WORLD

The succession question

BARRY CAME February 22 1999
WORLD

The succession question

BARRY CAME February 22 1999

THE PRICE FIXERS

Business

SPECIAL REPORT

JOHN NICOL

JOCK FERGUSON

It looked like any other corporate get-together. The nine executives greeted each other cordially as they gathered in a suite on the 33rd floor of the Hyatt Regency hotel in downtown Vancouver. The subject of conversation that day in June, 1993, did not seem anything special—the price of an agricultural feed additive called lysine. Who would have known that the players at this meeting were part of a global price-rigging conspiracy? What they in turn didn’t suspect was that one among them was an FBI mole, a man who had already secretly recorded dozens of similar meetings. The ordinary-sounding lysine, which puts more meat on hogs and poultry, was actually worth almost $1 billion a year in worldwide sales at rates concocted by this room of men. At the Vancouver meeting, the conspirators began a process that would ratchet up the Canadian price of lysine by 50 per cent—money taken from the pockets of hog and poultry farmers and, ultimately, consumers.

Two years later, this time at a hotel near the Toronto airport, it was another scam. Illinois-based Archer-Daniels-Midland Co., which ran the Vancouver meeting, was again among the corporate conspirators. ADM representative Barrie Cox berated a Swiss “competitor” for undercutting the fixed price of citric acid—an ingredient found in soft drinks, frozen foods and detergent. The citric acid group, which called itself the G4, met secretly to rig this $1.4-billion-a-year market under the guise of quarterly meetings of a manufacturers association. The

group kept the fix going for three years and dubbed themselves “sherpas,” who reported to “masters” at their head offices.

TEe link between the lysine and citric acid scams was Cox’s “master,” Terrance Wilson, a gruff-talking ex-marine and a group vice-president at ADM, the $20-billion-a-year food giant that touts itself as the “supermarket to the world.” Unwittingly, ADM’s executive office also provided the FBI’s informer for these meetings: a man named Mark Whitacre. The evidence he gathered forced ADM to plead guilty to price-fixing and to pay record fines of $140 million in the United States in 1996 and $16 million last year in Canada. Then, it led to a price-fixing trial that wrapped up in Chicago last September—and proved an eye-opener for Canadian authorities. From the hours of tape and mountains of documents in that case, Maclean’s has learned the breadth of the price-fixing schemes in Canada and the sheer audacity of competitors who joined forces in lawbreaking for greater profit. What also becomes clear is that Canada was a key component in the global conspiracy. Martin Low, a lawyer with the federal competition bureau, said Canada had to be onside for the cartel’s efforts to succeed. “The companies couldn’t risk having lysine flowing back across the border to disrupt the rigged U.S. market,” he said, “so they had to fix the Canadian price, too.”

Whitacre’s tapes and notes about the elaborate schemes led to the Chicago trial and the convictions of Wilson, 60, and Mick Andreas, 49, an ADM executive vice-president and the son of chairman emeritus

Dwayne Andreas. Although Whitacre was an FBI informer, his immunity from prosecution did not include the first few months of price-rigging in the summer of 1992 and he, too, was found guilty. The three men will be sentenced for the price-fixing conspiracy on Feb. 26. But Whitacre’s tapes were so damning that a checkered past did not harm the prosecution’s case. The informer is already serving nine years in prison for embezzling $14 million from ADM—money that he maintains was ADM’s method of giving off-the-books payments to its top executives. ADM denies such a practice.

There are other Canadian elements to this case. The food giant’s 1996 settlement with the U.S. government was handled by former Canadian prime minister Brian Mulroney, who has been an ADM board member since Oct. 21, 1993. Financial analysts lauded his efforts. But nothing could stem the flow of money from ADM’s coffers. It and other conspirators have paid a total of $340 million to settle civil lawsuits launched by American farmers and manufacturers who used lysine and citric acid. Then just last week, ADM was hit with its

THE MOLE WHO CRACKED A CONSPIRACY

Mark Whitacre used to tell his fellow executives at ArcherDaniels-Midland Co. he had been orphaned as a child when his parents’ car collided with a deer. He spent some time in an orphanage, he said, and then he was adopted by the owner of King’s Island, an amusement park in Cincinnati. It was all a lie—his parents are still alive—but nothing like the whoppers Whitacre told when he took over as head of ADM's bioproducts division. He told then-chairman Dwayne Andreas that a Japanese competitor had sabotaged ADM’s new production plant for lysine, an additive that puts more meat on hogs and poultry. The rival, Whitacre’s story continued, was trying to extort millions from the company.

