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Taken for a Ride

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By Jim Edwards

Eliot Spitzer hasn't quite come knocking, but the U.S. Department of Justice, the Securities and Exchange Commission and at least two state prosecutors have stepped up the pace of investigations into the marketing, advertising, printing and point-of-purchase display industries over the past year.

Collectively, the cases cut across all areas of marketing from clients and their ad agencies, to public relations, print houses, media providers and so-called collateral vendors. The scams also have common themes: Bid-rigging, inflated billing, cash kickbacks or excessive gift-giving.

Ongoing probes of the industry, even without the participation of the New York State attorney general, have led to the convictions of more than 60 executives since 1994, the Justice Department said in September. This year alone, there have been 12 investigations launched or indictments brought against marketers and their vendors by state and federal authorities.

Brands that have lost money include HBO, Salomon Smith Barney, Coca-Cola, Pfizer and Merck. Last year, there were five corruption cases, with similar allegations, that saw charges brought or sentences won against marketers or their vendor.

In the last two years 12 ad agency and print executives were indicted over the kickback conspiracy that occurred between Grey Global Group in New York and its print shop, Color Wheel. Two Grey executives were found to have illegally steered contracts to Color Wheel in return for hundreds of thousands of dollars in gifts and favors. The Grey/Color Wheel probe led to other investigations that resulted in the indictment of 10 other print and agency executives.

The fallout shows no sign of ending. Last week, the Justice Department alleged in a new sentencing memo that a purchasing agent at another ad agency took $125,000 in bribes from a New York print services salesman in return for contracts. The salesman, James Rattoballi of Print Technical Group in Manhattan, is set to be sentenced this week after pleading guilty in 2002 to bid rigging and mail fraud in connection with his service of Grey. Prosecutors are urging that he serve at least 37 months in prison because they say he lied to them about allegedly paying bribes to the other ad agency, which the feds declined to name. (Rattoballi's attorney did not return calls by press time.)

In addition, the memo describes—but does not name—another print services vendor that paid $96,293 in bogus consulting fees to obtain $700,000 in printing work from Grey on Brown & Williamson's Kool cigarettes campaign.

"Grey cooperated fully with the government in their investigation of the print production industry," said Grey rep Jan Sneed. "Grey has clearly been one of the victims in this matter and, in fact, several defendants including Color Wheel and [Grey evp/director of graphic services] Mitch Mosallem have been ordered to pay restitution to Grey."

Every industry has its bad apples. The total number of cases in advertising adds up to only a tiny fraction of the entire industry, and the dollar amounts involved are often insignificant compared to the size of the marketing budgets. "The reality is that the ad agency business is a huge business," said O. Burtch Drake, president and CEO of the American Association of Advertising Agencies. "It runs billions and billions of dollars through its books and I would say 99% of the time flawlessly."

The problem, however, is that although corruption may be statistically rare, it is still attracting the attention of the federal government.

Since April, Brandweek, a sister publication of Adweek, has taken a closer look at corruption cases in the marketing services business. The cases reveal tales of greed and excessive spending by vendors, often in the name of winning and pleasing clients. They serve as a warning about ethics problems among clients, agencies and their vendors. This week we examine new information surrounding the handling of the AT&T Wireless account by Foote, Cone & Belding in San Francisco and its print houses from 1998 to 2001. Next week, we will report on new information in the Grey/Color Wheel fiasco and its repercussions on the advertising industry.

Leading the Charge

The lead prosecutor behind dozens of the recent cases is Rebecca Meiklejohn, a Department of Justice trial attorney in the Antitrust Division. (The Antitrust Division monitors anti-competitive practices such as bid-rigging, which is common in these cases, hence its interest here.)

Meiklejohn, 54, and her colleagues—Douglas Tween and Elizabeth Prewitt—brought 22 of the recent cases stemming from the Grey/Color Wheel business.

This summer, Meiklejohn's team won the U.S. Attorney General's Award for Distinguished Service for their efforts on Color Wheel. It is the highest honor a federal prosecutor can receive from the Justice Department without being killed in the line of duty, according to Tween. The Justice Department described Meiklejohn's work as some of the "most significant" in recent years.

In particular, the 70-month sentence meted out to Grey's Mosallem was one of the longest issued in an Antitrust Division investigation, the department said. It is unusual for white-collar criminals to go to prison in antitrust cases, said Tween. Yet as a result of Color Wheel, three executives are currently serving a total of 10 years. Previously, "there's never been sentences like that in the advertising industry," he said.

Meiklejohn—who revealed in court this summer that she has used informants wearing hidden microphones to capture agency execs taking kickbacks—says her probe is ongoing. "We get complaints from co-workers," she said. "We get complaints from competitors. We get complaints from customers. We get complaints from vendors."

She declined to talk at any length for this article, citing Justice Department rules, but in court Meiklejohn talks twice as much, twice as fast and twice as loudly as her colleagues, spinning out in detail her encyclopedic knowledge of advertising crookery: The Grey/Color Wheel case featured more than 200 exhibits, a cast of about 30 characters, and a dozen or so witnesses. It involved so many parallel scams running simultaneously that not even the conspirators themselves knew all of them.

