CHECKS, LIES AND VIDEOTAPE THE FEDS PROBE ALLEGATIONS THAT ADM EXECUTIVES GOT PAID OFF-THE-BOOKS.MEANWHILE, MARK WHITACRE, FBI INFORMANT AND TAX EVADER, GETS A NEW LIFE--AS A CEO.
(FORTUNE Magazine) – THE DRAMA at Archer Daniels Midland, already a high-stakes tale of money and power, informants and intrigue, betrayal and corruption, keeps getting more lurid. Two leading men command the stage: 77-year-old Dwayne Andreas and his nemesis, Mark Whitacre, 38. Andreas is ADM's chairman. Whitacre is a once highflying division president at the agribusiness giant who became, in the following order, an informant for the FBI, an accused thief, a failed suicide, and now, in another bizarre plot twist, chief executive of a startup biotech firm. Aside from mutual hatred, the one thing the two men have in common is big problems.
ADM is already the object of three Justice Department investigations into alleged price fixing. Now, like a general itching to fight on every front, it has made charges that have triggered yet another federal probe, this one into reports that it illegally compensated senior executives--an allegation the company denies.
While Whitacre and Andreas are clearly at odds, their fates remain strangely linked. Whitacre's attempt to get on with his life hinges in large measure on his ability to demonstrate that the corruption at ADM flowed from on high. And Andreas's success in beating any price-fixing rap will depend partly on how adroit ADM is in demonstrating that Whitacre, the government's star informant, was a liar and a thief.
Those who have followed this corporate saga may remember that things began to get interesting in late June, when FBI agents raided ADM's headquarters in Decatur, Illinois. Two days later ADM learned that Whitacre, a leading candidate to become the company's next president, had been secretly tape-recording meetings between senior executives at ADM and top officials of some of its leading competitors.
Three grand juries are investigating whether ADM and some of its rivals conspired to fix prices in three product lines: lysine, an amino acid added to swine and poultry feed to promote the growth of lean muscles; high-fructose corn syrup, a caloric sweetener used in soft drinks; and citric acid, a common food flavoring. Whitacre described his activities as an FBI mole in a lengthy first-person account in Fortune (September 4). ADM has consistently declined requests for comments on Whitacre's remarks, including his revelation that senior managers favored the following slogan: "The competitor is our friend, and the customer is our enemy." So far no one at ADM or any other company has been indicted in connection with the federal investigations.
ADM fired Whitacre in August, accused him of stealing $2.5 million, and reported its findings to the Justice Department. The company later increased the amount it said Whitacre had stolen to $9 million. According to ADM, Whitacre had been embezzling money by submitting phony invoices for capital expenditures, then channeling the payments into offshore bank accounts. Whitacre acknowledged to the FBI that he had participated in the bogus invoice schemes, though he says the total he received was closer to $6 million. More significantly, he says the payments were made with the full knowledge and encouragement of his bosses.
ADM announced in September that it had fired three other executives it was accusing of theft; all had close ties to Whitacre. Two were managers in his BioProducts division: Sidney Hulse, head of North American marketing, based in Atlanta; and Marty Allison, head of European marketing, located in Wiesbaden, Germany. The third was Reinhard Richter, president of ADM's Mexican subsidiary, whom Whitacre had helped recruit from his former employer, Degussa, a German chemical company. Said ADM president James Randall: "They are all part of the Whitacre conspiracy." BUT ADM'S EFFORTS to portray Whitacre and his friends as a gang of thieves may misfire. The Justice Department is investigating whether the illegal payment schemes went beyond Whitacre and his associates and reached to the highest levels of the corporation. This wouldn't be the first time ADM's own actions have brought the company unwanted federal attention. As Whitacre related in Fortune, it was Dwayne Andreas who first summoned the FBI to Decatur--to help the company find a suspected saboteur in its lysine plant, the flagship of Whitacre's BioProducts group. Whitacre says that visit led the feds to begin investigating ADM's alleged price-fixing operations.
The Justice Department's criminal fraud section is delving into allegations that as many as 12 ADM executives, some not linked to Whitacre, received off-the-books compensation designed to allow managers to evade taxes, according to a source close to the investigation. Justice Department spokesman John Russell, while declining to comment on the details of the probe, says: "It could go beyond Mark Whitacre. We will investigate wherever the leads take us."