FBI special agent Brian Shepard was called in to investigate. In November, 1992, Shepard conducted formal interviews and then, one night, he and Whitacre talked in the agent’s car for five hours. Whitacre admitted that the sabotage story was a hoax, but dangled something even more interesting. He told

Shepard a story of worldwide pricefixing that involved the top executives of several global firms, including his own. Within a month, Whitacre would begin a 30-month career as an FBI mole.

Whitacre made clandestine calls to advise the FBI where to place hidden cameras at price-fixing meetings; he carried a false briefcase equipped with a tape recorder or strapped a sophisticated microphone to his chest. Whitacre’s evidence enabled

the FBI to raid ADM headquarters on June 27, 1995. Within days, his role as an informer was exposed and he was later fired. Whitacre says Andreas vowed that he would “regret the day he was born.”

A few weeks after the raid, an ADM spokesman said the company discovered evidence, “in almost blind luck,” that Whitacre had embezzled $12.6 million from ADM. The company said Whitacre diverted money to personal bank accounts in Switzerland and the Cayman Islands. Whitacre maintains the money was part of a secret bonus system used to reward top ADM executives. But no evidence surfaced that other executives received such bonuses.

In August, 1995, Whitacre attempted suicide—inhaling exhaust fumes in his garage—in response to the serious allegations against him.

Two Canadians on the ADM board—former prime minister Brian Mulroney and F. Ross Johnson, the former CEO of RJR Nabisco Ltd.— assailed Whitacre after the stories surfaced about fund diversions and company spying. In a speech to business students in Atlanta, Johnson got the crowd laughing with the line that Whitacre “tried to commit suicide, but he did it in a six-car garage, which is not the place to do it.” Mulroney told shareholders at an October, 1995, meeting that the man co-operated with the FBI, but wouldn't co-operate with the ADM board. In March, 1998, Whitacre was finally convicted of moneylaundering, wire fraud and income tax evasion. He was sentenced to nine years in jail and ordered to pay $16 million in restitution—$12.6 million plus interest.

Whitacre, who is now 40, teaches high school and college courses to fellow inmates and sings in the prison choir. While awaiting his Feb. 26 sentencing for price-fixing during the period before his FBI immunity, Whitacre did not want to say much. But he did dispute Andreas’s claim that he was the “dark cloud” over ADM. “It’s proven I wasn’t the dark cloud over the company—the pricefixing was.” And he feels that, as the whistle blower, he is being treated too harshly. While ADM and its price-fixing co-conspirators paid more than $500 million in criminal and civil penalties, Whitacre faces up to eight more years in jail.

J.N. and J.F.

first civil damage suit in Canada, initiated by a hog farmer from southwestern Ontario. The company is also Canada's 1ar~est strain miller.

Whitacre’s success in getting his fellow ADM executives to talk about their crimes within the range of the microphone in his briefcase has given the FBI leads to investigate other potential international cartels, including the sale of highfructose corn syrup, a sweetener widely used in the soft drink and candy industries. That additive is a $3.6-billion-a-year proposition throughout North America, and the case will be followed closely in Canada. In addition, both Canada and the United States are now investigating whether there is price-fixing in animal vitamins and another animal feed additive called methionine.

Both are multibillion-dollar-a-year markets controlled by a handful of global firms.

“International cartels are costing the American people billions of dollars,” says Gary Spratling, U.S. deputy assistant attorney general in Washington. ‘The fine imposed on ADM should be a wake-up call heard in boardrooms around the world.”

