The Obfuscation Report

WASHINGTON -- Prominent American food companies are under scrutiny in a federal probe of possible fraud and corruption in the military's food-supply operations for the Iraq war.

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Public Warehousing Co. disclosed the federal investigation in two lawsuits filed in federal courts in Washington earlier this year.

• In this complaint the company contended that the Pentagon was blocking its pursuit of further contracts because of the investigation. A PWC executive states his position here. After a Federal Claims Court judge indicated he would side with the company, the Justice Department and Pentagon reached a settlement with the company granting most of its demands.

Investigators from the Justice Department and the Defense Department are looking into deals that Perdue Farms Inc., Sara Lee Corp., ConAgra Foods Inc. and other U.S. companies made to supply the military, according to people involved in the inquiry. The companies made the deals with the help of former U.S. military procurement officials they hired as consultants or executives.

The inquiry is focused on whether the food companies set excessively high prices when they sold their goods to the Army's primary food contractor for the war zone, a Kuwaiti firm called Public Warehousing Co. A related question is whether Public Warehousing improperly pocketed for itself refunds it received from these suppliers. Public Warehousing bought vast amounts of meat, vegetables and bakery items from the food companies, and delivered them to U.S. troops.

Public Warehousing's dealings are the subject of "a very large and active investigation into criminal and civil fraud involving amounts in the hundreds of millions of dollars," Justice Department lawyer Brian Mizoguchi told a judge in Federal Claims Court in Washington, D.C., on June 12. Public Warehousing, which receives more than $1 billion annually to feed troops in Iraq and Kuwait, denies wrongdoing.

Federal investigators are also examining the role Army officials played in picking the food companies that are Public Warehousing's suppliers. Once a "prime vendor" is chosen by the Pentagon to deliver the food -- in this case, Public Warehousing -- that vendor receives guidance from the Army on what should be on the menu. Sometimes the Army demands specific brands of food from specific manufacturers. The prime vendor must then negotiate prices for these menu items with these manufacturers.

Profit Margins

In general, many military contracts pay suppliers the cost of the goods they distribute plus a profit margin. In such cases, it is a challenge to ensure that the supplier seeks the lowest price from the maker of the goods. Unless adequate safeguards are in place, the supplier and the maker have an incentive to inflate the cost and share the extra profits among themselves.

Federal law prohibits government contractors from obtaining money through false or fraudulent pretenses.

Details of the Kuwait transactions and the federal probe are spelled out in hundreds of pages of court documents, emails, spreadsheets and military files seen by The Wall Street Journal. Among other things, the records show that Sara Lee paid 5% of the purchase price back to Public Warehousing for meat and bakery orders to feed U.S. troops in Iraq and Kuwait. The agreement was negotiated by a Sara Lee executive in charge of military sales, Paul Simmons, who formerly served as a chief warrant officer for the Army. Mr. Simmons declined to comment.

A key figure in the probe is David Staples, a top procurement official at the Army who formerly worked at Sara Lee's Jimmy Dean sausage unit. Records show Mr. Staples required Army food contractors to purchase products from certain suppliers rather than allowing the contractors to shop around.

In a brief telephone interview, Mr. Staples said it is "not true at all" that he favors specific firms. "We follow standard business practices," he said. A Sara Lee spokesman said: "Sara Lee was subpoenaed, and has cooperated fully with the Department of Defense's investigation." Sara Lee and the other U.S. food companies declined to address specifically whether they overcharged Public Warehousing for their products.

While Army officials deny that they designate vendors for food, an internal spreadsheet that Mr. Staples emailed to a vendor in 2006 names specific vendors for specific products.

In one of the most striking examples of the agency's selectivity, Tyson Foods Inc., one of the world's largest chicken producers, has been virtually shut out in the competition to supply the troops for the Iraq conflict. Much of the chicken supplies for Iraq and Kuwait are provided by Perdue and a ConAgra unit called Pilgrim's Pride Inc. That is in line with a recommended menu on a spreadsheet issued by Mr. Staples's agency. The spreadsheet lists foods and recommended suppliers such as "turkey thigh roast, raw, netted, 8-10 lb avg" next to "Sara Lee."

In an April 3, 2007, letter to the Pentagon, a lawyer for Tyson complained that "elements within the military" were providing sole-source contracts "to certain companies employing former military personnel."

