Settlement Signed

8/4/2019 Settlement Signed

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OFFICE OF THE ATTORNEY GENERALOF THE STATE OF NEW YORK AOD # 11-015IN THE MATTER OF AN INVESTIGATION BY ATTORNEYGENERAL ERIC T. SCHNEIDERMANOF CERTAINPRACTICES IN THE FOOD SERVICE AND FACILITIESMANAGEMENT INDUSTRY.

REPORT, FINDINGS, AND SETTLEMENTAGREEMENTI. Office of the Attorney General's Report and FindingsI. This Report arises out ofAttorney General Eric T. Schneiderman's industry

wide investigation of rebating practices in the food service and facilitiesmanagement industry pursuant to the provisions of Executive Law section63(12), Article 22-A of the General Business Law, and New York's FalseClaims Act (State Finance Law sections 187 through 194) (the "OAGInvestigation").

2. The Whitsons family ofcompanies is based in Islandia, New York, and jointlyhas over $98 million in annual revenue. The group includes, among othercompanies, Whitsons Food Service Corp., Whitsons Food Service (Bronx)Corp., Whitsons School Nutrition Corp., Whitsons Ind. Food Corp., WhitsonsResource Management Corp., Whitsons Food Corp., and Whitsons NewEngland Inc. (collectively, "Whitsons" or "the Company"). Two of those NewYork entities, Whitsons Food Service Corp. andWhitsons School NutritionCorp., are food service management companies (commonly known in theindustry as "FSMC's") that provide food management services to educationalinstitutions in New York.

3. The Office of the Attorney General ("OAG") investigated Whitsons's schoollunch business! in various New York elementary, middle, and high schools

1 Whitsons has other business lines, including corporate, residential, and healthcare dining, catering, and vending.


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provided pursuant to contracts Whitsons entered with such schools an dschool districts (the "school clients") for th e period of January 1, 2002 throughth e date of execution ofthis agreement (the "Relevant Period").

4. During th e course of GAG's Investigation, Whitsons fully cooperated with th eGAG, by, among other things, responding to GAG subpoenas an d producingWhitsons's executives an d members of it s outside accounting firm forinterviews. Whitsons also participated in debriefing sessions th ro u gh its in-house and outside counsel.

5. The GAG's Investigation found that Whitsons entered into form contractswith th e school clients whereby Whitsons assumed operational responsibilityfor the preparation an d service of school meals at various Kindergardtenthrough-twelth-grade schools in New York.

6. The contracts entered into by Whitsons ar e in a form mandated by New Yorkregulations. Pursuant to such regulations, t he c as h value o f a ny rebatesreceived by th e food service management company ("FSMC") from it s foodvendors an d distributors must be passed through to th e school clients, an dfurther, th e FSMC is required to identify clearly th e value of rebates onoperating statements provided to th e school clients.

7. Under its contracts w it h t he schools clients for th e provision of food services,an d pursuant to regulations, Whitsons was permitted to bill the school clientsonly for th e actual cost of th e food acquired, ne t of all discounts or rebates.Whitsons wa s only permitted to earn a fixed fee for it s services in preparingan d serving th e food.

8. The GAG Investigation determined t ha t, i n some instances, Whitsons did no tpass th e cash value of rebates it received on to th e school clients as requiredby such contracts an d by regulations.

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9. Th e OAG Investigation further determined t hat the operating statementssubmitted by Whitsons to certain school c lie nts d id not, in some instances,fully reflect the cash value of rebates Whitsons received, or otherwise ma yhave included impermissible charges.

10. In addition, th e OAG Investigation determined t hat W h its on s h a d, b e gin nin gin th e 2009-10 school year, entered i nt o n ew arrangements with somevendors. Under these ne w arrangements, Whitsons would receive funds fromvendors in exchange for "marketing services," which according to th e"marketing agreements" could include various programs related to th evendors' products.

11. OAG reviewed th e "marketing agreements" a nd t he m ar ke ti ng materialsgenerated by Whitsons under those agreements. OAG determined t hat th efunds Whitsons received under th e "marketing agreements" d id n ot c or re la teto whatever services Whitsons performed for th e vendors.

