9 Executives Face Charges of Sales Fraud

The New York Times
January 14, 2005
9 Executives Face Charges of Sales Fraud
By CONSTANCE L. HAYS

Nine current and former sales executives from an assortment of food companies were charged yesterday with participating in a scheme that created a huge accounting fraud at U.S. Foodservice, which has been under investigation in the United States and in the Netherlands for the last two years.

The executives were arraigned in Federal District Court in Manhattan on conspiracy charges and released. They worked for companies that sold products like sugar, eggs, seafood and cake mix to U.S. Foodservice, which in turn supplied restaurants, corporate dining rooms and other institutions.

All the executives are accused of approving documents that claimed U.S. Foodservice, a unit of Royal Ahold, was owed millions of dollars more in promotional allowances - a type of rebate offered by manufacturers to stores and distributors - than was actually the case.

The scheme had the effect of inflating U.S. Foodservice's profits, prosecutors say.

The letters were issued by a former U.S. Foodservice chief marketing officer, Mark P. Kaiser, according to court documents. Mr. Kaiser is awaiting trial on conspiracy and fraud charges, along with Michael J. Resnick, the former chief financial officer. Two other former U.S. Foodservice executives, Timothy J. Lee and William F. Carter, pleaded guilty to similar charges last summer.

All the defendants charged yesterday signed audit letters containing false information at the request of Mr. Kaiser, the documents state.

"Their motivation was to maintain a very important business relationship," the acting United States attorney for Manhattan, David N. Kelley, said.

Most of the executives are expected to plead guilty, he said at a news conference, adding that none of the companies they worked for have been charged with wrongdoing. The investigation is continuing, "upstream and downstream," he said.

All of the executives have also been named in a civil case brought by the Securities and Exchange Commission, which accuses them of aiding and abetting a financial fraud.

Promotional allowances are intended to be used to help sell a manufacturer's goods to consumers, through discounts, displays or advertising, and they often add up to large amounts of money. U.S. Foodservice would pay the price of goods up front, as part of its costs, then book promotional allowances as assets in its records, according to court documents. Exaggerating the promotional allowances, sometimes by a factor of 30 or more, not only made U.S. Foodservice look like a better business than it was, but also improved the financial appearance of its parent, Royal Ahold.

Royal Ahold, a publicly traded company based in the Netherlands, revealed in February 2003 that it had overstated earnings by at least $500 million over the previous two years. The figure was later revised to $880 million.

Royal Ahold said much of the overstatement came from promotional allowances recorded by U.S. Foodservice. A host of executives, including the top management of Royal Ahold, resigned.

In a case involving John Nettle, a 45-year-old former vice president at General Mills, a letter prepared by U.S. Foodservice's auditor stated that General Mills owed the company $13.44 million at the end of 2001.

"In truth and in fact, General Mills owed U.S.F. less than $2.5 million," the government charged in court documents. Mr. Nettle is accused of signing the letter despite the false information.

For 2002, he signed a letter stating that General Mills owed U.S. Foodservice $36.64 million, although the amount was actually less than $1 million, according to the documents.

"As Nettle well knew, the $36.64 million figure was grossly overstated and General Mills did not owe that amount," the documents state.

A lawyer for Mr. Nettle, William Michael, said his client "was pressured into signing these letters and he is very sorry for what this has caused his former employer as well as his family." He said that Mr. Nettle planned to plead guilty.

Two of the defendants have been charged with securities fraud and obstruction of a federal investigation. Mark Bailin, who was president of Rymer International Seafood, and Peter Marion, president of Maritime Seafood Processors, are accused of buying U.S. Foodservice stock in 2000, ahead of the company's announcement that it was being acquired by Royal Ahold.

They made about $1.5 million in illegal profits, according to court documents.