Accounting & Tax

Ahold to Avoid U.S. Prosecution

Extensive cooperation with federal prosecutors allowed the Dutch conglomerate to sidestep prosecution in the wake of its accounting scandal.
Stephen TaubSeptember 29, 2006

Royal Ahold NV will not face criminal prosecution for the accounting scandal at its US Foodservice (USF) subsidiary, according to an announcement from Michael Garcia, U.S. Attorney for the Southern District of New York.

Under the deal, the Dutch food conglomerate will not be prosecuted for the accounting fraud or a related civil suit brought by the Securities and Exchange Commission. In addition, Ahold will not be prosecuted for making false statements to the U.S. Department of Defense, or any other U.S. agency, related to the pricing of goods sold between 2000 and the present. However, as previously announced by Ahold, the pricing issue remains under investigation by the civil division of the U.S. Attorney’s Office.

The nonprosecution agreement requires that Ahold continue to cooperate with federal law-enforcement officials.

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According to Garcia’s announcement, the decision to enter into the nonprosecution agreement was based on a number of key factors: Ahold’s full cooperation with the government’s investigation; the company’s settlement of the SEC’s enforcement action, which included Ahold’s consent to an injunction for violating the antifraud and other provisions of U.S. securities laws; Ahold’s settlement of a class action brought against it by victims of the accounting fraud, including a $1.1 billion payment to class members as compensation; and the negative effect that charges against Ahold would have on the company’s innocent employees and legitimate activities.

The last factor — a desire not to hurt innocent employees — is seemingly a response to criticism that followed the conviction of former accounting giant Arthur Andersen for its role in Enron’s bankruptcy. The Supreme Court subsequently overturned the Andersen conviction, but it was too late to save the audit firm, which had all but disintegrated by the time the decision was handed down.

Ahold is among a growing number of companies that have avoided prosecution or received leniency from the Justice Department and the SEC because they agreed to cooperate with investigations. “Ahold self-reported the misconduct and conducted an extensive internal investigation, including an investigation of misconduct beyond that at USF,” said the U.S. Attorney in making the announcement. Garcia also noted that Ahold made company personnel available to investigators for interviews, turned over some of the results from its internal investigation to the government, and brought witnesses to the United States from abroad.

The U.S. Attorney also credited Ahold for firing employees responsible for the wrongdoing at USF. In July 2004, USF’s former chief financial officer Michael Resnick and former chief marketing officer and executive vice president of purchasing Mark Kaiser were indicted on conspiracy and securities-fraud charges. The charges related to their efforts to “artificially reduce USF’s costs through the improper recognition of over $800 million in fictitious ‘promotional allowances,’” according to Garcia’s announcement.

On September 8, Resnick pleaded guilty to participating in a conspiracy to keep false books and records while employed at USF, and he will be sentenced on December 11. Kaiser’s trial is scheduled for October 10.