On Feb. 11, Deloitte & Touche LLP asked for an emergency meeting with U.S. Foodservice's three top executives, after a small supplier told the auditor that the Columbia company's numbers were wrong, sources familiar with the events said.
That night, chief executive James L. Miller confronted longtime protege Mark P. Kaiser behind the locked doors of the executive suite. Within 24 hours, chief marketing officer Kaiser and purchasing executive Timothy Lee were escorted out of the building, and their offices were sealed until 20 investigators from the law firm of White & Case and a team of forensic accountants arrived to comb through files and computers and to interview employees.
Miller alerted his superiors at Royal Ahold NV, U.S. Foodservice's Dutch parent company. Within a week, Royal Ahold's board, the Securities and Exchange Commission and the U.S. attorney's office in Manhattan were informed of the problem. The company went public with its accounting woes on Feb. 24, disclosing that it had overstated revenue by at least $500 million over two years.
Authorities are seeking information from at least two dozen suppliers to U.S. Foodservice, as they investigate whether there was collusion between the food service company and its suppliers to incorrectly report rebates and inflate U.S. Foodservice earnings, sources said.
One supplier on the list, ConAgra Foods Inc., said in a statement that the company had been asked by Deloitte to confirm its accounts payable to Royal Ahold and "systematically refused to verify confirmation requests that were inaccurate."
Another supplier on the list, Tyson Foods Inc., said federal regulators had contacted it this week regarding U.S. Foodservice. ConAgra and Sara Lee Corp. were identified yesterday by the Wall Street Journal as also being on the list.
Sara Lee said in a statement that the company has not been contacted by authorities. It also said it had checked its operations after the Ahold scandal broke to make sure it had done nothing wrong.
"We immediately reviewed all of our records associated with each of our food service distributors and confirmed that our conduct and accounting was appropriate and accurate," said President C. Steven McMillan.
Other suppliers contacted declined to comment.
U.S. Foodservice officials said in a statement, "It appears that a small number of trusted employees worked outside our established accounting procedures and betrayed the company. Unfortunately, controls cannot prevent people from breaking the rules; they can only catch the violators."
U.S. Foodservice receives substantial rebates from suppliers for selling large quantities of their products. Investigators have seen letters signed by Kaiser in which he tells suppliers they don't have to pay as much in rebates as they officially agreed to pay, sources said.
Each year, Deloitte, the outside auditor, sends letters to many of its suppliers to confirm that they actually paid the rebate that U.S. Foodservice listed in its financial records. Sources say it appears that the account representatives at some suppliers -- and not people in the financial office -- signed the confirmations, which may have enabled the scheme to go undetected for a while.
Authorities are investigating the actions of Kaiser and of Miller and other U.S. Foodservice and Ahold executives to determine what they knew, according to sources. No one has been charged.
U.S. Foodservice said in a statement, "We believe that company officials moved quickly to address the concerns raised by auditors and promptly communicated the issues to Ahold's senior management. Upon being informed by auditors of some accounting questions, company officials immediately undertook an internal examination and retained outside experts to conduct an independent review in order to assess the scope and nature of the problem."
Officials at the SEC and spokespeople for Deloitte and U.S. Attorney Jim Comey declined to comment for this article. Lawyers for Kaiser and Lee did not respond to multiple e-mails and phone calls seeking comment.
Sources familiar with the investigation said there is no evidence so far that either U.S. Foodservice employees or suppliers stole money or took kickbacks. Rather, U.S. Foodservice employees appear to have been trying to improve the company's performance, and the suppliers appear to have been seeking to keep and expand their sales to U.S. Foodservice -- thus improving their commissions, according to sources.
Sources said the authorities are still at the early stage of their investigation. Decisions by the SEC and the U.S. attorney's office in Manhattan to broaden the probe to cover Ahold scandals in Scandanavia and Argentina could lengthen and complicate the process, sources said, although authorities could later decide to break up the case into smaller pieces.
Both the SEC and federal prosecutors claim jurisdiction over the overseas scandals because Ahold's American depository receipts trade on the New York Stock Exchange and thus securities fraud abroad would hurt U.S. investors. American authorities are looking to see whether the overseas accounting problems violate the Foreign Corrupt Practices Act or would constitute a fraud on the U.S. stock market, sources said.
"Royal Ahold may be the government's best opportunity to . . . say we will not limit our focus to the 50 states," said former SEC lawyer and prosecutor Jacob S. Frenkel.
Staff writer Carrie Johnson contributed to this report.