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Price-fixer
to the world
John K. Wilson
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.
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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