By Lucy Komisar
100Reporters, Jan 19, 2012
Mitt Romney, who makes his hands-on business experience a talking point in his campaign for the Republican presidential nomination, was a member of the board of directors and audit committee of a global company when it paid millions of dollars to settle charges of extracting kickbacks that cheated clients.
The company is Marriott International and the accusers were hotel owners who had hired Marriott to manage their properties under the Marriott name.
In recent weeks, Romney has come under fire for his role at Bain Capital, with critics faulting Bain for putting employees out of work when it bought up ailing companies and loading them with unsustainable debt”charges that Romney rejects.
But his actions as an independent director at Marriott in the late 1990s and again just two years ago open another window on the candidate‘s record in business and leadership qualities.
As a board member, Romney held oversight responsibilities at a time when Marriott was repeatedly accused of obtaining secret rebates that enriched Marriott at the expense of hotel owners who had hired Marriott to run the hotels on their behalf. A series of owners also accused Marriott of falsifying financial statements to conceal the arrangements”charges that Marriott had denied, and yet still paid $24 million to settle.
The allegations concerning kickbacks were contained in a series of lawsuits and complaints that extended from 1998, when Romney served on the Marriott board, to past 2002, when he left. They were still occurring when Romney returned to the board for another term from 2009 to 2011. The $24 million settlement that took place during Romney‘s tenure came in response to complaints that Marriott obtained secret rebates from suppliers while billing property owners full price for goods and services. These incidents led to six lawsuits, in a series of episodes that tarnished Marriott‘s name within the industry.
William Brewer, a hotel litigation attorney, said that buying goods and services on nationwide contracts and taking kickbacks not known or agreed to by the hotel owners had grave financial implications for a hotel management company like Marriott.
“Marriott‘s stock price is based, in large part, on the belief it has long-term management contracts that will not be terminated early,” he said. Had Marriott lost any of the lawsuits, it risked having to give up revenues collected through the disputed practice. Other owners could also use the finding to argue for terminating their agreements, cutting off this revenue stream to the company, said Brewer. He added that such a scenario could have threatened Marriott‘s survival.
To be sure, Romney‘s was only one voice of ten on the board. What he may have said privately at board meetings or to Marriott executives about the secret rebates and the risk to shareholders and the company is not known. What is known is that during his tenure the company continued a practice that had come under severe reprimand by the courts, and there is no record that Romney ever denounced or criticized the practice.
In addition, the company failed to disclose the mounting disputes to the Securities and Exchange Commission despite the risk they represented to the company‘s stock price, and did so only after they culminated in public lawsuits.
With law and business degrees from Harvard University, Romney was well-schooled in understanding the legal and business risks to the company from these charges. Romney was one of the designated “independent,” members of the Marriott board, which meant that neither he nor his family were to have financial ties to the company. Indeed, no Romney had been an employee of Marriott or the company‘s auditor.
On personal and political levels, however, bonds between the Romney and Marriott families run deep. The company founder J. Willard Marriott was close to Romney‘s father George. Both families are important in the Mormon Church. Romney was named Willard (the W. in his name), in Marriott‘s honor.
In 1994 the Marriott family gave hundreds of thousands of dollars to Romney‘s campaign for the U.S. Senate. In 2008, CEO J. Willard “Bill” Marriott, the founder‘s son, was national finance co-chair of Romney‘s campaign for the Republican presidential nomination. Bill Marriott has so far donated $500,000 to Romney‘s current campaign through the pro-Romney “super PAC,” Restore Our Future, while his brother, Richard Marriott, has given the same.
The Romney campaign did not respond to requests for comments or to e-mailed questions. A Marriott International spokesman also declined to comment.
A Series of Complaints
Marriott International is one of the world‘s leading hotel companies, with revenues in 2010 of $11.7 billion, mostly from managing nearly 3,700 investor-owned properties in more than 70 countries.
In the 1990s, Marriott was eager to expand its brand of hotels, in part by developing an upper-tier international presence. In 1997, it paid Hong Kong companies CTF Hotel Holdings and its affiliate HPI (Hotel Property Investments) $1 billion for the Renaissance brand name and the right to manage 66 Renaissance hotels around the world.
Before long, CTF complained of a steep drop in income from the hotels Marriott took over. In 1998, it collected evidence that it believed proved that Marriott was extracting kickbacks. It demanded an end to the practice, to no avail, said KC McDaniel, a New York lawyer who helped prepare the CTF case. The following year, CTF handed Marriott a default notice, giving it 30 days to correct the problem or face the agreement‘s termination.
McDaniel said she was surprised that Marriott did not disclose the default notice in its public filings with the SEC. By law, a company must disclose any “material event” that could alter its stock price.
