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U.S. indicts Foodservice executives

NEW YORK — NEW YORK - Federal prosecutors announced criminal charges yesterday against four former executives at Columbia-based U.S. Foodservice in connection with a scheme to inflate earnings by more than $800 million. The Securities and Exchange Commission also filed an array of civil charges against the company's former leaders.

The actions capped a 17-month investigation into accounting irregularities at the food distributor that nearly toppled its Dutch parent company and cost investors here and abroad an estimated $6 billion.

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Mark P. Kaiser, 47, former executive vice president for purchasing, and Michael J. Resnick, 42, former chief financial officer, were charged with conspiracy, securities fraud and making false statements. They are alleged to have booked millions of dollars in phony rebates from food manufacturers, said David N. Kelley, U.S. attorney for the Southern District of New York.

Two other U.S. Foodservice executives pleaded guilty to charges relating to the scheme, prosecutors said at a news conference yesterday at the U.S. attorney's office in Manhattan.

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Timothy J. Lee, 40, a former vice president of purchasing, pleaded guilty Friday to charges that included securities fraud and insider trading for tipping off certain vendors to the impending sale of U.S. Foodservice to Royal Ahold NV in late 1999 and early 2000.

William F. Carter, 43, a former vice president, pleaded guilty Monday to securities fraud and conspiracy. Kaiser, Resnick, Lee and Carter are Baltimore-area residents.

The four executives played a central role in a scandal that caused investors to lose confidence in Dutch food conglomerate Royal Ahold NV, the world's third-largest retailer behind Wal-Mart and Carrefour SA of France. The February 2003 revelations touched off a debate over corporate ethics in Europe that paralleled the one sparked in the United States by disgraced energy trader Enron Corp.

"The defendants manipulated income, accelerated income and in some instances simply made it up," said Linda Thomsen, deputy enforcement director of the SEC, which filed civil charges against the five men.

Ahold removed 39 executives and managers and disciplined 60 others at U.S. Foodservice as part of a broad effort to restore the company's credibility and return it to profitability.

As yet untouched in a continuing federal investigation are a number of the unit's former top executives, including James L. Miller, who was ousted as chief executive in a management shake-up in May 2003.

An attorney for Miller declined to comment yesterday.

"This investigation and others like it are continuing," said Pasquale D'Amuro, the assistant director of the FBI's New York field office. "A timely free market economy requires that everyone play by the rules and no one gets unfair treatment."

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Jane F. Barrett, Lee's attorney, said her client is cooperating with investigators. Lee faces up to 40 years in prison and millions of dollars in fines for his role in the scandal. Sentencing for him and Carter has been set for January.

Supplier also charged

In a separate indictment unsealed yesterday, Peter O. Marion, 53, a wholesale fish supplier to U.S. Foodservice, was charged with trading U.S. Foodservice stock based on the tip from Lee.

Resnick, Kaiser and Marion, who lives in Rhode Island, are expected to surrender to authorities today.

Resnick's lawyer, Paul Gardephe of Patterson Belknap in New York, said his client would plead not guilty.

"We are saddened that Michael Resnick has been made the scapegoat for the accounting fraud at U.S. Foodservice. He was the CFO for only 15 months and was not knowledgeable about the rebate fraud scheme. He looks forward to establishing his innocence in a court of law," Gardephe said.

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Lawyers for the others could not be reached yesterday.

Investigators said the fraud helped Resnick and Kaiser double their salaries, which were tied to earnings, to about $500,000 a year.

If convicted, Resnick and Kaiser face up to 35 years in prison and millions of dollars in fines. Carter faces up to 15 years and fines, and Marion 30 years.

In a statement, company officials said they were continuing to work with investigators.

"U.S. Foodservice has been actively cooperating with the authorities in their investigations. We will continue to cooperate with the government in its efforts to hold accountable those individuals who may have violated the law and abused our trust," said Lawrence S. Benjamin, who was named CEO of U.S. Foodservice in October 2003.

A spokesman for Ahold in Amsterdam said the company had taken measures to tighten controls over its properties, which include Giant Food, the No. 1 supermarket chain in Maryland.

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"Both U.S. Foodservice and Ahold made really significant changes in both financial controls and ... Ahold itself has unveiled totally new corporate governance," said Fritz Schmuhl, the Ahold spokesman.

"This gives us a very good base to work on in the future to prevent similar events."

Questionable rebates

Ahold revealed in early 2003 that certain sales and finance executives at its U.S. Foodservice unit had improperly booked hundreds of millions of dollars in volume rebates and promotions that food manufacturers pay to distributors in exchange for shelf space in their warehouses.

The federal investigation found that by the end of 2002, U.S. Foodservice had more than 125 "promotional allowance" contracts with vendors. The indictment alleges that Resnick and Kaiser conspired to inflate the size of the allowances and booked them as income before they were earned.

"It was a cooking of the books fueled by the greed of the defendants," Kelley, the U.S. attorney, said. "It became increasingly aggressive each year."

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Court documents say Kaiser, Lee and Carter "induced" vendors to confirm the false promotional allowance numbers to fool the company's auditors, essentially creating a second set of books. For example, a vendor would sign a letter confirming it would pay a steep promotional allowance, when in fact it paid a smaller amount.

The documents say Resnick, Kaiser and Lee also once blocked internal auditors from reviewing the records related to the allowances, compromising the audit.

Kelley said the scandal was revealed when "one of the vendors refused to sign."

"That's where the house of cards began to crumble," he said.

A companywide probe of several subsidiaries subsequently forced Ahold to restate earnings for three years by $1.2 billion, with most of it related to the irregularities at U.S. Foodservice. Investors sent the company's shares plunging by 60 percent, erasing $6 billion in market value.

The U.S. investigation is said to be the biggest involving an overseas company, and the retailer faces additional investigations by the SEC and authorities in Europe.

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The scandal tarnished Miller's reputation as an aggressive and savvy businessman. The U.S. Foodservice founder is credited with building the company into the nation's second-largest food distributor, behind industry leader Sysco.

He took the company from a little-known distributor with $600 million in sales to a $17.5 billion powerhouse with 28,000 employees. He then sold the company to Ahold in 2000 for $3.6 billion, causing some analysts to wonder whether the retailer had overpaid.

Meanwhile, the once-dominant Dutch retailer has been in a race to sell assets and pay down debt in the wake of the disaster at U.S. Foodservice. The company said in June that it lost $487 million in the first quarter because of asset-related write-downs. The company has said it hopes to raise $3 billion by year's end.

Ahold is selling some assets in the United States, including the supermarket chains Bi-Lo and Bruno's. The company has said it plans to hold on to U.S. Foodservice, as well as Giant.

Sun staff writer Robert Little contributed to this article.

US FOODSERVICE

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Charged

Michael J. Resnick, former chief financial officer: One count of conspiracy, one count of securities fraud and one count of false filing with the SEC.

Mark P. Kaiser, former chief marketing officer and executive vice president of purchasing: One count of conspiracy, one count of securities fraud and one count of false filing with the SEC.

Timothy J. Lee, former executive vice president of purchasing: Pleaded guilty to one count of conspiracy, one count of accounting fraud, one count of securities fraud (insider trading) and one count of making false statements.

William F. Carter, former vice president of purchasing: One count of conspiracy, one count of accounting fraud.

Peter O. Marion, outside vendor: Six counts of securities fraud (insider trading); six counts of fraud in connection with a tender offer; one count of obstruction of justice; one count of making false statements.


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