NEW YORK -- Confirmation that federal investigators are looking into alleged fraudulent billings practices in the print production community is stirring uncomfortable, if familiar, fears in the agency community.
Historically, print production, considered a less glamorous outpost in the corridors of the ad world, has functioned as an autonomous operation with a reputation for accepting vendor gifts. In today's era of public ownership and agency management, such traditions have been downplayed as a fading throwback to a three-martini era long past.
But the allegations currently rocking Grey Global Group suggest otherwise. Already, shops like Bates have been contacted by the U.S. Department of Justice and asked to cooperate with the federal probe. Many agencies conduct regular internal audits of all departments, including print production. Others are doing so now, each wary of becoming the next poster child for billing fraud.
With the Grey case focusing on a period beginning as early as 1991 and extending through 2000, the industry finds itself confronting the difficulties of monitoring employee behavior before it's too late.
"You cannot get to the bottom of these things very easily because you can't go into that department and say, 'Hey, anyone around here get a free yacht from one of our suppliers?' " said Jeff Goodby of Goodby, Silverstein & Partners.
Several agency CEOs described print production groups as "fiefdoms" operating without much oversight. "You always hear rumors about improprieties," said one, adding that a major concern is that questionable behavior does not involve clients.
Taking graft is one thing. What is disturbing about the situation Grey is now facing are the allegations that Mitchell E. Mosallem, former vp, director of graphic services, inflated bills with the intention of overcharging clients for the benefit of agency employees and, possibly, the agency itself (see sidebar).
"The issues are client security," said Jeff White, CEO of J. Walter Thompson in Atlanta. Key questions, he said, include, "Are we running a shop that's screwing our clients? Do you not have systems that you can use to catch this? If not, how can I trust you in future? [The Grey case] has big implications." If the charges are confirmed, he said, Grey may have "essentially cheated clients for no one knows how often or how long."
"This investigation will probably cause clients to put additional pressure on agencies to justify all their purchasing on behalf of the clients," said Rick Kurnit, an attorney at New York law firm Frankfurt, Garbus, Kurnit, Klein and Selz, which represents many ad agencies and individuals in the business.
The complaint against Mosallem alleges that he was a primary facilitator of the overcharges. But one source who read the Justice Department complaint was intrigued by a reference stating that Mosallem authorized suppliers to add charges benefiting other senior Grey employees or members of their families. The source said he would not be surprised if the government leaned on Mosallem to name names.
The Grey disclosures come amid scrutiny of the print production industry by the Justice Department's antitrust division and the IRS division of criminal investigations.
One of New York's largest graphics production houses, The Color Wheel, was issued an IRS search warrant of its premises in December 2000. Color Wheel, a Grey supplier, denied any wrongdoing in a letter last week to other clients that was obtained by Adweek.
"Our invoicing of Grey Advertising, as with all our customers over the years, has reflected the value of services and benefits actually provided to Grey. How they bill their clients, based upon Color Wheel's invoices, is entirely within the control and direction of Grey," the letter said.
In January, Grey hired Michelle Unger from Young & Rubicam as its new print production chief. Sources said she subsequently chose not to work with Color Wheel or three other print production houses Grey had been using: New York's Print Technical Group and Total Concepts and Boston's Unigraphics. It was unclear why they were replaced or by which companies. A Grey representative declined comment.
Other agencies contacted in the investigation distanced themselves from the scandal. Bill Whitehead, regional president of the Americas for Bates, said he would cooperate fully, adding that he is "confident" no impropriety will be found at his shop. "This has always been an ongoing concern in the industry," he said. "A lot depends on the people you hire."
It's not clear what effect, if any, the investigation will have on Grey's business dealings with government agencies. Last week, Grey pitched the IRS account. It also did a project for the U.S. Postal Service last fall and is among the shops that received the USPS review questionnaire.
When word of the Color Wheel probe began circulating last summer, it brought to mind a similar IRS investigation seven years ago of Harold Singer, then print production head at Wells Rich Greene. Asked why such questionable business practices may still continue, one source speculated that print production executives resent their treatment as second-class citizens even as they work on some of an agency's most important clients. "They observe the lifestyles of the rich and famous," the source said. "They basically resent it."
More and more, agencies look for clues in how their modestly paid print production execs are living. "We were literally checking people's lifestyles because the stories were legendary," says one former CEO of a global shop.
Despite their best internal policing, agencies face a difficult challenge. "I don't know how there can be safeguards unless you wire a print production manager when he goes to lunch," says one Manhattan print jobber. "How are you going to know what transpires? All you need is a little opening -- the client wants two cars in an ad instead of one. You substitute new photos, new film, new quantities, new lots. You've opened an avenue so the original price no longer stands. No one really checks once the initial estimate has been put in. Legitimate change can be easily embellished. Later on, someone gives you $1,500 at lunch, it's not going to be traceable."
The 4A's last week declined to comment on the case.