12. In some instances, Whitsons failed to produce to OAG any documentationrelating to particular "marketing" arrangements. In other instances, OAGdetermined that t he a mo un t of money paid to Whitsons by a vendor exceededth e fair market value of services performed by Whitsons for that vendor. Inother instances, different vendors paid Whitsons significantly differentamounts for substantially similar services. OAG determined t hat th e fundsreceived by Whitsons under it s vendor "marketing agreements" wer e a c tu a llyrebate funds , some ofw hi ch s ho ul d h av e been passed through to or allocatedto Whitsons' school clients.

13. As a result oft he conduct described in th e foregoing paragraphs, Whitsonscharged some school clients more than permitted for their food and supplies.Th e OAG Investigation determined t hat Whitsons improperly failed to creditthirty New York school clients with more than $807,343.50 in rebates.

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14. In furtherance of the OAG Investigation, Whitsons, with the assistance of it soutside counsel and outside accountants, and at its own expense, conducted areview of it s services to its school clients in New York that received foodservice from Whitsons to determine whether the school clients wereappropriately credited for vendor rebates received by Whitsons during theRelevant Period (the "Review"). Pursuant to this Review, Whitsonssubmitted data, information and documents to the OAG between October2010 and August 2011 (the "Whitsons Submissions").

15. Based on the Review and the Whitsons Submissions, the OAG determinedthat Whitsons failed to properly account for and credit $807,343.50 for thefollowing school clients (the "Listed Schools"):

Abbott HouseBlind Brook Public SchoolsBriarcliffManor School DistrictBridgehampton Union Free School DistrictEast Hampton Union Free School DistrictEast Quogue School DistrictGood Shepherd ServicesGraham WindhamHarrison Central School DistrictHicksville Public School DistrictHuntington Union Free School DistrictJewish Child Care AssociationKings Park Central School DistrictLeake & Watts Services, Inc. - Woodfield CottageMamaroneck Union Free School DistrictMercyFirstMill Neck Family of OrganizationsMount Vernon City School DistrictOssining Union Free School DistrictPearl River Union Free School DistrictPeekskill City School DistrictPlainview-Old Bethpage School DistrictPleasantville Union Free School DistrictPort Chester-Rye Union Free School DistrictSCO Family of Services -Madonna Heights

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SCO Family of Services - The Robert J. McMahonChildren's CenterSouth Country Central School DistrictSyosset Central School DistrictUnion Free School District of the TarrytownsWallkill Central School District

n. Terms and Conditions16. The Settlement Agreement ("Agreement") is entered into by the State of New

York, acting through OAG (the "State"), and Whitsons. The State andWhitsons shall be referred to collectively as the "Parties."

17. Whitsons does not admit or deny the OAG's Report and Findings as set forthin this Agreement.

18. The State contends that it has certain civil claims against Whitsons underthe New York State False Claims Act (N.Y. State Fin. Law 189 et fg.),other New York statutes and the common law for the following "CoveredConduct":

a. During the Relevant Period, Whitsons failed, in some instances,to pass off-invoice rebates through to the Listed Schools, asrequired by Whitsons's contracts and by New York regulations;and

b. During the Relevant Period, Whitsons submitted, in someinstances, operating statements and other documentation thatfailed to disclose the cash value of vendor rebates Whitsonsreceived on food supplies provided to the Listed Schools.

19. To avoid the delay, uncertainty, inconvenience, and expense of protractedlitigation and continued investigation relating to the OAG Investigation, theParties desire a final negotiated settlement and compromise of their disputes,as more fully set forth herein.

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20. The Parties have determined and hereby agree that settlement is in each oftheir best interests and the GAG has agreed to accept the terms of thisAgreement and discontinue the GAG investigation ofWhitsons as describedherein.

III. Payment and Compliance Terms21. To resolve New York's claim for the Covered Conduct specified above,

Whitsons shall pay to the State of New York the sum of one million sixhundred fourteen thousand six hundred eighty-seven dollars ($1,614,687.00)within twenty (20) days of the full execution of this Settlement Agreement.Such payment will be made by electronic funds transfer pursuant to writteninstructions to be provided by the State ofNew York.

