Tomato bribery probe just the beginning, prosecutors say

To his friends, Randall Lee Rahal was just a food salesman, someone who routinely left his home on Shadyside Road in Ramsey, N.J., to crisscross the country hawking California tomatoes.

The 61-year-old sold them pureed. He sold them crushed. He sold them roasted and mashed into paste. His clients were food manufacturers, supermarket chains and other commercial buyers who turned his products into soup, ketchup and salsa.

But in the eyes of the Justice Department, Rahal was Tomato Enemy No. 1 -- a produce scofflaw who allegedly peeled off $100 bills and carried cash-stuffed envelopes to bribe buyers from leading food companies in a decade-long racketeering scheme that may have led to higher prices for consumers at the grocery store.

In a series of court filings starting in 2008, federal prosecutors in Sacramento allege that Rahal, nine others and SK Foods of Monterey, Calif., used more than $330,000 in bribes from 1998 to 2008 to subvert competition and nail down deals to sell the company’s tomato paste, peppers and other products to Kraft Foods Inc., Safeway Inc., Frito-Lay North America and B&G Foods, among others.

All but one of the individuals have pleaded guilty to offenses typically associated with organized crime: racketeering, collusion, bribery, money laundering and bid-rigging. Five of the people worked for SK Foods; four were employed by its customers. SK Foods’ sales plummeted as the case unfolded and it was sold out of Bankruptcy Court last year to a Singapore firm.

Rahal -- who pleaded guilty to racketeering, money laundering and conspiring to eliminate competition -- faces up to 20 years in prison at his scheduled sentencing in May. Neither Rahal, who was a sales broker and a director of the company, nor his attorney could be reached for comment.

Federal prosecutors, however, say the investigation into SK Foods is just the beginning as the government ramps up its scrutiny of the food sector.

Behind the push are growing concerns that, as the industry becomes increasingly consolidated, the public’s grocery bills are getting bigger in part from corrupt or monopolistic practices among food processors, distributors or farmers.

Step into a grocery store these days and on almost every aisle there’s an item tied to a federal investigation: dairy distributors, egg producers, citrus firms and seed developers are all the targets of federal lawsuits or investigations. Starting next month, the Justice Department and the U.S. Department of Agriculture will hold meetings to gather complaints and hear concerns over lack of competition in the dairy, grain, livestock and poultry sectors.

“Agriculture will be a priority of mine,” Christine Varney, who leads the Obama administration’s antitrust team at the Justice Department, said during her congressional confirmation hearings last year.

The government’s latest move came last week, when FBI agents arrested the former owner and chief executive of SK Foods, Frederick Scott Salyer, as he stepped off a flight from London at New York’s John F. Kennedy International Airport.

U.S. Magistrate Judge Steven Gold denied Salyer bail at a court appearance in Brooklyn on Friday. Salyer, 54, did not enter a plea.

Salyer is charged with 20 counts of mail fraud and wire fraud as part of the alleged scheme to dominate the market for tomato paste and other processed vegetables, and overcharging for food products that, while safe for consumption, sometimes fell short of Food and Drug Administration and U.S. Department of Agriculture standards.

Now detained in New York, Salyer is expected to be transferred in the coming weeks to Sacramento, where he will face a preliminary hearing to enter his plea.

“The charges are unfounded,” said Malcolm Segal, Salyer’s defense attorney. Segal said his client has been living in France and works as an agricultural consultant. Salyer was returning to the U.S. to wrap up some business dealings and has been cooperating with investigators, Segal said.

But federal investigators said in the complaint thatSalyer has spent months trying to shelter millions of dollars from his tomato and farming empire in the Caribbean and Liechtenstein banks, and was weighing whether to flee to South America or elsewhere where he could avoid extradition.

“This would have to be the biggest case involving fraud within the agriculture industry that we’ve had in many years,” said Benjamin B. Wagner, the U.S. attorney in Sacramento. His office along with the Justice Department antitrust unit in San Francisco are spearheading the case.

Nearly 95% of all tomatoes grown in the U.S. are processed by four companies in California. SK Foods, with its two Central Valley plants, was one of these tomato giants. The company bought much of its produce from farmers in the state, as well as from a vegetable growing and shipping firm controlled by Salyer.

The SK Foods investigation started with a Justice Department probe of California’s overall tomato industry in 2007. What they uncovered at SK Foods, investigators said in court filings, was a scheme designed to trick food makers into buying a lesser-quality tomato paste (which had been mislabeled to appear of a higher grade) and then shut out rivals on deals with big processors and supermarket chains. In the end, prosecutors say, the conspirators were able to sell the paste at a markup of 30% or more.

For the plan to work, SK Foods officials bribed some of their customers’ employees to take the orders and look the other way, according to court documents. The insiders allegedly leaked proprietary information to SK about rival bids and then made sure their companies bought SK’s products.

Some of the kickbacks were paid in cash or checks, handed off at a rural diner in one instance and at a secret meeting outside a Bay Area transit station in another, the complaint alleges. Others were less direct, such as offering to pay for medical insurance for a buyer’s child, prosecutors say.

FBI officials recorded several calls between Salyer and Rahal, then a broker for the company. Time and again the pair talked about paying off food insiders, according to a sworn FBI declaration.

“Crooks are handy on the inside,” Salyer said in one call, according to the declaration.

In another, Rahal said a purchasing manager at one large food company “was going to need a retirement program” as an inducement to take part in the scheme, according to the declaration.

Salyer asked, “How fast are you going to reel in that fish?”

Company officials allegedly shrugged off warnings about being caught, even when one of their contacts included a remark that the quality of SK Foods’ tomato paste was getting too poor to ignore.

“We pack garbage for them anyway and they always take it, but we’ve hit new lows,” said Rahal, according to the declaration.

Several of SK Foods’ former customers said they have not analyzed if, or how much, the corrupt practices translated into higher prices at grocery stores.

But Wagner said food companies weren’t the only ones paying more.

“I have no doubt that there was some excess cost to the consumer” as a result of the criminal activity at SK Foods, Wagner said.