Foodservice leaders should have stuck with food

May 06, 2007|By Jay Hancock | Jay Hancock,Sun Columnist

To be successful in the food-distribution business, cook the products, not the books.

Somebody should have told this to Mark P. Kaiser, Michael Resnick and the other people involved in a scheme that artificially boosted U.S. Foodservice's profit by $880 million, according to an investigation by its parent company.

Last week's sale proves that the fraud at the Columbia-based company - besides being criminal and almost ruinous - was completely unnecessary.

U.S. Foodservice was quite capable of making money the indictment-free way: by selling products to customers and accurately recording the results. Two private buyout firms agreed to buy U.S. Foodservice from Royal Ahold NV for $7.1 billion - twice what Ahold paid for it in 2000.

The price amazed analysts. Imagine what U.S. Foodservice could have accomplished without the disruption of a four-year criminal investigation and the fumigation of its executive offices. But a thriving business, fat salaries and a brilliant future apparently aren't enough for some folks.

You can empathize, in a twisted way, with the criminals at Enron and WorldCom. Their products were largely imaginary, so, of course, they required imaginary accounting.

You can also sort of relate to desperation that got David Stockman in trouble.

Stockman, once President Ronald Reagan's budget chief and lately head of auto-parts supplier Collins & Aikman Corp., was indicted in March on fraud and conspiracy charges relating to events while he was trying to save the company from bankruptcy proceedings. Stockman is innocent until proven guilty, but if he did anything wrong it might have been crisis management gone amok.

But U.S. Foodservice's hams, butter, olives and potatoes, unlike Enron's natural-gas derivatives, were real. And U.S. Foodservice was nowhere near desperate.

The company's restaurant customers struggled after the terrorist attacks of September 2001. But they soon recovered and have enjoyed an extremely prosperous five years. Food sales to nursing homes, schools and hospitals that make up U.S. Foodservice's other chunk of customers also have grown nicely.

Under Chief Executive Officer Lawrence S. Benjamin, who took over after the fraud was discovered, U.S. Foodservice had a bang-up 2006, nearly quintupling operating profits from 2004, thanks to intelligent cost cutting and sales growth. Revenue has grown to $19 billion. The division basically carried Royal Ahold for the period because profits at most of the Dutch company's grocery chains (including Landover-based Giant Food) were lackluster.

Ahold shares are still nowhere near the $40 level they reached in 1999 but nor are they at the $3 depths attained after the fraud became public.

Last week, after the U.S. Foodservice sale was announced, they began trading north of $13 for the first time in more than three years.

Smart of Ahold CEO Anders Moberg not to sell U.S. Foodservice at a fire-sale price a few years ago, as some suggested. Also smart of Moberg to resign from Ahold last week after four years. Fixing Giant and Ahold's other U.S. grocery chains will be much harder than fixing U.S. Foodservice.

Federal authorities have prosecuted several former U.S. Foodservice executives in connection with the fraud.

Chief Financial Officer Resnick pleaded guilty to a single count of conspiracy last year and was sentenced to six months of home detention. Kaiser, the company's marketing head, was convicted of conspiracy and fraud. He is scheduled to be sentenced this month, says his lawyer, Richard J. Morvillo. Company CEO James L. Miller resigned in 2003 but has not been charged.

Prosecutors have also gone after numerous small-fry at food vendors such as Hunt-Wesson, Sugar Foods and ConAgra who were allegedly pressured into aiding the U.S. Foodservice scheme.

That's because the fraud involved fake vendor rebates that made U.S. Foodservice's profits look much higher than they really were.

When auditors began trying to verify the rebates, the vendors faced a dismal choice of probably losing the U.S. Foodservice account - if they refused to go along - or committing improprieties if they played ball.

It was all very complicated, and the stakes, as corporate fraud goes, weren't even very high. There apparently were no stock options. Prosecutors alleged that by puffing up earnings Kaiser made hundreds of thousands of dollars a year - not millions - in performance pay.

But imagine the bonus that he could have made last year, when U.S. Foodservice quintupled profits - legitimately!

The lesson is that if you want to make money and minimize the possibility of jail time, your best bet still is to work on your business, not your books.

jay.hancock@baltsun.com

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