I hen Dwayne Andreas took it over in 1966, ADM was an ailing Illinois agribusiness. A former farmer, Andreas had developed a knack for brokering international agriculture deals, meeting along the way world leaders such as Joseph Stalin,

Charles de Gaulle and Haile Selassie. On the home front, he fared just as well. Andreas has known every U.S. president since Harry Truman and was a close friend of former vice-president Hubert Humphrey, who introduced him to many foreign leaders. His political contributions have ended up in the campaigns of Bill Clinton, the White House safe of Richard Nixon and even in the bank account of a Watergate burglar. His political connections have also helped ADM to obtain huge subsidies and tax breaks. The company cultivated its public image, sponsoring public broadcasting news shows and hiring respected former newsman David Brinkley as spokesman.

But in agriculture circles, ADM has long had a reputation for business practices that were close to the edge. In 1978, it entered a no-contest plea to charges that it conspired to fix prices on U.S. food relief programs. It was investigated during the 1980s for attempting to control the high-fructose corn syrup market, but the case was dismissed. In 1992 and 1994, it willingly paid a total of $2 million to settle two civil suits alleging it had conspired to fix the price of carbon dioxide. In both cases, ADM never admitted guilt.

In 1991, the company built a huge plant near its Decatur, 111., headquarters that was capable of producing enough lysine to supply more than half of the world market. But it also created an imbalance. Two Japanese firms, Kyowa Hakko Kogyo Co. Ltd. and Ajinomoto Co. Inc., had dominated the market and had fixed prices of lysine as far back as the 1970s. But with the arrival of the Decatur plant, there was an oversupply of lysine and the price plummeted to less than the cost of production.

ADM decided to flex its muscles and show off its new state-of-the-art facilities. The firm invited the Asian competitors to tour the plant. A short time later, it organized a meeting of lysine producers in Mexico

City; which included the South Korean companies Sewon Co. Ltd. and Cheil Jedang Corp. "We are not cowboys; we should be trusting and have com petitive friendliness," said Wilson, unaware that his words would end up before the FBI. This was the begin ning of a three-year international con spiracy. Wilson alternated between bullying and cajoling at these meet ings, informing his co-conspirators that the "God damn buyers" are the enemy. "We've gotta have them. But they are not my friends. You're my friend. I want to be closer to you than I am to any customer because you can make us money." The FBI recordings reveal a casual manner at the meetings, which masked a determined plan to fix lysine prices. In Vancouver, Ajinomoto ex ecutive Kanji Mimoto and Whitacre had this discussion: Mimoto: "But how about the Cana dian price? Heartland [Lysine Inc., Ajinomoto's U.S. subsidiary] got in formation that you increased the price to three Canadian dollars already. Did you do that?" Whitacre: "Three dollars Canadian [per kilogram] was when we an nounced the 95 cents [per pound] in the U.S." Mimoto: "Heartland Lysine asked me yesterday, please fix the price in Canada at three-point-ten." Whitacre: "OK, I will change that price to three-ten." It appears that during the conspira cy, the Canadian price jumped from $2.30 a kilogram in 1993 to $3.44 in 1994. The benchmark price of lysine was fixed in U.S. cents per pound and then translated into local currencies. John Connor, an economist at Indiana's Purdue University and the leading expert on agricultural price-fixing, said the cost increases could mean the difference between a farmer making or losing money. He explained that "the lysine thing took over two years of hard negotiations before they settled on a formula that worked." He views the Vancouver meeting as crucial, because it led to a final agree ment on market share some six months later. This, he said, included "an elaborate compensation scheme if they strayed from the agreement.

They learned this from the citric acid people in Europe." The citric acid fix began in 1991 with a different cast of characters. Four companies-ADM, Haarmann & Reimer Corp., a subsidiary of the German pharmaceutical giant Bayer AG, as well as Swiss lirms Jungbunzlauer International AG and E Hoffmann-LaRoche Ltd.met secretly in Brussels, Jerusalem, Vienna and London before coming to Toronto for an emergency meeting on Feb. 23, 1995, to try to keep the failing conspiracy afloat. Jungbunzlauer, it was learned, had been discounting for some customers. The FBI had gathered enough evidence in the citric acid and lysine