22. Whitsons further agrees that from and after the date of the execution of thisAgreement, it will allocate to its school clients any fees received for"marketing services" pursuant to "marketing agreements."

IV. Disclosure23. Within two weeks of execution of this Agreement, and quaterly thereafter for

the term of the engagement of the independent consultant (as provided inSchedule C), Whitsons shall i ssue a letter in the form set forth as Schedule Ato al l New York elementary school, high school, and other National SchoolLunch Program participants.

24. Whitsons's Corporate Board Members shall execute a certification, in theform annexed hereto at Schedule B, as to the veracity of the informationprovided by Whitsons to GAG.

V. Independent Consultant25. As part of this Agreement, Whitsons shall engage an "Independent

Consultant," upon the terms set forth in Schedule C, which shall examine

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Whitsons's pass-through of rebates to New York State school clients. Theengagement of the Independent Consultant shall be for and correspond tothree consecutive 12 month periods, starting with the date that commencesthe firs t day of the calendar month following the date of the execution of thisSettlement Agreement.

26. The engagement of the Independent Consultant will terminate after twoyears if Whitsons establishes to the satisfaction ofthe OAG, as evidenced bywritten acknowledgement: (1) Whitsons receives during the first two years ofthe engagement aggregate rebates of less than $50,000 for the first year and$20,000 for the second year on school purchases (as verified by theIndependent Consultant); and (2) the Independent Consultant verifies thatsuch rebates were properly allocated to the appropriate schools in each year.

27. Whitsons's obligations and representations concerning the IndependentConsultant are explicit conditions precedent to the administrativeforbearances and relief granted by the State herein, and, in the eventWhitsons violates such conditions, the State will be relieved of the obligationsse t forth herein as to Whitsons, and may pursue al l remedies otherwiseavailable under the law. Notwithstanding such violations and action by theState, Whitsons obligations hereunder will remain in full force and effect.

VI. Releases28. In consideration of the obligations incurred by Whitsons herein, the State

agrees to release Whitsons, including all current and former officers,directors and employees (collectively, the "Whitsons Releasees") from anycivil claim arising from the Covered Conduct that the State has or may haveagainst the Whitsons Releasees under the New York False Claims Act,Executive Law 63(12), or any other New York statute, or common law,under any theory in law or equity, including but not limited to equitabletheories ofpayment by mistake, disgorgement, unjust enrichment, breach of

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contract, or fraud.29. Whitsons releases OAG, as well as all other New York State governmental

entities, agencies, employees, attorneys, servants, and agents ("New YorkRelease Parties") from any claims (including attorney's fees, costs, andexpenses of every kind and however denominated) that Whitsons hasasserted, or could have asser ted, or may asser t in the future against any ofthe above related to the Covered Conduct. Should, however, a New YorkState governmental entity, including without limitation a New York school orschool district, bring an action against Whitsons, then this release will benull and void to the extent of allowing Whitsons to raise any availabledefenses or counter-claims in such action.

VII. Miscellaneous30. All correspondence related to this Agreement must reference the above

caption and reference number 11-015.31. The State has agreed to the terms of this Agreement based on, among other

things, the representations made to OAG by Whitsons and its counsel andOAG's own factual investigation as set forth in the Findings above. To theextent that any material representations are later found to be inaccurate ormisleading, this Agreement is voidable by OAG in its sole discret ion. Norepresentation, inducement, promise, understanding, condition, or warrantynot se t forth in this Agreement has beenmade to or relied upon by Whitsonsin agreeing to this Agreement. Whitsons represents that this Agreement isfreely and voluntarily entered into without any degree of duress orcompulsionwhatsoever.

32. Whitsons represents and warrants, through the signatures below, that theterms and conditions of this Agreement are duly approved, and execution ofthis Agreement is duly authorized. Whitsons shall not t ake any action or

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make any statement denying, directly or indirectly, the propriety of thisAgreement or expressing the view that this Agreement is without factualbasis. Nothing in this paragraph affects Whitsons's (i) testimonialobligations or (ii) right to take legal or factual positions in defense oflitigation or other legal proceedings to which the State is not a party.

