Parmalat, one of the world's biggest producers of long-life milk and number three US cookie maker, afloat. He has six months to present a restructuring plan that sources said will take into account all creditors' interests.
If that plan is rejected by the government, the company would be allowed to collapse and its assets would be sold off.