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Price-fixer to the world

Archer Daniels Midland (NYSE: ADM) used to be known as, "The supermarket to the world," thanks to its ads on political talk shows. But after an FBI investigation in the 1990s, ADM pleaded guilty to fixing international prices on citric acid and lysine, paid a $100 million fine, and saw three of its top executives convicted and sent to prison.

The scandal devastated a politically influential company that had long been viewed as a success story. Founded a century ago to make linseed oil as Archer Daniels Linseed (it acquired Midland Linseed in 1923 to become ADM), the company began to lag in the 1960s. ADM offered the Andreas brothers, Lowell and Dwayne, 6 percent of the company to come in and revitalize it. The company's financial picture quickly turned around, and the Andreas family and its trusted friends -- including president James Randall -- have dominated ADM's executive ranks and its board of directors since then.

Much of ADM's profitability came from its former chairman and CEO, Dwayne Andreas, who was legendary for his political contacts. Contacts that proved crucial as ADM became the world's largest recipient of corporate welfare. With the help of a high cane-sugar tariff and support that costs the government $1.5 billion a year and consumers $3 billion annually (to protect the $3 billion high-fructose corn syrup market that ADM dominates), and the heavily subsidized and protected ethanol business (another ADM specialty), Dwayne's empire grew.

As did his political influence.

Hubert Humphrey was godfather to Dwayne's son Mick, and despite a lousy golf game, Humphrey regularly managed to beat Dwayne -- an excellent golfer -- during rounds in which they bet $100 a hole. Dwayne also had less subtle ways of giving money to politicians. He left $100,000 in cash for Nixon during a 1972 visit to the White House and also gave $1 million to the Nixon library. He bought Jimmy Carter's peanut farm for $1.5 million and organized House Speaker Tip O'Neill's retirement dinner.

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Over time, the political donations grew. From 1995 to 1999, ADM gave $1.35 million in soft money to both parties, and its PAC gave over $700,000 from 1993 to 1999 directly to Congressional candidates.

ADM also was adept at protecting itself from media inquiries and political opposition through its sponsorship of news programs. From January 1994 to April 1995, ADM spent $4.7 million on NBC's "Meet the Press," $4.3 million on CBS's "Face the Nation," and $6.8 million on PBS's "MacNeil/Lehrer Newshour." It also was the primary sponsor of ABC's "This Week with David Brinkley."

But the PR machine and price-fixing schemes fell apart thanks to Mark Whitacre, president of the ADM Bioproducts division. When Whitacre blamed problems with the company's new lysine plant on industrial sabotage -- inventing Japanese extortion threats in the process -- the FBI was called in, and then just as quickly kept at bay for fear the group would uncover instances of price-fixing. While the company realized Whitacre had invented the threats, he was too valuable as a knowledgeable insider to be fired.

What ADM didn't realize was that Whitacre had admitted inventing the threats to the FBI and had agreed to cooperate with them. Over the next several years, Whitacre would make tapes of ADM price-fixing meetings.

ADM had been tainted by allegations of price-fixing before. In 1965, it paid fines for helping to fix the price of bakery flour. In 1976, the company pleaded no contest to charges of short-weighting and false grading of grain exports. In 1978, ADM was convicted of conspiring to fix Food for Peace program prices. In 1994, ADM paid $1.5 million to end a lawsuit over price rigging in the liquid carbon dioxide market. In 1998, ADM paid nearly $70,000 to settle a sodium gluconate (MSG) price-fixing lawsuit.

ADM's main defense was that its competitors were already fixing prices when it entered each market. However, Whitacre's tapes showed that ADM took the lead in price-fixing and even added a new twist: allocating sales volume among its conspirators. At a 1992 meeting, when lysine was under 80 cents per pound, ADM Corn Processing Division President Terry Wilson proposed "friendly competition" to raise the price to 80 cents, then 95 cents, then $1.05 and then $1.20.

As Wilson told the other lysine makers in a secret meeting recorded by Whitacre, "You're my friend. I want to be closer to you than I am to any customer 'cause you can make us money." ADM president James Randall told the group, "We have a saying here in this company that penetrates the whole company. It's a saying that our competitors are our friends. Our customers are the enemy."

ADM officials see their company as a victim of government persecution. However, James B. Lieber's book, "Rats in the Grain: The Dirty Tricks and Trials of Archer Daniels Midland," (Four Walls Eight Windows, 2000), raises questions about the government's failure to pursue the case against ADM completely. Far from treating ADM unfairly, Lieber finds the government did not pursue some of its most damaging evidence, such as Whitacre's claim that the company accepted embezzlement by its top executives or the strong evidence that ADM fixed prices in the corn-syrup industry.

Wall Street also seemingly let the company off easy, rewarding the news of ADM's fine with a 1 1/8 rise in its stock price, leading to an all-time high of $21.75. However, ADM stock began to fall soon after as investors realized just how much of its business depended on government largesse and price-fixing. As Dwayne Andreas told a Senate committee in defending the Export Enhancement Program -- which gave $130 million to ADM between 1985 and 1995 -- "When it comes to agriculture there is no such thing as a free market." In 1999, ADM set aside $269 million to deal with its fines and lawsuits--$4 million more than its most recent net earnings. After the 1999 sentencing of top ADM executives, ADM's stock slipped below $13. ADM settled a citric acid price-fixing lawsuit for $35 million and paid $30 million to shareholders for its falling stock price.

Price-fixing at ADM was part of the corporate culture shared by the entire upper management, not simply Wilson and Mick Andreas, who were left unprotected by the plea agreement and ended up receiving two-year prison sentences. The government was more concerned with getting a guilty plea and a successful case rather than prosecuting ADM for all of its crimes. Whitacre, the informant who revealed the scheme, ended up with the harshest punishment: He was sentenced to more than 10 years in prison, most of it due to a fraud conviction for embezzling $2.5 million from ADM.

ADM has cost consumers and farmers billions through government subsidies and price-fixing. And it's quite likely that in spite of the record $100 million fine and the embarrassment to the company, ADM still made a healthy profit from price-fixing. ADM's current problem is that its guilty plea included an agreement to allow monitoring to ensure the company does not continue to fix prices for its products. However, with government subsidies continuing to prop up its dominance in ethanol and corn syrup, ADM may be able to survive its scandals. The question is whether ADM can ever again make a healthy profit without cheating its customers.

-- Posted: Dec. 21, 2000

 
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