33. This Agreement is not intended for use by any third-party in any otherproceeding and is not intended, and should not be construed, as an admissionof liability by Whitsons.

34. For purposes of construction, this Agreement shall be deemed to have beendrafted by al l Parties to this Agreement and shall not, therefore, be construedagainst any Party for that reason in any subsequent dispute.

35. The individuals signing this Agreement on behalf of Whitsons represent andwarrant that they are authorized by Whitsons to execute this Agreement.The State of New York signatories represent that they are signing thisAgreement in their official capacities and that they are authorized to executethis Agreement.

36. This Agreement may not be amended except by an instrument in writingsigned on behalf of all the Parties to this Agreement.

37. This Agreement shall be binding on and inure to the benefit of the Parties tothis Agreement and their respective successors and assigns, provided that noparty, other than OAG, may assign, delegate, or otherwise transfer any of it srights or obligations under this Agreement without the prior written consentofOAG.

38. In the event that anyone or more of the provisions contained in thisAgreement shall for any reason be held to be invalid, illegal, or unenforceablein any respect, in the sole discretion of OAG such invalidity, illegality, or

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unenforceability shall not affect any other provision of this Agreement.39. All communications from any party concerning the subject matter ofthis

Agreement can be addressed as follows:Counsel for WhitsonsAndrew E. BlusteinSteven J. ChananieGarfunkel Wild, P.C.111 Great Neck RoadGreat Neck, NY 11021of Counsel for New YorkJohn F. CarrollDeputy Bureau Chief, Taxpayer Protection BureauOffice of the Attorney General of the State of New York120 Broadway, New York, New York 10271

40. Acceptance of this Agreement by OAG shall not be deemed or construed as anapproval by OAG of any of the practices or procedures referenced herein, andWhitsons shall make no representation to the contrary.

41. I f a court ofcompetent jurisdiction finally determines after all applicableappeals have been exhausted, that Whitsons has breached this Agreement,Whitsons shall pay to OAG the cost, if any, of such determination and ofenforcing this Agreement, including, without limitation, legal fees, expenses,and court costs.

42. This Agreement shall be governed by the laws of the State of New Yorkwithout regard to any conflict of laws principles. The Parties agree that theexclusive jurisdiction and venue for any dispute arising between and amongthe Parties under this Agreement will be the Supreme Court of the State ofNew York, New York County.

43. This Agreement is effective on the date of signature of the last signatory tothe Agreement ("Effective Date of this Agreement"). Facsimiles of signatures

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shall constitute acceptable, binding signatures for purposes of thisAgreement.

44. Mter the conclusion of the OAG Investigation into Certain Practices in theFood Service and FacilitiesManagement Industry, the OAG will return tocounsel for Whitsons, or destroy, all Whitsons documents concerning theOAG Investigation, including reports, documents and data producedelectronically, and provide a certification of said destruction, at Whitsons'sexpense, unless inconsistent with the State's Freedom of Information Law(NYS Public Officer's Law, Art. 6, 8490).

45. Whitsons shall retain for a per iod of one year from the date of execution ofthe Agreement a se t of all produced documents in electronic mediaconforming to OAG's Concordance load format, to be provided to OAG withinfive (5) business days of receiving written notice from OAG should OAGrequire the documents for investigative purposes, to be determined in OAG'ssole discretion.

46. This Agreement may be executed in counterparts, each of which constitutesan original and al l of which constitutes one and the same agreement.

