Thursday, July 22, 2010

Sodexo to pay New York $20 Million for School Meal Rebate Fraud

By Ed Bruske
aka The Slow Cook

Sodexo, one of the world's largest food service companies, has agreed to pay New York $20 million to settle complaints that it fraudulently pocketed rebates from food manufacturers that it was supposed to turn over to some 21 school districts and the State University of New York, New York Attorney General Andrew M. Cuomo announced yesterday.

"This company cut sweetheart deals with suppliers and then denied taxpayer-supported schools the benefits," Cuomo said in a statement. An investigation revealed that over a five-year period beginning in 2004, Sodexo "received significant rebates from the suppliers without acknowledging or passing the savings on to these schools--in violation of the contracts [between Sodexo and the schoolsl] as well as state and federal laws."

New York's investigation was sparked by two former Sodexo employees, brothers John and Jay Carciero, who were general managers for the company in Massachussetts and were "outraged when they discovered Sodexo's practice of pressuring food and beverage vendors to kick back huge rebates and then secretly pocketing the savings rather than passing them on to government clients as required by their contracts," according to a statement released by the Carciero's attorney. The clients included hospitals, universities, schools, and nursing homes.

John Carciero complained he was fired after he complained internally about Sodexo's rebate practices. Jay Carciero said he was demoted and later fired for the same reason. The brothers filed a whistleblower lawsuit against Sodexo under the federal False Claims Act in Massachussetts, and later added claims under similar state laws in New York.

The settlement was described as the largest ever under New York's false claims statute that did not involve Medicaid.

Jay Carciero has since died. John Carciero yesterday issues a statement, saying, "My brother, Jay, and I were angry when we learned that Sodexo, a mult-billion dollar company, was ripping off school lunch programs and other government food services. The millions of dollars from the rebates should have gone back to schools and other government clients. Sodexo betrayed the trust of the clients it was supposed to serve and hurt taxpayers at the same time."

Under New York state law, the Carcieros as whistleblowers are entitled to $3.5 million of the $20 million settlement. The rest is to be divided among the school districts involved.

Manufacturers commonly give rebates for purchases from large food service companies such as Sodexo, Chartwells and Aramark. Under federal law, contractors are supposed to credit those rebates as part of their invoices, so that federal agencies are paying only "net costs." Under U.S. Department of Agriculture rules governing the federally-subsidized school lunch program, school contracts with food service providers must explicitly state that all rebates will be credited to the schools. But it has been widely assumed in school food circles that the big food service vendors were not passing on to school all of the rebates they receive. The rebate issue is cloaked in a shroud of secrecy by industry players.

The investigation in New York "has revealed that it is common practice within the food service industry for service providers like Sodexo to leverage their size and market dominance to obtain these rebates from vendors that supply food products, equipment, and supplies," said Cuomo. Those rebates typically amounted to about 14 percent of Sodexo's purchases from suppliers, according to the New York Attorney General's office. Cuomo said his investigation "continues to examine the rebating practices of other large, multi-national corporate providers of food service and facilities management."

A report I recently published based on documents obtained under the Freedom of Information Act showed that D.C. Public Schools had received more than $1 million in rebates from Chartwells, its contracted food service provider, since Chartwells took over the job two years ago. The rebates help explain why children in D.C. schools are often served brand-name products of dubious nutritional value. But the rebates Chartwells declared on its invoices totaled only 5 percent of purchases, a rate some observers say is low--and certainly far less than the 14 percent cited by Cuomo in the Sodexo case.

D.C. school officials said they requested an itemized accounting from Chartwells last October of where the rebates it claimed had come from, but had only recently received it, some nine months later. They have not made it public.

At attorney for the Carcieros in Washington, D.C., Colette G. Matzzie, said in a statement, "New York is not the only state where Sodexo operates school cafeterias and accepts rebates from vendors. With so many state and local governments short on funds, we hope that other governments will look to what New York has done for its citizens and make sure that Sodexo and other food vendors pass along savings to those who are paying the bills."

As part of the settlement announced yesterday, Sodexo must:

* Disclose in future contracts with public entities that it is receiving rebates and indicate whether rebates will be retained by Sodexo or credited to the client.

* Provide written disclosure to school district clients for the next two years that it is receiving off-invoice rebates.

* Establish a hotline for clients to call with any questions concerning rebates.

* Pay for an independent auditor's review of its off-invoice rebate program for the next three years.


  1. Hooray for people who pay attention! And speak up.

  2. Here is the email our school district got from Sodexo trying to explain why they are probably screwing our district out of rebate money for know knows how many years:

    "You might hear about a situation regarding a settlement Sodexo has reached with the state of New York. As one of our valued partners, we want to provide additional information to you.

    Sodexo reached this settlement following an investigation conducted by the New York State Office of the Attorney General (NYSOAG) of companies in the foodservice industry. This includes the recent qui tam case of which you might have heard (see below for more information). Sodexo cooperated fully with the NYSOAG’s office on the investigation, including voluntarily funding our own parallel internal investigation, and providing those findings to the NYSOAG.

    One of the issues raised in this situation is as follows: Sodexo’s own internal investigation showed that, for historical reasons, Sodexo inadvertently had been operating three private school accounts in our Corporate Services Division and so those accounts were mistakenly not operated under the same compliance programs as applicable to our School Services Division. Sodexo has taken measures to ensure that all schools that participate in the National School Lunch Program are fully compliant with the applicable regulations and managed by the School Services Division. Further, we have ensured that all schools continue to operate within the School Services Division to ensure compliance with U.S. Department of Agriculture regulations.

    It is important to note that besides these three private schools, all schools served by Sodexo have been operating as appropriate within the School Services Division, and no changes will be made to these in terms of structure within Sodexo. The settlement also addressed a Campus Services Division account, and the settlement resolved potential claims related to unique contract issues. Sodexo has long-term relationships with these clients.

    This is part of an industry-wide investigation, and we are proud to be the first to complete it and resolve the issue with the NYSOAG.

    Sodexo has agreed to pay $20 million to the state of New York. The settlement encompasses activities going back as far as 2004. With this settlement, Sodexo is released from any and all claims asserted arising out of the situations that were investigated. The settlement indicated compromise of disputes, and does not constitute any admission on Sodexo’s part of any violation of law.

    Sodexo remains committed to ethical business practices and maintaining strong relationships with our clients. Our client retention rate of higher than 95 percent demonstrates that our clients trust our expertise, and trust our management practices to be fair and open. We are further validated by independent organizations that include Ethisphere, which recently named Sodexo one of the most ethical companies in the world, citing our transparent reporting practices and consistent emphasis on integrity in our operations, which are continually monitored.

    If you have any further questions, please do not hesitate to contact me and feel free to share this information to anyone with interest."

  3. I work at a private college which has it's Dining Services run by Sodexo. Many of the dining service workers are employed by the College and the management is Sodexo. We all knew they were taking kick backs but we were afraid no one would believe us, or no one would really investigate or that we would lose our jobs if we said anything. I am so glad that John and Jay Carciero took moral stock and turned them in. If the New York Attorney General will just keep up the pressure for years to come maybe they won't get away with kick backs or any other form of rebates again.