Noting that Marriott had paid steeply for the Renaissance brand name and management portfolio of the 66 hotels, she said: “This notice indicated that a lot of those assets might go away pretty quickly.” She added, “This type of risk falls within the zone of a standard auditor inquiry. Auditors ask about claims and threatened claims which could result in this scale of loss.” But Marriott‘s directors and audit committee offered no public disclosure of the risk.
John C. Coffee Jr., a Columbia Law School professor and Director of the Columbia Center on Corporate Governance, agreed with McDaniel‘s view.
In 1999, a year after the first complaints surfaced, Marriott signed an interim settlement with CTF with a three-year horizon. It included a $24-million payment to compensate for what the owners described as improper charges, self-dealing, accounting manipulation and refusal to provide information about such practices. In a later legal filing, they said that Marriott promised transparency regarding kickbacks, soft-dollar payments and other similar arrangements going forward in the settlement. (Soft-dollars are redeemable credits.)
Failure to Disclose
But just as the charges were never publicly disclosed, neither was the settlement–not to the company‘s shareholders, potential investors or the public at large. Coffee said that Marriott should have notified shareholders of the interim settlement, noting, “$24 million isn‘t necessarily a material amount to Marriott, but the possibility of a major number of franchisees walking away would be the kind of risk factor that should be disclosed.”
These were not the only allegations of illicit kickbacks that Marriott faced while Romney was on the board. Another of Marriott‘s partners, Strategic Hotel Capital of Chicago, also accused Marriott of double-dealing in kickbacks and rebates. Marriott ran a string of premier hotels in California for Strategic, including the Ritz-Carlton Laguna Niguel, the Rancho Las Palmas Marriott and the Renaissance Beverly Hills. Strategic sued Marriott in 2002, alleging that Marriott had failed to honor its January 2000 contract to provide services at a fair and honest price to the hotel owners.
Strategic‘s suit charged Marriott with pocketing “millions of dollars in suspect rebates” and failing to disclose these payments on Marriott‘s financial statements. Strategic demanded restitution, the payback of profits and other undisclosed income that it claimed Marriott had obtained through unlawful and deceptive practices. It sought punitive damages as well and asserted Strategic‘s right to terminate the hotel contracts. The result was a confidential settlement whose terms were not disclosed, but that included changes in contracts.
In other cases, hotel owner disatisfactions that began heating up while Romney served on the board provoked lawsuits that were filed just after he stepped down in April 2002 to run for governor of Massachusetts.
In May 2002, In Town Limited Partnerships, owner of the Charleston Marriott Town Center Hotel, filed suit against Marriott. In Town alleged that Marriott had engaged in undisclosed self-dealing with its affiliates and related parties, and used these relationships to camouflage kickbacks from contracts signed by Marriott, as well as Avendra and Marketplace, two Marriott affiliates that purchased goods and services for the hotel. The suit accused Marriott of falsifying financial statements to the owners. The legal complaint asked the court to sever Marriott‘s management rights, order Marriott to pay back some $18.5 million in management fees, as well as compensatory and punitive damages.
A few months later, in August 2002, the Flatley Family Trust, owner of the Boston Marriott Quincy Hotel, also sued Marriott over suspect rebates.
In both cases, Marriott settled without disclosing the terms.
Coffee said the CTF settlement and the series of other complaints should have prompted action from Romney and the rest of Marriott‘s corporate board. “You would think a director would want some kind of study,” said Coffee, “as to whether the company was encountering these problems because it was following a consistent pattern of questionable operation,” one that could jeopardize Marriott‘s relationships with property owners.
As a member of the board‘s audit committee, which is charged with asking management and accountants about risks and investigating suspected improprieties, Romney‘s role during this period was even more critical. His position afforded him even greater awareness and focus on issues of this kind.
“Everybody on the board only has one voice,” said Nell Minow, a board member of Governance Metric International. “The question is, what you do with that voice? Are you going to ask questions? Are you going to argue with people? Are you going to vote ˜No‘ on various things? Are you going to quit in protest?
“Those are all options that you have for exercising that voice,” Minow said.
If the practices troubled Romney, there is no evidence that he voiced objections.
In April 2002, CTF sued Marriott International. It complained that Marriott had failed to honor the interim settlement of 1999 and had solicited “hundreds of thousands, and perhaps millions, of dollars in commercial bribes‘‘ since the last settlement was signed.
In its quarterly filing to the SEC, Marriott dismissed the suit as “without merit.” Chief Financial Officer Arne Sorenson told the Wall Street Journal that Marriott‘s actions were “consistent with the terms of our agreement with [CTF],” and that any rebates were collected with the owner‘s “knowledge and consent.” Marriott again settled, this time agreeing to end the relationship with CTF.