Meiklejohn's success rate is high. Of the 22 recent New York cases she has secured convictions in all but one. Among the more high-profile ongoing cases in New York and elsewhere:

• The president of one major New York agency is under indictment for alleged fraud, and will take a leave of absence on Jan. 1 to prepare a defense for her trial, set to begin in February. That executive is Shona Seifert of Omnicom's TBWA\Chiat\Day, who is accused of inflating the federal government's bills on the White House's $1 billion anti-drug account when she worked at Ogilvy & Mather. She has pleaded not guilty. If convicted, she could face up to five years in prison and a hefty fine. Ogilvy has paid the government $1.8 million to settle the matter fully. That probe was conducted by the U.S. Attorney's Office.

• Robert Gugliuzza of New York marketing services agency Impact Communications has been convicted of taking $665,000 in kickbacks from vendors on Merck and Pfizer's marketing accounts. The former printing services director is set to be sentenced this fall.

• In Los Angeles, pr agency Fleishman-Hillard, another Omnicom unit, was simultaneously sued and audited this spring by the city of Los Angeles, in addition to being the subject of dueling criminal probes by the county district attorney's office and the U.S. Attorney's Office into $20 million in billings the agency won from the city. Per published reports, FH charged the city $2,400 for a two-hour lunch meeting, not including the food. "If billing irregularities are found on any account we'll reimburse the client," said FH general manager Richard Kline, who has ordered an internal probe into the matter. "We honestly don't have all the facts yet."

It is not just agencies, but clients too.

• At HBO, director of print services Michele Nicosia Komack was sentenced in May to five years' probation and three years' electronic monitoring and house arrest for skimming $439,223 in kickbacks off $18 million that HBO spent on print ads. Some of that went to pay for her $28,000 wedding at the Plaza Hotel in Manhattan, according to the indictment.

• And at Salomon Smith Barney, graphics department manager Maria Shaw was indicted in April for allegedly taking a $100,000 bribe from a print vendor. She has pled not guilty and is awaiting trial.

"For every one that winds up in the courts, there's probably three or four or five that get quietly handled," said Al Stauderman, a former Procter & Gamble brand manager whose consultancy, Bird Bonette Stauderman in Westport, Conn., checks agencies' bills for wary clients.

A Graft Culture

While dozens of client, agency and vendor executives have been questioned in the course of Brandweek's investigation into ethically questionable practices, most declined to comment publicly. But many admitted that the so-called "graft culture" has escalated the costs of doing business.

For example: A Coca-Cola executive, talking about dubious billing schemes used by the company's hundreds of vendors, said, "It happens every single day." He cited exaggerated insurance premiums, staffing inflation, and strange fees for couriers and other routine services. A minor but telling example: Coke once received a stamp bill for 39 cents, the executive said. The stamp cost 37 cents, and the vendor had added 2 cents for "labor." A second Coke executive confirmed that the company often encounters vendors who, upon sensing interest from the $260 million client, simply jack up their prices in the hope that the company is too big to care.

Overall, clients have been silent on the issue—though some have hired outside consultants to keep down costs or to ensure billing accuracy. Nancy Carr, Kodak's director/vp of worldwide advertising, is among those who believe agency billing is not corrupt but could be more accurate. "It's not a matter of cheating, it's a matter of sloppy," she said.

From time to time, the subject of ethics has also been raised as a concern on industry surveys, but no one, it appears, wants to talk much about it. Some agency buyers say that reluctance hurts only the clients themselves. They say clients are generally aware of how their money is spent, but that they are so busy (or big, or bureaucratic, or incompetent) that a little monkey business falls off the priority list.

"I think part of it is the client not being on top of what's going on around them," said an agency buyer who crossed over to the print sales side. "It's not the client's fault. I'm just saying they probably could have been a little bit more proactive with what's going on in their company."

The Coke executive agreed. Sales and market share are a marketer's top priorities, and everything else is details, he said. "I've grown numb to it," he added. "These guys are going to rip us off and it's part of the game . . . they all do it."

The notion that clients are too busy or too accepting of graft is common. A former buyer for Sun Microsystems who placed $4 million in print work each year says he was the subject of "blatant offers of bribes in return for promises of business."

"It was certainly made very, very clear to me that for favorable treatment of a particular printer . . . I would be treated favorably in return," he said. He never took those offers, he said. When asked why nothing was ever done about the stream of gratuities—prostitutes, weekends in Mexico, even cocaine—that washed around him, the client said, "It's a necessary evil."

Not all clients are complacent.

One buyer at a New York fashion house was offered a weekend trip to California but turned it down and fired the printer, he told Brandweek. "I think there's definitely been an improvement in the [ethical] atmosphere but it hasn't made it through to all the people who've been doing this for years," he said.

Prosecutor Meiklejohn said that clients are often in the dark, and as long as they stay there, their marketing services vendors tend not to feel as if they are breaking the law.

"People often think the worst that can happen to them is that they can be ordered to pay their back taxes, or they might lose their jobs, but I don't think they think of themselves as criminals who are actually going to be behind bars," she said.

The investigations detailed here and next week should serve as a fair warning to clients, agencies and their vendors: It's time to pay attention.