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IN WITNESS WHEREOF, this Agreement is executed by th e parties hereto.ERIC T. SCHNEIDERMAN. ATTORNEY GENERALOF THE STATE OF NEW YORK

Dated:Oet.1 ,2.' 11 B Y : ~ f \ v . . + . C ~Joh F. CarrollDeputy Bureau ChiefTaxpayer Protection Bureau

On behalf ofWhitson's Food Service Corp.,Whitsons Food Service (Bronx) Corp., WhitsonsSchool Nutrition Corp., Whitsons Ind. Food Corp.,Whitsons Resource Management Corp., WhitsonsFood Corp., and Whitsons New England Inc.:

NameTitleCompany

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Schedule AModel Client Disclosure Concerning Rebates

[On Whitson's Letterhead]Dear [Client Contact]:The New York Office of the Attorney General (OAG) is conducting an investigationinto the food service and facilities management industry and its practice ofobtaining rebates from vendors. Whitsons cooperated with the investigation, andOAG has completed it s examination ofWhitsons's conduct in this arena.

Since the investigation with respect to Whitsons is now complete, we take thisopportunity to discuss and explain supplier rebates and their role in Whitsons'sbusiness. Food service management companies ("FSMC's") like Whitsons receiverebate payments from vendors and suppliers from which we purchase goods on yourbehalf. These vendors and suppliers often provide FSMC's these rebates as part ofthe overall procurement arrangement they have entered into with the FSMC.We, in conjunction with OAG, have recently completed a review ofthe rebatesearned through your account to ensure that the proper amounts were credited toyou pursuant to the terms ofyour contract with Whitsons. We have retained (a t nocost to you) an independent consultant, Citrin Cooperman, to perform similarreviews of your account through 2013 to ensure that you continue to receive theappropriate rebate credits. I f you have any questions about rebates you are alsowelcome to call Citrin Cooperman at (800) _-__. You are also, as always,welcome to contact your Whitsons client representative with any questions orcomments you may have with respect to rebates or any other matter .

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Schedule BSworn Statement re: Submitted Information

The below-signed swear to the following under penalty of perjury:I. That the data and information submitted by Whitsons Food Service Corp.,Whitsons Food Service (Bronx) Corp., Whitsons School Nutrition Corp., Whitsons Ind.Food Corp., Whitsons Resource Management Corp., Whitsons Food Corp., and WhitsonsNew England Inc. (collectively, "Whitsons") to the Office of the Attorney General("OAG") between October 2010 and August 201 I (the "Whitsons Submissions"), ismaterially accurate, and2. That Whitsons did not fail to pass through vendor rebates to any educationalentity in New York State, other than as set forth in the Whitsons Submissions.

MARY PARISINOTARY PUBLlCSTATE OF NEW YORK

No. 01PA6174214QuaJIII.ci In SUffOlk County

My Commlulon Explr September 17. 201 t

Sworn to before me on

?/a,/flN J c A ~eth BunsterChief Financial Officer, DirectorDated:

Dated: 7PJfil ~ ~ ~ ~ ~ ~ ~DouglPresid

IN WITNESS WHEREOF, this Statement issworn to by the individuals listed below.

Dated: 1M- ~ A n d ~ WI1itCOIl1bDirector

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w.tre me on

Sworn to before me onqjql/tl . MARY PARISINOTARY PUBLlCSTATE OF/J.;.; NO.01PA61742Qualified In Suffolk

C : N ~ - " " 1 h C : : l ' " - ~ - - - i M o h j ....e ~ O I " " h i h l . .ton Expire. Septemry IC .

">

Robert WhitcombChairman and CEO, Director

;tl.i/d_.a ~ c o m bExecutive Vice President, Director

Michael WhitcombVice President, Director

U J C u f u j ~William Whitco;;tDirector

#4iiiibChief Operating Officer, Director

Dated:


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Schedule CIndependent Consultant Terms

This document sets forth the terms of the agreement by which Whitsons FoodService Corp., Whitsons Food Service (Bronx) Corp., Whitsons School NutritionCorp., Whitsons Ind. Food Corp., Whitsons Resource Management Corp., WhitsonsFood Corp., and Whitsons New England Inc. (collectively, "Whitsons"), agree toengage the Independent Consultant ("IC") referred to in the Settlement Agreementabove.1. This document, together with the the Settlement Agreement, constitutes the

entirety of the understanding between the Office of the Attorney General ofthe State of New York ("OAG") and Whitsons concerning the IC.