The feds are further looking into allegations that the off-the-books payments were approved by top management. Reinhard Richter, the deposed president of ADM Mexico, told FORTUNE that one of the executives who authorized his $190,000 off-the-books signing bonus when he joined the company in 1991 was president James Randall. Recalls Richter: "He said to me, 'What are you going to do with all that money? Are you going to buy a Ferrari?' " Randall declined to comment, but the company has issued a statement saying it "denies making any illegal off-the-books compensation."
Richter says he has done nothing wrong. As a German national living in Mexico and working for an American company, it's unclear whether he faces any U.S. tax obligations as a result of the off-the-books payments. "I am not a thief," says Richter. "I feel really mistreated by ADM." What especially galls the former executive is the way Williams & Connolly, the Washington law firm coordinating ADM's defense in the price-fixing probe, handled the information Richter provided. "The lawyers just ignored the truth," he says. "They were just looking for ways to dump things on Mark and his colleagues."
ADM's board of directors may also have had a role in the alleged illegal payment schemes, albeit an unknowing one. Company sources say that the board, which meets quarterly, must authorize all capital expenditures above $250,000. One source told Fortune that some claims for offshore pay were disguised as requests for spending on plant and equipment. The requests were buried in a long list of proposed expenditures that were usually approved by the directors with little discussion. If board members were authorizing payment of bogus expenses, there is no indication they realized it.
Shareholders believe that ADM's directors have been strangely quiet about the company's problems. "You have a feeling that there is news that hasn't come out," says Roland Machold, investment director for the state of New Jersey, which holds 5.8 million shares. "You started off with this fellow who was talking about price fixing, and suddenly the ground shifted to executive compensation." Alan Hevesi, comptroller of the city of New York, which owns 2.8 million shares, sent Andreas a letter on September 8. "I find it particularly disturbing that the board has been virtually silent, despite reports that the investigations have targeted top officials of the company," he wrote. A month later, Hevesi had still not received a response.
So far only one member of ADM's 17- person board has spoken out--Ross Johnson, former CEO of RJR Nabisco (see box). But it is Johnson's compatriot and longtime friend, Brian Mulroney, a former prime minister of Canada, who may have a lot to answer for. Mulroney, who joined the ADM board in 1993, co-chairs the special committee of eight outside directors charged with coordinating the company's response to the federal investigations.
If part of Mulroney's job is to safeguard the interests of shareholders--even if those interests diverge from senior management's--it's not clear that he is up to the task. Like virtually everyone on ADM's board, Mulroney has close ties to Dwayne Andreas. While Mulroney was prime minister, the Canadian Bureau of Competition Policy issued a pair of controversial decisions; the first blocked a merger between two Canadian flour millers, and the second allowed ADM to buy one of the two companies.
Even if that is just a coincidence, Mulroney and his committee don't seem to be serving the company or its shareholders well. John Coffee, a corporate governance expert at Columbia University law school, says what ADM needs is not a special committee but a team of experts to lead a full-blown, independent investigation: "The allegations against ADM could not be more serious," says Coffee. "Even if Mr. Whitacre is crooked, the stories about the false invoices show a complete breakdown of internal accounting controls. This is the kind of case where you bring in forensic accountants, special auditors. There are a lot of things you could do to make this a much more thorough investigation."
ALTHOUGH it is not clear that the government's inquiry will lead to indictments, companies convicted of price fixing can be fined tens of millions of dollars, perhaps hundreds of millions, with the possibility that some executives could also be sent to jail. ADM must also defend itself against a growing number of class-action lawsuits brought by shareholders and customers, each of which claims heavy damages. Whitacre, meantime, must worry about tax fraud and mail fraud charges, offenses that can be punished by seizure of assets, fines, and imprisonment.
At the moment, the big difference between Whitacre and ADM is that the former executive has admitted he broke the law, although exactly which laws he broke isn't clear, even to him. "I confessed in early August to the government, and I have been cooperating with them to the full extent," said Whitacre during a brief telephone interview. "I'm willing to plead guilty to whatever the charges are. I confessed to receiving payments overseas, where taxes were not paid, and shareholders were not informed."
