US: Food Companies Face U.S. Probe Over Iraq Deals

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 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.




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."