Nine vendors whose companies include major names in the U.S. food industry were charged in federal court in New York yesterday with helping Columbia-based U.S. Foodservice Inc. perpetrate an $800 million accounting fraud that illustrated the pressure on suppliers to engage in a cover-up to maintain lucrative business relationships, attorneys said.
The vendors, whose companies included General Mills Inc. and Tyson Foods Inc., were charged with aiding executives of U.S. Foodservice in producing false records that created the illusion of $800 million in added revenues over three years.
The scheme, from 2001 through 2003, damaged Royal Ahold NV of the Netherlands, one of the world's largest retailers and owner of Giant Food LLC, the top supermarket chain in the Baltimore-Washington area. The scandal triggered management changes at the parent company, which also owns Stop & Shop in New England and BI-LO in the South, and at U.S. Foodservice, an Ahold unit and the second-largest food distributor in the United States.
Ahold discovered and announced the inflated earnings in early 2003. Four executives from U.S. Foodservice were criminally charged last year. Former chief financial officer Michael J. Resnick and former chief marketing officer Mark P. Kaiser await trial on charges of conspiracy, securities fraud and making false statements. Two other former vice presidents, Timothy J. Lee and William F. Carter, pleaded guilty last July to charges of participating in a conspiracy to commit securities fraud.
In the case of the vendors, David N. Kelley, U.S. attorney for the Southern District of New York, said that he expected most, if not all, of the vendors to plead guilty.
Among those charged with submitting false confirmation letters were John Nettle, 45, former account manager for General Mills; Michael Rogers, 37, former vice president of sales for Tyson Foods; and Michael J. Hannigan, 46, who had worked as a regional sales manager for Sugar Foods Corp., the makers of the Sweet'N Low sugar substitute.
Facing up to 5 years
The other six charged were Mark A. Bailin, 49, president of Rymer International Seafood; Kenneth H. Bowman, 58, an independent contractor for Total Food Sales Inc., a broker for Riceland Foods Inc. and Sanderson Farms Inc.; Timothy Neal Daly, 44, former vice president of business development for Michael Foods Inc.; Peter O. Marion, 57, owner and president of Maritime Seafood Processors Inc.; Gordon Redgate, 45, owner and president of Commodity Management Inc. and Private Label Distribution Inc.; and Bruce Robinson, 53, a former divisional sales manager of Basic American Foods.
Each of the nine faces up to five years in prison and a maximum fine of $250,000.
Bailin and Marion face additional penalties on charges of insider trading. Prosecutors allege that the men bought U.S. Foodservice stock after learning that it was to be bought by Royal Ahold in 2001. They sold the stock after word of the transaction was publicly announced. Marion made about $364,000 while Bailin gained $1.5 million, according to court documents.
The nine voluntarily surrendered to authorities yesterday morning.
The Securities and Exchange Commission also filed separate civil complaints yesterday against the nine. Bailin, Hannigan, Nettle, Redgate and Rogers agreed to settle the actions without admitting or denying wrongdoing. Each will pay a $25,000 penalty and consent to permanent SEC injunctions.
"The significance of this case is the message it sends to third parties," said James Coffman, an assistant director in the division of enforcement at the SEC. "Third parties aren't immune. If they help commit a fraud, they may be just as liable as the people who design it and orchestrate it."
Investigators determined that U.S. Foodservice, which distributes food products to cafeterias and restaurants, improperly booked rebates or discounts that its vendors customarily paid the company in exchange for high-volume purchases. These negotiated rebates, known as promotional allowances, reduced U.S. Foodservice's cost of sales, which increased its earnings.
Prosecutors said U.S. Foodservice inflated by hundreds of millions of dollars the amount of promotional allowances it received. The nine vendors were charged with signing confirmation letters that verified amounts they knew to be false.
"Each of these defendants knew full well what they overstated," Kelley said at a news conference in Manhattan yesterday afternoon. "The false confirmation letters were, in fact, lies."
U.S. Foodservice issued a statement yesterday that said it was continuing to work with investigators. It said that since the scandal surfaced, it has fired its former management and made sweeping changes in its accounting and control systems.
Kelley said the investigation will continue. He would not rule out charging any of the companies that the vendors worked for.