NEW YORK, NOV. 13 -- Beech-Nut Nutrition Corp., the nation's second-largest baby food producer, pleaded guilty today to 215 felony counts of intentionally shipping millions of jars of bogus apple juice for babies. According to the government, Beech-Nut knew the jars were filled with a cheaper mix of other juices and sugar syrups.
U.S. District Judge Thomas C. Platt in Brooklyn imposed a $2 million fine, the largest "by at least sixfold" ever paid under the Food, Drug & Cosmetic Act of 1938, said Assistant Attorney General Richard K. Willard.
"We hope that such prosecutions send a strong message that consumer fraud will not be tolerated by the government."
Beech-Nut counsel John S. Martin told Platt that an "extensive investigation" by his law firm had confirmed government charges that tests by the company's own chemists over the years had led some employes "to seriously question the authenticity" of Beech-Nut's claim that it was using pure concentrates of apple juice.
The investigation also confirmed that "Beech-Nut is criminally liable ... for the collective knowledge of its employes," Martin said.
Beech-Nut, of Fort Washington, Pa., is second only to Gerber Products Co. in the $1.8 billion baby-food industry, and has been wholly-owned by Nesfood Inc., a subsidiary of Nestle S.A. of Switzerland, since November 1979.
In addition to Beech-Nut, the indictment named in all but 20 of its 470 counts Niels L. Horvald, Beech-Nut's president and chief executive officer, and John F. Lavery, the company's vice president for manufacturing in Canajoharie, N.Y., where what was sold as "pure apple juice concentrate" was heavily diluted with beet sugar, corn syrup and other ingredients.
Horvald and Lavery are to go to trial Monday. Martin told reporters the two executives are on paid leaves of absence.
Two alleged coconspirators will go to trial with them: Nina B. Williamson, a former owner of Food Complex Co. of Woodside, N.Y., which the government says sold phony apple juice concentrate to Beech-Nut, and Danny A. Shaeffer, who is alleged to have worked with two other defendants who are said to have supplied counterfeit juice. The other two defendants are Zeev Kaplansky and Raymond H. Wells, owner of Food Complex.
On Thursday, Wells pleaded guilty to 10 felony counts, including one each of conspiracy and mail fraud, while a corporate defendant, South Orange Express of Clifton, N.J., pleaded guilty to five felony counts, including one of conspiracy and two of mail fraud. A plea from Kaplansky is expected, according to the office of U.S. Attorney Andrew Maloney.
The indictment said the adulterated products -- mostly apple juice, but including apple-cherry and other juices -- were shipped during a five-year period ending in March 1983. The counts to which Beech-Nut pleaded quilty covered the final 16-month segment.
The wholesalers and food chains that bought the phony products were in 20 states (Maryland, Virginia and the District were not among them); Puerto Rico, the Virgin Islands, and five foreign countries: the Bahamas, the Dominican Republic, Japan, Saudi Arabia and Taiwan.
The FDA, while finding no demonstrated hazard in the fake juice, said it could not rule out a health risk, particularly because juice is sometimes part of a limited diet for infants.
At the time, Beech-Nut described the violations as "technical" in nature, and had instituted new testing procedures to assure the purity of its products.
The company also said that it had recalled the suspect products in late 1982. The indictment alleged, however, that Beech-Nut had successfully minimized a potential loss of at least $3.5 million by continuing until March 1983 to ship from existing stocks juices made from phony concentrate.
The indictment had no significant short-term impact on Beech-Nut's standing with consumers. Indeed, a Gerber spokesman told Newsday, its rival's market share increased from 17 percent at the end of 1985 to 19 percent at the end of 1986, nearly two months after the indictment.
Newsday cited three major reasons: Gerber had been having a serious, mysterious and publicized problem with glass splinters in jars of its baby food; Beech-Nut was a longtime beneficiary of consumer trust in its products, and much of the news coverage of the indictment was not prominent.
The indictment led to a flurry of pretrial defense motions. In one, lawyers for Williams & Connolly, the leading Washington law firm representing Horvald, said he and Lavery were "unknowing victims" of a fraud by codefendants.
An omnibus government response called the statements "nothing short of ridiculous," alleging that the two men had been "willing participants in the scheme to defraud," and "know full well that they were not victims, but rather perpetrators." The government said Beech-Nut employes told their superiors on several occasions that they were puzzled by the company's ability to buy "apple juice" concentrate at below-market prices. At the same time, the company was being told by its own and independent testers that the purported apple juice concentrate contained very little apple juice.
The response also said "Beech-Nut, with full knowledge of Horvald and Lavery, regularly (on several hundred occasions), purchased phony apple juice concentrate ... Beech-Nut knowingly used this adulterated product."
The investigation leading to the indictment was done by the Office of Consumer Litigation in the Justice Department's Civil Division, headed by Willard, in cooperation with the FDA and the U.S. Attorney's Office.
In addition to the $2 million fine, Beech-Nut's plea agreement requires it to pay $140,000 to reimburse the government for its investigation, plus a special assessment of $41,000 for a victims' compensation fund.
Assistant U.S. Attorney Thomas H. Roche and Martin, a former U.S. Attorney in Manhattan, said the plea agreement also called for dropping 235 counts from the indictment, which was returned a year ago.