The fraud at US Foodservice involved the falsification profit figures, and also implicated executives from a number of the company's major suppliers, among them some of the biggest names in the US food industry, who provided false statements to confirm that the over-inflated figures were correct. The four executives were accused by the US Securities and Exchange Commission (SEC) of lining their pockets with bonuses which they 'earned' as a result of fraudulently meeting the profit targets.
The four executives are Michael Resnick, former chief financial officer, Mark Kaiser, former marketing director, Timothy Lee, former purchasing manager, and William Carter, a former vice-president, and they are accused of inflating US Foodservice's accounts by $700 million or more between 2000 and 2002. In addition, Lee is accused of insider trading prior to the takeover of US foodservice by Ahold in 2000, from which he is alleged to have profited to the tune of $363,000. The primary method used to perpetrate the fraud was to improperly inflate USF's promotional allowance income - rebates from its suppliers. For example, USF would pay the full wholesale price for a product, and then receive rebates of a portion of that price from the supplier if certain purchase volume and other conditions were met. These apparent rebates would then be used to cover the shortfall in profits, ensuring that targets were met and that the executives received their performance bonuses.
A number of suppliers were also implicated in the fraud, persuaded by the four USF executives to sign audit confirmation letters even though they knew that the letters were false, the SEC alleges.
"Executives at US Foodservice went to extraordinary lengths to perpetuate the illusion of stellar financial performance. Their fraud created the appearance that they had met their budgets and allowed them to line their own pockets with unearned bonuses," said Linda Chatman Thomsen, deputy director of the SEC's Division of Enforcement.
"To cover up their scheme, the defendants needed false confirmations from suppliers to defeat the audit process. It is disappointing that the defendants so successfully corrupted the audit and confirmation process," added Thomas Newkirk, associate director of the Division of Enforcement, who stressed that investigations were ongoing, implying that other executives, from US Foodservice or its suppliers, could also face prosecution.
Kraft Foods, Heinz, Sara Lee, General Mills, ConAgra and Tyson Foods have all been contacted by investigators, while Sara Lee and ConAgra both said last year that they had uncovered evidence that former employees had participated in the fraud.
No charges have been brought against James Miller, former chief executive of USF, but the SEC's investigation into whether he participated in - or at least knew about - the fraud is still continuing.
The bringing of charges against the four men will be something of a mixed blessing for Ahold. While justice will at least be seen to be done - and, assuming the four are convicted, some, if not all, of the money should be returned - the case will also turn the spotlight onto the company's less-than-creditable past once again as it struggles to draw a line under the fraud and start afresh.
As a result, the company has gone to great pains to stress that it has progressed significantly since the fraud was uncovered. "US Foodservice has taken numerous actions over the course of the past year and a half to ensure this conduct does not occur again. Ahold has also put in place a series of measures that will give the company the ability to more closely monitor the financial activities of its operating companies," said Peter Wakkie, Ahold's chief corporate governance counsel.
These include a new executive leadership team - the four accused employees lost their jobs last year - as well tighter controls over financial systems and the creation of a new corporate governance office.