A spokesman for Public Warehousing said it is cooperating with the investigation. The company, which is also called PWC, says it had revenues of more than 1 billion Kuwaiti dinars in 2006, or about $3.6 billion, and employs more than 20,000 people. (The company isn't related to the accounting firm PricewaterhouseCoopers.) "PWC welcomes a full and impartial review of its work and its performance under these government contracts, and will continue to cooperate fully with all such inquiries," the spokesman said.

FIGHT FOR IRAQ

See continuing coverage of developments in Iraq, including an interactive map of day-to-day events in Iraq and a tally of military deaths.

Public Warehousing attributes its high food prices to the costs of operating in a war zone. It says all discounts or refunds it receives from food makers after it pays its bills are specifically allowed by its contracts and represent normal practice in the food industry as an incentive for prompt payment. Pentagon officials have repeatedly heaped praise on the firm for its record in making hazardous deliveries to U.S. bases in Iraq.

One internal Public Warehousing email obtained by federal investigators refers to an agreement under which the firm's primary Kuwaiti supplier paid a 10% refund to Public Warehousing on all orders received from the military. In other words, the supplier would return to Public Warehousing 10% of the money the supplier received in exchange for its goods. Company officials confirmed the arrangement but said these large discounts are standard in the Middle East. The supplier, Sultan Center, is owned by a Kuwaiti merchant family that is also among Public Warehousing's largest stockholders. Sultan Center did not respond to requests for comment.

Within the U.S., the investigation is focused on an Army agency in Virginia known as Army Center for Excellence, Subsistence. It plays a key role in determining the Army's favored suppliers. Mr. Staples, a senior official at the center, works closely with sales agents for a handful of U.S. firms including Sara Lee, ConAgra and Quantum Foods Inc., according to emails and people involved in the investigation.

Since 2003, the Army agency has issued guidelines directing that chicken breast, turkey breast, ham and sausage consumed by U.S. forces in Iraq and Kuwait be supplied by Sara Lee.

In its letter of complaint, Tyson asserted: "It appears that the process for specifying brand-named merchandise may have been inappropriate." A spokesman at Fort Lee, the Army base in Virginia where the agency is located, said officials there aren't aware of the investigation.

The agency also has directed that virtually all of the beef purchased for U.S. troops in Iraq and Kuwait -- several tons per month -- come from Quantum Foods, an Illinois meatpacker. Quantum is represented by a former Army employee, Emily Prior. Until 2002, Ms. Prior held Mr. Staples's position at the Army agency.

Asked if she has been contacted by investigators, Ms. Prior replied: "Absolutely not. And I know of no reason why I would be." She declined to answer further questions.

'Potential Witness'

Perdue is also represented by Ms. Prior, while ConAgra is represented by a former Army sergeant, James Kennedy. A ConAgra spokeswoman, Stephanie Childs, said the company is not a target of the probe. "However, as a potential witness, ConAgra Foods' Lamb Weston division did receive a subpoena to provide its PWC sales records, and Mr. James Kennedy gave an interview as a witness in the investigation of PWC," she said.

Julie DeYoung, a spokeswoman for Perdue, said the company hasn't received a subpoena from investigators. She said that Ms. Prior worked as a consultant for Perdue for three years beginning in April 2003, a month after the U.S. invaded Iraq, and signed a new agreement with the company on Sept. 1.

As of Feb. 14, 2005, internal Public Warehousing pricing data show, Quantum was charging Public Warehousing $5.66 a pound for a 42-pound case of frozen and marinated 14-ounce T-bone steaks. Industry insiders say $5.66 per pound would be in the range of typical retail prices for ungraded T-bone steaks, which tend to be tougher than "choice" or "select" grades, but is steep for a wholesale price. In 2006, according to the Army, U.S. forces in the Iraq theater consumed some 24 truckloads of beef a month, costing more than $3 million.

Investigators are exploring whether Public Warehousing might have been willing to accept high prices because of the payment terms it received from its suppliers. In the case of Quantum, Public Warehousing gets 4% back if it pays its bills in 20 days. That means the higher the price from Quantum, the more Public Warehousing gets back for making a prompt payment.

"Quantum Foods is cooperating with the U.S. attorney general in its investigation," company spokesman Kenneth Trantowski said. "This remains an ongoing investigation and Quantum Foods must limit any detailed disclosures."

Write to Glenn R. Simpson at glenn.simpson@wsj.com

Labels: American Corporate Republic

# posted by The Punisher @ Wednesday, October 17, 2007