Dairy executives rigged bids on milk for schools and military, probe finds

May 23, 1993|By Diana B. Henriques and Dean Baquet | Diana B. Henriques and Dean Baquet,New York Times News Service

Federal and state investigators have found evidence in at least 20 states, including Maryland, that executives at the nation's largest national and regional dairy companies have conspired -- sometimes for decades -- to rig bids on milk products sold to schools and military bases.

So far, 48 people and 43 companies -- including industry giants such as Borden, Pet and Dean Foods -- have been convicted or have pleaded guilty to federal criminal charges of price-fixing and bid-rigging. At least $91.4 million in criminal fines and civil damages has been levied, and two dozen people have been sentenced to prison.

The cases follow a common pattern: Top regional executives arranged, usually by telephone but sometimes at gatherings at local restaurants, to divvy up the local milk business by deciding in advance who would submit the "low bid" for each school district and military base in their region.

As a result, students and military personnel, and the taxpayers who subsidize their meals, have overpaid for milk and ice cream, while dairy companies have reaped millions of dollars of artificially inflated profits. In a typical case, a federal prosecutor in Florida said the bid-rigging had raised milk prices by 14 percent.

At least 32 federal grand juries are involved in the investigation, which grew out of state investigations that started in the late 1980s.

Maryland -- along with Delaware, Pennsylvania and Virginia -- is among the states conducting bid-rigging investigations. No details of the investigations were immediately available.

"We've looked at other industries in the past, but we haven't uncovered anything like this," said Joseph H. Widmar, director of operations for the Justice Department's antitrust division.

Mr. Widmar said the investigations would last at least another year, with more prosecutions expected. He also said the prosecutors thought that some conspiracies continued into 1991, two years after prosecutions became public in other states.

The milk investigation was the biggest his unit had conducted since the highway construction scandals of the early 1980s, which resulted in 347 criminal cases, Mr. Widmar said. At least 50 lawyers -- one-sixth of the division's legal staff -- have been assigned to pursue corruption in the milk industry.

Among the nation's largest dairies, Flav-O-Rich, based in Louisville, Ky., and six of its executives have pleaded guilty in seven states. Borden, its Meadow Gold subsidiary, and nine Borden and Meadow Gold executives have admitted rigging bids in six states. Pet, based in St. Louis, and the Land-O-Sun dairy unit of Finevest Foods in Greenwich, Conn., which purchased Pet's dairy business in 1985, have pleaded guilty in five states; seven executives who worked for Pet and Land-O-Sun have also pleaded guilty.

Southland Corp. and several top executives of its former Velda Farms dairy unit, along with two subsidiaries of Dean Foods, have pleaded guilty to rigging bids in Florida. Dozens of smaller regional dairies across the South, along with their top executives, have also pleaded guilty.

Speaking for the dairy industry, E. Linwood Tipton, president of the Milk Industry Foundation, said he thought the industry's local problems had been exaggerated by the "spotlight" of the federal prosecutions and state civil suits.

"When there are enormous investigatory powers directed at you, it looks like a more abnormal situation than it probably is," Mr. Tipton said.

Federal investigators will not say whether they suspect the bid-rigging found so far was sanctioned by the top management at the large corporations that pleaded guilty. Citing the secrecy of grand jury investigations, Mr. Widmar would say only, "You're going to have to look at the record and decide."

Included in that record is a 1990 case in which a Borden sales executive in Florida testified that he believed the company's top managers, including a senior dairy executive, condoned the illegal practices and would protect employees who got caught. The Borden executive identified in the testimony, who has since retired, denied the accusation, as did lawyers for the company.

Borden -- like all the major corporations that pleaded guilty -- insisted that its senior managers were completely unaware that many junior executives were ignoring company warnings about bid-rigging.

As the roster of cases grows -- dwarfing earlier antitrust cases filed against many of the same corporations in the 1960s and 1970s -- some people active in the investigation are questioning how such long-running conspiracies could have flourished without corporate and industry leaders becoming aware of them.

"When you have a problem that creeps across state borders like this, you either have upper-management involvement -- or you have an upper-management problem," said Mary Sue Terry, the former Virginia attorney general who directed her state's bid-rigging inquiry before resigning recently to run for governor.

At least two federal judges have questioned whether defendant executives were shielding their superiors in exchange for the companies' payment of their legal bills.

Besides being widespread, these conspiracies were long-lived; some of them continued, with occasional changes in personnel, from the late 1960s at least to the late 1980s.

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