Federal prosecutors are preparing to bring criminal charges this week against former senior executives at Columbia-based U.S. Foodservice Inc. for their alleged roles in a scheme to pump up earnings by overstating rebates from suppliers, according to sources involved in the case.
The U.S. attorney's office in New York will file conspiracy and insider trading charges against Mark P. Kaiser, the former marketing chief at the giant food-distribution company, the sources said. Kaiser's one-time deputy, former purchasing official Timothy Lee, has agreed to plead guilty to four similar charges and to help the government with its ongoing investigation, they said.
Former chief financial officer Michael Resnick also may face criminal charges stemming from the rebate scheme and its impact on Foodservice's finances, according to the sources, who spoke on the condition of anonymity because of the secrecy of the grand jury process.
U.S. Foodservice, one of the nation's biggest distributors of food to restaurants and hotels, came under intense scrutiny in February 2003 after its Dutch parent company, Royal Ahold NV, disclosed it had overstated earnings and laid most of the blame on the Maryland unit. Ahold also owns Landover-based Giant Food LLC.
Investigators at the New York law firm White & Case LLP, working for Ahold's board of directors, uncovered evidence last year that Kaiser and Lee had colluded with employees at large food companies. They claim that Kaiser and Lee signed undisclosed letters that required food suppliers to pay the company only $1 million, for instance, when Foodservice's official accounting records indicated it would receive $2 million in rebates for selling suppliers' products.
That effectively created two sets of books, one of which was hidden from outside auditors and others, investigators said at the time. Their full report remains under wraps. The scheme allegedly helped the unit inflate its income dating back to at least 2000, before Ahold purchased U.S. Foodservice.
Food companies including Kraft Foods Inc., H.J. Heinz Co., General Mills Inc., Sara Lee Corp., ConAgra Foods Inc. and Tyson Foods Inc., have confirmed they were contacted by prosecutors or Securities and Exchange Commission investigators in relation to the Foodservice case. Individual employees from some of those companies have also come under regulatory scrutiny because of allegations that they aided Kaiser and Lee. It is unclear if any of those workers will be indicted this week alongside Kaiser.
In all, Ahold has disclosed some $1.1 billion in accounting irregularities in operations around the globe, going far beyond the problems in its Maryland distribution business.
Ahold's chief executive and chief financial officer resigned under pressure in 2003, and they remain under investigation by authorities in the United States and the Netherlands. The case touched off a broad discussion about corporate responsibility and shareholder rights in Europe, coming on the heels of scandals at Enron Corp. and WorldCom Inc.
Prosecutors and securities regulators continue to scrutinize former U.S. Foodservice founder and chief executive James L. Miller, who rapidly increased the size of the company through a series of acquisitions and aggressive sales and marketing tactics. Miller was forced out of the company in May 2003 and has disavowed knowledge of the rebate scheme. The government has sought help from Kaiser, who had a close friendship with Miller, but Kaiser has declined to cooperate with prosecutors, who hope he can provide evidence that would incriminate Miller, sources said.
The company and its former officials also are the target of a series of shareholder lawsuits, which have been consolidated in Baltimore. Earlier this year, New York-based prosecutors told the judge in the civil case that they expected to bring criminal charges sometime this summer.
Spokesmen for the U.S. attorney in New York and at the SEC declined comment yesterday, as did defense lawyers for Kaiser, Lee and Resnick. A lawyer for Miller and a spokesman for Ahold did not return calls.