As federal authorities probe the web of food suppliers for U.S. troops in Iraq, one focus of scrutiny is a Lebanese-American businessman indicted for allegedly inflating food prices with fraudulent bills.
The Houston businessman, Samir Itani, runs a privately held company called American Grocers Inc. He has worked closely with a pair of Kuwaiti companies that lie at the heart of the U.S. government's fraud inquiry. American Grocers supplied them with millions of dollars of peanut butter and other food items, according to court records and corporate spreadsheets. Investigators suspect the goods were overpriced.
Public Warehousing Co. disclosed the investigation in lawsuits filed in federal courts in Washington earlier this year.
• In this complaint2 the company contended that the Pentagon was blocking its pursuit of further contracts because of the investigation. A PWC executive states his position here3. After a Federal Claims Court judge indicated he would side with the company4, the Justice Department and Pentagon reached a settlement with the company granting most of its demands.
Mr. Itani is charged in U.S. District Court for the Southern District of Texas with 46 criminal counts of conspiring to defraud the U.S. and making false claims in connection with at least $1.9 million in allegedly bogus invoices he submitted between 2004 and 2005. He has pleaded not guilty.
"Samir Itani did not engage in any intentional wrongdoing and looks forward to his day in court," said Mr. Itani's lawyer, Paul Nugent.
The indictment charges that American Grocers, among other things, inflated its bills for food by putting on its invoices costs that were never incurred, such as trucking charges. Public Warehousing Co., a Kuwaiti company that is the main contractor for providing food to American troops in Iraq, paid the inflated bills and passed the costs on to the U.S. government, the indictment says.
Public Warehousing has said it did nothing wrong and it is cooperating with the U.S. investigation. A Public Warehousing spokesman said yesterday that an executive at the company spotted irregularities in American Grocers' invoices and brought the problem to the Pentagon's attention. "They caught it and they reported it. They did the right thing," said the spokesman.
The Wall Street Journal reported yesterday5 that the federal probe also is examining the role of major American food companies including Perdue Farms Inc., Sara Lee Corp. and ConAgra Foods Inc. Investigators are asking whether the companies received excessively high prices for their goods.
ConAgra said yesterday it has been assured by the Defense Department that its role "is limited to that of a witness." ConAgra said it "provided the relevant records and testimony" after it was contacted in January. A spokeswoman for Perdue Farms said it "never sold any product directly to Public Warehousing" and didn't set the prices paid or charged by Public Warehousing.
The American Grocers indictment sheds light on the long chain of intermediaries by which food makes it way from the U.S. to the Iraq war zone, and it gives a hint of ways in which the U.S., according to investigators, may have been overcharged by hundreds of millions of dollars.
American Grocers was the primary U.S. supplier for a Kuwaiti company called Sultan Center KSC. Sultan Center, in turn, supplies more than $200 million in food items annually to Public Warehousing, according to Public Warehousing.
Federal investigators are exploring whether Public Warehousing passed along to the U.S. government excessively high prices from several of its subcontractors, and then improperly pocketed for itself refunds it received from these suppliers. Public Warehousing says U.S. officials explicitly approved in advance all of the prices it charged.
Mr. Itani, a naturalized U.S. citizen, could play a key role in the case because he has direct knowledge of the two Kuwaiti companies' operations, say people involved in the investigation.
American Grocers has about 30 employees and "sells millions of dollars of American food products to overseas customers each month," Mr. Itani's lawyer said in a court filing. Before his arrest, Mr. Itani frequently traveled to the Middle East, but he is now confined to Houston. His wife posted his $1 million bail with cashier's checks.
Members of Kuwait's powerful Sultan merchant family are among the largest stockholders in both Sultan Center and Public Warehousing. Normally a principal contractor would seek to get the lowest price on goods from its suppliers. U.S. authorities are investigating whether Public Warehousing was negotiating at arm's length from Sultan Center, and, if it wasn't, whether the U.S. was overcharged as a result.
In a filing in a separate case at U.S. District Court in Washington, D.C., Public Warehousing said it and Sultan Center "work at arms length in their subcontracting activities."
The Sultan family controls many commercial ventures in Kuwait, including a fish market and shopping mall on the waterfront of Kuwait City. The family's flagship venture is the Sultan Center chain, a retailer of foodstuffs and other basic items. The chain is known for its American-style "big box" stores where Kuwaitis stock up on everything from computers and stereo systems to 11-pound bags of basmati rice.
Sultan Center owns 30.54% of a firm called the National Real Estate Company WLL, which owns 23.74% percent of Public Warehousing, corporate records show. Prosecutors have obtained evidence that Sultan Center, after receiving payment for the goods it supplied, returned 10% of the amount to Public Warehousing in what the companies referred to as a "discount," according to people familiar with the situation.
Lawyers for Public Warehousing, which is also known as PWC, say the practice of receiving such discounts is legal and appropriate. Neither of the two Kuwaiti companies was charged in the July 23 indictment of Mr. Itani. He is the only person to be charged in connection with the Public Warehousing food transactions.
Many U.S. military contracts pay a supplier's costs plus a profit margin. Contracting rules generally prevent a supplier from passing goods among a series of related entities and inflating the cost along the way.
The chairman of Public Warehousing is Tarek Sultan Al-Essa, a longtime Sultan Center board member and the nephew of Sultan Center founder Jameel Sultan Al-Essa. Through spokesmen, they declined to be interviewed.
If Public Warehousing and Sultan Center were judged to be related entities, Public Warehousing might be obligated to pass on to the U.S. government any "discounts" or rebates it received from Sultan Center. Public Warehousing says it isn't an affiliate of Sultan Center under federal procurement rules, and wasn't required to name Sultan Center as a related party in disclosures to the Defense Department.
In one letter given to the Pentagon, Public Warehousing simply stated that Sultan "is neither a parent nor a subsidiary." The letter didn't mention the common ownership or overlapping management. In a court declaration, Public Warehousing Chief Executive Toby Switzer repeated the description and called the two "separate entities."
Much of the food for U.S. troops in Iraq and Kuwait is supplied from Public Warehousing's vast headquarters facility in an industrial area on the outskirts of Kuwait City. It is protected by armed guards and half-mile-long walls topped by five strands of razor wire. At one corner of the tract is a large Sultan Center wholesale outlet.
According to corporate records, Sultan Center acted as a middleman, supplying Public Warehousing with pepperoni calzone, potato wedges and other American products made by ConAgra Foods and other U.S. firms, which originally shipped the products to American Grocers. It's unclear why American Grocers couldn't ship the food directly to Public Warehousing, instead of adding Sultan Center as a middleman. Public Warehousing paid its invoices to Sultan Center, which then paid American Grocers.
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