U.S. Food had far too many chefs cook books

August 01, 2004|By JAY HANCOCK

YOUR MOTHER knew about lies. You can't tell just one. One fib requires a second to support the first, which spawns two more, and so forth into Wonderland.

Truth is vindictive this way. Once bruised, it must be beaten to a bloody mash or it comes back and gets you. But as the offense rises from battery to murder, so do chances you'll get caught.

Prosecutors like that.

What were people thinking at U.S. Foodservice? As bogus accounting swelled from figment to $800 million fantasy, top managers apparently spent as much time spinning Mother Goose stories as they did running the Columbia wholesaler. Exposure seems to have been inevitable.

It's one thing to cook the books with a coven of insiders, as happened at Enron, HealthSouth, and WorldCom. It's another to enlist outside suppliers whose interests diverge from those of the primary defrauders, as allegedly occurred at U.S. Foodservice.

The company's spiral of fiction is painted in loving detail by civil and criminal prosecutions launched by federal authorities last week. It's hard to tell when the alleged deceit began, but for illustration let's go to the second quarter of 2002, when U.S. Foodservice reported some $200 million in operating income, enough to satisfy Wall Street and qualify executives for big bonuses.

That was the first lie. The outfit had nowhere near $200 million in income. Next the defrauders had to build lots of little lies to brace the big one, the government contends.

Prosecutors have charged Mark P. Kaiser, former chief marketing officer; Timothy J. Lee, former executive vice president of purchasing; William F. Carter, former vice president of purchasing; and Michael J. Resnick, former chief financial officer.

Lee and Carter have pleaded guilty to charges related to the scheme and are cooperating with prosecutors. Kaiser lawyer Richard J. Morvillo has said he intends to "vigorously" defend his client, and Resnick's attorney has contended he is a "scapegoat" who was in his post only 15 months and knew nothing of the scam.

But somebody seems to have told tales.

Where did the $200 million operating profit come from?

Well, according to U.S. Foodservice's story, most of it came not from primary earnings on sales of beef, lasagna, pies and other restaurant supplies but through rebates from manufacturers such as Kraft, Heinz, Sara Lee and General Mills. (Lie No. 2)

Great, said the auditors. Let's see the rebate contracts.

Oh, there aren't written contracts, was the reply. We do a handshake deal on manufacturer discounts and everybody's fine with that. (No. 3)

So how do you know what rebates to apply to reported earnings?

We estimate based on historical trends.

But the volume in your major accounts - big restaurant chains, the kind auditors can easily check - doesn't look big enough to support the rebate profit you're recording.

We can explain that, said the executives. Our business with small, independent eateries is booming. (No. 4) And we've also negotiated new, more lucrative rebate programs with the food manufacturers. (No. 5)

OK, said the auditors. We'll check all this with the manufacturers and make sure they really owe you the rebates.

Whoa! The jig was up if the food companies didn't join the game. It's easy to forge receivables in the privacy of your office. Widening the scheme to independent outsiders is tough and risky - but U.S. Foodservice did it, according to prosecutors.

It got managers at several large food vendors - so far unidentified - to fraudulently confirm auditors' inquiries about what was owed in rebates, according to federal documents. What inducements were wielded is unstated, but they probably included threats by U.S. Foodservice executives to withhold future business. It wouldn't be surprising if they involved bribes.

That prompted more questions and more whoppers. These auditors' statements bear no resemblance to reality, the food companies said. Why do we need to sign them?

Don't worry, U.S. Foodservice managers replied. It's for "internal" use only. It doesn't mean anything. (Lie No. 6)

Eventually, of course, it all unraveled. A vendor executive complained to auditors, who bestirred themselves and found problems. But don't credit them. Sometimes misconduct grows so out of control that it summons its own reward.

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