THE PLAYERS IN THE ADM SAGA

Terrance Wilson: The grufftalking ex-marine who was a group vice-president at Archer-Daniels-Midland Co. He told a cartel meeting in Mexico City in June, 1992, that customers were "the enemy," while the competi tors in the room were his "friends?' "I want to be closer to you than I am to any customer," he said, "because you can make us money." Wilson faces sentencing on Feb. 26, along with fellow ADM executive Mick Andreas, after they were convicted of price-fixing by a Chicago jury. Mark Whitacre: He attend ed price-rigging meetings on behalf of ADM. He

became the FBI's mole, taping hundreds of cartel conversations. The mountains of notes and tapes Whitacre collected gave the FBI a solid case and in 1996 ADM agreed to a fine of $140 million in the United States. In Canada, the firm paid a record $16-million fine in

1998. Whitacre also faces sentencing for price-fixing, although U.S. authorities will request a lighter term because of his assistance. Dwayne Andreas: The patri arch of ADM, he took over the business in 1966 from the Archer and Daniels families and cultivated friendships with political leaders around the world. He stepped down as chairman in January, but remains on the board. Brian Muironey: The former Canadian prime minister is a member of ADM's board. He co-ordinated the U.S. plea agreement and criticized Whitacre's role as an FBI informant.

schemes to pounce on ADM’s Decatur headquarters on June 27, 1995, and to get search warrants for the homes and offices of all of the company’s top executives. The investigation was by then known as Operation Harvest King and it reached the top of ADM’s hierarchy—to president James Randall and ADM patriarch Dwayne Andreas.

The FBI raid pushed Brian Mulroney to the forefront to direct the company out of its legal nightmare. He had been appointed to the ADM board in 1993, and had been acquainted with Dwayne Andreas since his days as prime minister in the 1980s. Mulroney, who annually earns $150,000 for being on the ADM board, was widely praised for his work over the next year and a half on the company’s behalf. “It took someone with a great deal of diplomacy to explain to Dwayne the necessity for all the things that had to be done,” says Ray Goldberg, an economist from the Harvard University Graduate School of Business, who was also on the board at the time. Mulroney was “talking to a man who was called in by the families who started the firm, the Archers and the Daniels, to save it and improve it, and Mulroney told Dwayne what to do and how to do it, which is not an easy thing.” (Andreas stepped down as chairman in January, but still sits on ADM’s board.)

In September of 1995, Mulroney was quoted as saying, “ADM is the cleanest company in America.” But a month later, unhappy investors asked tough questions about the FBI investigations at ADM’s annual meeting. Mulroney, who had been named to oversee the company’s response to the government’s case, was introduced as a statesman who was friends with Russia’s Boris Yeltsin, France’s François Mitterrand and Germany’s Helmut Kohl. Mulroney soothed the hostile crowd with a joke, and then spoke with outrage at Whitacre’s “secret contact with the FBI,” while the executive had told the ADM board nothing. Mulroney did not wish to discuss his ADM work with Maclean ’s, but

asked his former aide Luc Lavoie to respond. Lavoie, whose public relations firm was hired by Mulroney’s committee to help ADM through the crisis, said Mulroney’s role was “co-ordinating”—shuttling between Washington and New York City and talking to top U.S. law firms to organize a plea agreement for the company. In that agreement, completed in 1996, the U.S. government promised not to pursue any charges against ADM in its investigation of the pricing of high-fructose corn syrup. The government also decided not to prosecute Randall and Dwayne Andreas in the lysine and citric acid cases—moves that unhappy shareholders have criticized.

Connor says ADM’s high-fructose corn syrup deal was the real bargain, because anyone found guilty of fixing the price of this widely used product would face fines in the hundreds of millions of dollars. Since the ADM plea agreement, the price of that sweetener has dropped dramatically. ADM has pledged to assist the investigators in that probe, which had been stalled pending the completion of the lysine case. In addition, a civil lawsuit in Peoria, HI., against ADM and other high-fructose corn syrup producers could lead to damage awards approaching $4.5 billion, Connor said.

R ein Minnema has launched a similar civil suit in Canada (page 53). The son of a Dutch farmer, Minnema immigrated to Canada in 1978 and built his pig farm into a million-dollar operation by keeping up on the latest developments in the business. That's why he was interested in lysine, a natural addi tive that would put more meat on his hogs. But when the cost of his feed began to rise, Minnema's inquiries indicated the cause was the price of lysine. When he read what ADM and the others had done to fix the price, he had no Irouble agreeing to a Barrie,

Ont., law firm’s suggestion that someone had to launch a class-action suit. It needed to be done, said the 54-year-old Minnema. ADM and the other food giants “have more power than any government in any place in the world. Only through the courts can you bring them down to size.”