ADM has disclosed details of only one of Whitacre's suspicious transactions. In November 1992 (about the time, coincidentally, that he began working for the FBI), Whitacre and other ADM executives made a deal with a Swedish company called ABP International. They agreed to buy a strain of bacteria used to produce threonine, an amino acid that, like lysine, is added to animal feed. The exact amount of the multimillion-dollar purchase price was not disclosed.
ADM says Whitacre created a phony $2.5 million invoice, also supposedly for threonine technology, to be paid to a company called ABP Consulting. ADM says the firm, which had no connection to ABP International, was a shell company based in Switzerland and controlled by Whitacre. A former official of ABP International told Fortune that his firm had no knowledge of the $2.5 million invoice until ADM lawyers brought it to their attention this summer.
The story doesn't end there. Last April, in an action that received scant notice, Ajinomoto, a major Japanese competitor to ADM, filed suit in U.S. District Court in Delaware, claiming that ADM was infringing on a patent that Ajinomoto held for threonine technology. Ironically, Ajinomoto is one of the companies that are under investigation by the feds for allegedly conspiring to fix lysine prices with ADM.
In court documents, ADM has denied that it infringed on Ajinomoto's patent.
CONTRARY to what was initially published in the New York Times, Whitacre has not struck a plea agreement with the Justice Department. But he is clearly hoping that his willingness to plead guilty, and his pledge to cooperate with the government's investigation of ADM, will persuade the feds to treat him leniently. He has a lot of explaining to do. Sources involved in the investigation say federal authorities were furious at Whitacre when they learned about the offshore payments in early August. Under the terms of a "covert cooperation and testimony" agreement signed by Whitacre when he formally became an informant in January 1993, the government promised him immunity from prosecution provided he met certain conditions. Whit-acre pledged that he "would not engage in any criminal activity of any kind without the prior knowledge and approval of FBI agents or this office [the Justice Department]." By accepting off-the-books compensation without first telling authorities, Whitacre seems to have violated that agreement.
A source familiar with the investigation told FORTUNE that Whitacre notified the FBI of the offshore payments before ADM did--but only by a matter of days, and not until he apparently got wind that ADM was about to go public with its allegations. Shortly after Whitacre confessed to the Justice Department, he attempted to kill himself at his home in Moweaqua, Illinois. Friends say he was overwhelmed by the pressure placed on him and his family by ADM and the feds.
He ended up in a suburban Chicago hospital with no job, no place to live, and no place to send his children to school. He also had money problems, having promised the government that he would not touch any of the funds in his overseas accounts. The Whitacres had already cleared their possessions out of their Moweaqua estate in anticipation of moving to a house they had agreed to buy in Franklin, Tennessee. Whitacre and his wife Ginger had signed a contract to buy the house near Nashville for $925,000, but after the suicide attempt they backed out of the deal. The couple that was selling the house, Paul and Carole Myer, filed suit in Tennessee for full payment plus damages. The Whitacres, in answer to the suit, denied that they breached the contract. A judge issued an injunction in mid-September ordering the Whitacres to turn over proceeds from the sale of their residence in Moweaqua, now on the market for $1.25 million. The court ruled that the money be held in escrow until the parties negotiate a settlement.
But Whitacre, despite everything that has happened to him, seems to have landed--remarkably--on his feet. He and his family have relocated to the Chicago area, where they live in a rented house. In early October, Whitacre told FORTUNE, he became chief executive of Future Health Technologies, a startup medical biotechnology firm. Whitacre says the company, which is not yet incorporated, will make products using Chinese technology. He adds that the fledgling firm is backed by investors with a proven track record in the industry, but he will not disclose their names until they complete some pending patent applications. They are, he says, paying him a six-figure salary comparable to what he earned--or at least comparable to what he earned legally--at ADM.
Whitacre says Future Health Technologies is arranging private placement financing and plans to go public over-the-counter early next year. Whitacre himself operates out of a rented office not far from his home, in a suite occupied by other small companies. It's a long way from global agribusiness, but it represents a chance for Mark Whit-acre, former corporate star, former mole, and former tax evader, to reinvent himself yet again.