Royal Ahold NV agreed to pay $1.1 billion to settle a securities fraud class-action lawsuit, ending major civil litigation stemming from an accounting scandal that has roiled the Dutch company's U.S. Foodservice Inc. unit based in Columbia.
Ahold said the settlement, which is subject to approval by U.S. District Judge Catherine C. Blake, in Baltimore, will allow the grocery giant to continue its plan to revive the stumbling Maryland-based unit.
"We have attempted to make a fair restitution without endangering the continuity of the company or its business strategy for the coming years," said Peter Wakkie, a member of Ahold's executive board and its chief governance counsel. "We will avoid lengthy, costly and time-consuming litigation."
Earlier this month, seven former suppliers of U.S. Foodservice agreed to plead guilty to conspiracy charges that they helped executives at the company meet earnings targets from 2000 to 2003 by inflating promotional allowances to Ahold by $800 million. So far, 16 former executives and suppliers have been charged criminally by Manhattan federal prosecutors in the alleged rebate-inflation scheme, and of those 12 have pleaded guilty.
Gregory W. Smith, general counsel for the Colorado Public Employees' Retirement Association, a lead plaintiff in the suit, said yesterday's civil settlement is an "extraordinary recovery for Ahold shareholders and a good result for the company."
The Ahold settlement is the latest in a string of high-profile deals reached by shareholders in the wake of the corporate scandals that rocked U.S. markets in the early part of the decade. Enron Corp. investors have now recovered more than $7 billion from Wall Street banks after the Canadian Imperial Bank of Commerce in August agreed to pay $2.4 billion for its role in the energy company's 2001 collapse. WorldCom Inc. investors have recovered more than $6.1 billion in the wake of the telecommunications provider's 2002 collapse. Last year alone, the value of securities-fraud settlements reached $5.5 billion, according to Cornerstone Research, based in Menlo Park, Calif.
The Ahold scandal became public in February 2003, when the company announced that a series of accounting irregularities had overstated more than $500 million in profit booked in the previous two years. Subsequent disclosures revealed that Ahold's publicly reported earnings overall had been overstated by more than $1 billion and that prior revenue had been overstated by $24 billion.
In its initial announcement, Ahold said U.S. Foodservice, which supplies food to restaurants and hotels, had overstated income by inappropriately accounting for discounts from suppliers. Ahold said managers at the unit booked more money in promotional allowances, which are provided by suppliers to promote their goods, than it actually received.
The initial news in 2003 sent Ahold shares, which trade on the New York Stock Exchange as American depository receipts, down more than 60 percent, to about $4.16 a share. Ahold ADRs closed at $7.11 yesterday, up 9 cents.
The company itself is not under investigation, and prosecutors have said Ahold is cooperating. Former U.S. Foodservice marketing executive Mark P. Kaiser and onetime top lawyer Michael J. Resnick are scheduled to face trial on conspiracy, securities fraud and others charges stemming from the probe. They have pleaded not guilty.
Ahold has also struggled with another of its local subsidiaries, Giant Food LLC. Earlier this year, the area's biggest supermarket chain, acquired by Ahold in 1998, said it was laying off more than 500 Washington area workers, selling or closing its manufacturing operations and shuttering its 80-acre campus in Landover. The restructuring followed a round of layoffs last year that eliminated 200 jobs.