It will not be easy bringing ADM down to size, because its sphere of influence continues to grow in Canadian grain handling and milling. Since 1992, ADM has gained control of most of Canadian grain milling, thanks to controversial decisions by Ottawa’s competition bureau. By purchasing Olgivie Mills, ADM became the country’s major flour miller, even though the competition bureau had rebuffed Olgivie’s attempts to merge with Maple Leaf Mills Inc. a year earlier. ADM’s biggest move into Canada came in 1997, when it bought a 45-per-cent interest in Winnipeg-based United Grain Growers Ltd., the second-largest grain marketer in Canada, for $113 million.

Jim Ross is the owner of Grand Valley Fortifiers Ltd. of Cambridge, Ont., where Minnema buys his lysine-enriched feed. Ross says he is frightened by the growing consolidation of agricultural companies. “It all ends up meaning one thing—power. We’re seeing it with vitamin people, we’re seeing it with pharmaceutical people, certainly people like ADM—very powerful players.” Ross doesn’t believe company statements about greater efficiencies. “I think it’s for more than that. You eliminate the competition, or reduce the competition, and you do what you want.”

The mergers and acquisitions branch of the competition bureau approved ADM’s expansion into Canada even though the criminal investigations section of the department was probing the company’s sales of lysine and citric acid. One investigator, who asked not to be named, admitted that ADM’s continued acquisitions during the pricefixing investigation “caused us a little heartache.” Harry Chandler, who headed those investigations, said both cases involved close cooperation with U.S. antitrust officials. By the summer of 1995, he said, “they had all the main players, so it didn’t make sense for us to replicate

AD)I I~IILLION8 IN ch pENALTII~S

things. We hadn’t even heard of this product, lysine. We had to find out how the market worked [in Canada], who the players were.” Chandler said the Canadian investigation got a big boost when, in return for immunity from prosecution, Japanese lysine maker Kyowa Hakko agreed to assist in October, 1996. A year later, competition bureau investigators spent 10 days in Hong Kong examining company documents and meeting with lawyers and executives from Kyowa Hakko and the Korean firm Sewon. Chandler sent target letters to Ajinomoto and ADM in late 1997 asking them to co-operate. ADM, which had already paid a $ 140-million fine in the United States, came forward and agreed to pay a $14-million fine for its role in the lysine conspiracy, and a $2-million fine for its role in the citric acid conspiracy. As part of that deal, Ottawa agreed not to pursue ADM for its role in fixing prices of sodium gluconate, another food additive, nor in its examinations of other food and feed additives. However, ADM is committed to helping the government in its investigations. “It was a trade-off in exchange for information,” Chandler said. After ADM pleaded, Ottawa negotiated a $3.5-million fine against Ajinomoto of Japan and a $70,000 fine against Sewon.

The record fines against ADM may be a deterrent, but law enforcement officials on both sides of the border know that attempts to discourage price-fixing will depend on sentences handed out to executives. That’s why next week’s sentencing of Mick Andreas, Wilson and Whitacre is so important. U.S. justice department officials will seek prison sentences of up to three years for Wilson and Mick Andreas, but request a lesser penalty for the FBI informant. The sixman, six-woman jury that convicted Whitacre had a hard time finding him guilty for those four months before he became an FBI mole because, as one juror admitted after the trial, the audiotapes and videotapes made possible by Whitacre’s collaboration were critical to assigning guilt.

Spratling of the U.S. justice department has called the discovery of the lysine and citric acid schemes “historic—the most elaborate and harmful conspiracies ever discovered” by the antitrust division. Since the ADM probe, the FBI has doubled the number of agents working on antitrust violations, and the U.S. department of justice now has 30 grand juries investigating price-fixing. Sources say Ottawa’s competition bureau expects to charge more than a dozen corporate household names for similar practices in the coming year. Still, the FBI and other regulators around the world know they can’t have a mole in every pricerigging meeting, or even know the name of every product that could be fixed. What the enforcers hope is that the crackdowns, convictions and sentences will scare the cartels back into competition. □