Accounting & Tax

Nine Will Plead in Ahold Fraud Probe

The food giant's U.S. Foodservice subsidiary often bought at full price, then received ''negotiated rebates'' that reduced its cost of sales and co...
Stephen TaubJanuary 14, 2005

Nine individuals have agreed to plead guilty to helping U.S. Foodservice Inc., a subsidiary of Dutch food conglomerate Royal Ahold, engage in an accounting fraud that enabled Ahold to inflate its earnings by more than $800 million, according to wire-service reports.

The individuals, who were either employees or agents for vendors that supplied U.S. Foodservice (USF), were also charged by the Securities and Exchange Commission with aiding and abetting the fraud.

David Kelley, U.S. Attorney for the Southern District of New York, alleged that the individuals signed false audit confirmation letters that “falsely and fraudulently overstated amounts earned by and/or owed” to USF from the vendors using various arrangements involving
promotional allowances.”

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According to Thursday’s charges, USF typically purchased products from a variety of suppliers at full price. However, the suppliers often refunded to the company a portion of the purchase prices in the form of negotiated rebates — the “promotional allowances” — that reduced USF’s cost of sales and consequently boosted its earnings.

The individuals — Mark A. Bailin, Kenneth H. Bowman, Timothy Neal Daly, Michael J. Hannigan, Peter O. Marion, John Nettle, Gordon Redgate, Bruce Robinson,
and Michael Rogers — were accused of conspiracy to falsify books and records, which carries a maximum 5-year prison term, according to Bloomberg. Bailin and Marion have also been charged with insider trading, reported Reuters.

The SEC charges allege that U.S. Foodservice personnel contacted vendors and urged them
to sign and return the false confirmation letters. In some cases U.S. Foodservice pressured the vendors; in other cases it provided side letters assuring the vendors that they did not owe U.S.
Foodservice the amounts reflected in the confirmation letters, the commission added.

“The letters clearly stated that the confirmations were being used in connection with the annual audit and the letters directed the defendants to return the confirmations directly to the company’s auditors,” the SEC added.

The amounts overstated in the confirmation letters were often inflated by millions of
dollars and by more than 100 percent, according to the commission.

The arrest was the largest ever of suppliers accused of helping a company defraud investors, Kelley reportedly said. He added that the arrests signal that prosecutors will target anyone connected to corporate fraud, according to Bloomberg.

In July 2004, four former USF executives were charged with participating in a scheme to inflate that unit’s earnings.