2. Whitsons and OAG have selected Citrin Cooperman, to serve as IC to conductan examination and to report on Whitsons's rebating procedures for a per iodof three consecutive 12 month periods, starting with the date that commencesthe first day of the calendar month following the date of the execution of thisSettlement Agreement.

3. Whitsons hereby agrees to budget $20,000 per year for the duration of theengagement of the IC.

4. Whitsons and the IC shall enter into an Agreement whereby the IC monitorsand reports on Whitsons's pass through ofRebates, as that term is definedbelow in paragraph 5, to all of it s New York clients that participate in theNational Scool Lunch Program ("Clients"). The Agreement is subject to finalapproval by OAG and shall include the following terms:

a. Whitsons and the IC shall confer and agree upon a Summary ofProcedures that the IC will implement to determine whetherWhitsons is properly crediting Rebates to it s Clients and the

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amount of any such Rebates. This Summary of Procedures shallbe incorported into Whitsons's Agreement with the IC.

b. IC shall meet and confer with Whitsons to consider creation of aPolicy & Procedure concerning Rebates in connection withWhitsons's Clients.

c. IC shall establish a toll-free 800 number available to Clients forthe purpose of responding to questions concerning rebates.

d. IC shall issue annual reports on all of the above-specifiedactivities to OAG and Whitsons.

e. IC shall, upon request of OAG, provide OAG with informationand/or reports related to all of the above-specified activities.

5. The term "Rebates" means money or other thing of value paid to Whitsons bya vendor, manufacturer, producer, or distributor, either directly or indirectlyconcerning the purchase of products or services by Whitsons for New Yorkschools. Rebates include, but are not limited to cash or cash equivalents,credits, concessions, marketing incentives, manufacturer's incentives,allowances, volume allowances, volume discounts, volume discountallowances, VDAs, discounts, offinvoice rebates or payments, "couponclipping" receipts, stocking fees, approved or preferred supplier allowances orpayments, volume purchase agreement fees, commissions, contingentcommissions, communication fees, award fees, RFP fees, consulting fees,preferred customer fees, preferred customer bonuses, securities, loanforgiveness, Professional Enhancement Fund (PEF) payments, PlacementService Agreement (PSA) payments, compensation for alleged servicesrendered, Market Service Agreement payments, Production Incentive BonusAgreement payments, Administrative Service Agreement payments,Additional Compensation Schedule payments, Overrides, Placement Service

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Revenue payments, or any other transfer of consideration, in whatever formand however denominated.

6. The IC shall review information that is reasonably necessary to accomplishthe purposes set forth in this document and the Settlement Agreement.Whitsons shall fully cooperate with the IC, allowing the IC unfettered accessto al l information requested to be reviewed or examined by the IC.

7. Access shall include access to employees, offices, work sites, computersystems, books and records, internal accounting and systems manuals.Satisfactory cooperation and compliance with this paragraph shall bedetermined solely by OAG.

8. If the IC reports to the OAG that Whitsons potentially has not allocatedrebates appropriately in accordance with the IC Agreement, and if Whitsonsdisagrees with that report, Whitsons will discuss the matter with OAG, andthe parties will attempt to agree on a resolution. I f the parties are unable toagree upon a resolution, then Whitsons reserves the r ight to bring an actionin a court of applicable jurisdiction requesting a judicial determinationadjudicating the IC's finding that is in dispute; provided, however, that anyresolution by the court shall not impact or affect any provision or theenforceability of the Settlement Agreement regardless of the finding by thecourt on the disputed issue.

9. In the event the IC believes that a matter involving the possible improperretention of rebates by Whitsons warrants additional inquiry that exceedsthe scope of the engagement described in this document and in theSettlement Agreement, the IC shall inform OAG, and OAG shall meet andconfer with counsel for Whitsons regarding the matter. OAG shall informcounsel for Whitsons of the general nature of the inquiry and OAG andcounsel for Whitsons shall agree on additional fees to be paid by Whitsons tothe IC.

Settlement Signed

Documents

Transcript of Settlement Signed