Frank Franklin II  /  AP
U.S. Attorney David Kelley speaks as Pasquale D'Amuro, assistant director of the FBI, right, and Linda Thomsen, left, the deputy enforcement director of the SEC, look on during a news conference Tuesday in New York to announce the filing of charges.
updated 7/27/2004 8:45:57 PM ET 2004-07-28T00:45:57

Federal authorities announced criminal fraud charges Tuesday against four former executives accused of cooking the books at a U.S. subsidiary of supermarket giant Royal Ahold NV.

The former executives of U.S. Foodservice Inc., including its former chief financial officer, conspired to inflate earnings by reporting $800 million in fake rebates from suppliers, prosecutors said.

When parent company Ahold said in early 2003 that it had overstated its earnings by more than $1 billion, mostly because of the fraud at U.S. Foodservice, its stock dropped by 60 percent. About $6 billion in market value evaporated.

Former CFO Michael Resnick and former executive vice president for purchasing Mark Kaiser were charged with conspiracy, securities fraud and making false filings. They were to surrender to the FBI on Wednesday.

Former Executive Vice President Timothy Lee and former Vice President William Carter pleaded guilty within the past week in sealed proceedings, prosecutors said.

Netherlands-based Ahold’s U.S. properties include the Stop & Shop and Giant supermarket chains. U.S. Foodservice is one of the largest distributors of food products in the country, providing to restaurants and other customers.

U.S. Foodservice routinely buys products from suppliers at full price, and the suppliers refund some of the price in rebates known as promotional allowances.

The four defendants were accused of reporting promotional allowances that never existed, lying to company auditors and getting supplies to submit false paperwork as well.

‘Fueled by the greed of the defendants’
U.S. Attorney David Kelley said the four men received performance bonuses of up to $500,000 when the company met “increasingly aggressive” earnings estimates.

“It was a cooking of the books fueled by the greed of the defendants,” Kelley said.

Sometimes, Kelley said, the men would “brazenly draw into the ledger any promotional allowance numbers they wanted in order to close the gap between real earnings and those they had targeted.”

In addition, prosecutors charged Peter Marion, a former supplier to U.S. Foodservice, with insider trading for buying and selling stock in the company based on advance knowledge of its merger with Ahold in 2000.

Marion profited by $363,000 from the tips, which prosecutors say were provided by Lee, the former executive vice president.

Lee’s lawyer has declined to comment, and Kaiser’s lawyer said previously that he was unaware of any charges. Lawyers for Resnick and Marion did not immediately return phone calls for comment, and Carter’s lawyer could not immediately be reached by telephone.

SEC files civil charges
In addition, the Securities and Exchange Commission filed civil charges on Tuesday against all five men, making most of the same allegations.

“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, the SEC’s deputy enforcement chief.

In a statement, Ahold said it was cooperating with U.S. investigators and had taken measures to ensure such activity could not happen again.

In trading Tuesday, Ahold’s U.S.-traded shares gained 7 cents to close at $6.98 on the New York Stock Exchange.

Lee and Carter face 40 and 15 years in prison, respectively, but will get far less time under federal sentencing guidelines. They are to be sentenced separately in January 2005.

Kaiser and Resnick face 35 years apiece and Marion 30 years if convicted, but they would also get dramatic reductions under the federal guidelines.

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