While the complaints by CTF and Strategic began in 1999, the first court case to be filed against Marriott was in March 2001 by Green Isle Partners, owner of the Ritz-Carlton on Isla Verde beach in San Juan. Florida entrepreneur Harvey Sandler charged that Marriott had falsified records while engaging in kickback schemes and self-dealing using Avendra, its affiliated buying agent. The suit and charges were noted in Marriott‘s annual report to the SEC for the year ending 2001.
In an SEC quarterly filing, Marriott said the charges by CTF and Green Isle were “without merit.” The case ended when Green Isle went bankrupt, and the issues were never adjudicated.
When Romney resigned from the board to run for governor of Massachusetts in 2002, CEO J.W. Marriott, Jr. praised him as “an extraordinarily effective director and visionary leader.” He credited Romney with “incisive analysis, unerring judgment, and a tremendous dedication to help our company become the world‘s hospitality leader,” adding, “Mitt has been an active, hands-on director.”
In 2009, Romney returned to the board, this time chairing the finance committee. Allegations of improper rebates continued.
Declaring that, “This situation did not happen overnight. It has been building up over a period of years,” the Lewis Trust Group, UK, owner of the Ritz-Carlton Palm Beach Hotel, served Marriott with a notice of default in February 2011. In July, it filed a lawsuit alleging secret “rebates, allowances and other kickbacks.”
Marriott spokesman Thomas O. Marder declined repeated requests for comment on the charges raised by the lawsuits or to provide the company‘s legal responses in the cases.
Romney has never spoken publicly about the rebate schemes. He resigned from Marriott International in January 2011 to concentrate on seeking the Republican nomination for president.
Article on 100Reporters site.
AVENDRA: Kicking Back on Kickbacks
Property owners began taking a closer look at the purchasing practices of hotel chains following a landmark 1997 ruling against the Sheraton Washington Hotel over secret vendor rebates. Sheraton faced a $52 million judgment, most of it in punitive damages. Though an appeals court reduced the judgment to about $3.5 million, the case heightened the scrutiny of hotel chains.
The verdict also prompted measures by Marriott and other hotel chains to protect the flow of vendor rebates. Marriott joined forces with Hyatt to form a new firm, Avendra, that would act as a buying agent for the chains. The hotel chains insisted that Avendra was an independent entity, and thus had no obligations to property owners.
But here, too, behind-the-scenes ties raised questions about Avendra‘s claims of independence from Marriott. Avendra opened in a Marriott building in 2001, and was staffed by employees from Marriott‘s purchasing group; it eventually relocated off the Marriott campus. Dennis M. Baker, Avendra‘s President and CEO, had worked for Marriott for thirteen years, and Joseph Ryan, Chairman of Avendra‘s board, was Marriott‘s Executive Vice President and General Counsel. Avendra acquired a large share of the business of the Marriott Distribution Services operation and began with Marriott holding a majority share of the ownership.
The hotel management companies set up Avendra as a buying club. They shared overhead costs, while Avendra funneled rebates to each member based on its purchases.
John C. Coffee Jr., a Columbia Law School professor and Director of the Columbia Center on Corporate Governance, said Marriott‘s board would have been involved in approving the establishment of Avendra. He said, “I would have thought use of Avendra had to go to the board, because it is self-dealing. You‘ve got your general counsel sitting there, with ownership interest. The board had to be advised of that. You were setting up an intermediary to give an appearance of greater legitimacy to these transactions.”
Avendra declined to comment for this article, but CEO Baker acknowledged to the Wall Street Journal in 2002 that rebates in excess of fees were returned to the founders. He said, “How the managers then deal with the owners depends on their individual contracts.” He told the Journal, “There are cases where some get [the rebates] back and some don‘t.”
Article on 100Reporters site.
Rebate Culture Extended to Other Marriott Holdings
The rebate culture ran deep in Marriott and continued in Sodexho Marriott, formed in 1998 by the merger of Marriott‘s food service and facilities management business (Marriott Management Services) with the U.S. subsidiary of Sodexho (So-DEX-oh) Alliance, a worldwide food and management services company headquartered in France. Marriott shareholders owned 51% of Sodexho Marriott Services, Sodexho owned 49%.
The shared client base included U.S. schools and colleges, health care facilities, businesses, government agencies, the military and prisons. Marriott International distributed food and supplies to Sodexho Marriott and provided administrative and data processing services. Sodexho Marriott, listed on the New York Stock Exchange, claimed to be the largest provider of outsourced food and facilities management in North America.
Sodexho Marriott built its business model on confidential rebates, and guarded its price list with care. In a previously unreleased July 21, 2000 memo, Anthony Alibrio, president of the Healthcare Service Division, warned employees not to divulge prices to hospitals and other facilities seeking to do price comparisons, and underscored the company‘s reliance on rebates.
“SODEXHO MARRIOTT PRICING IS CONFIDENTIAL” (emphasis in original), Alibrio wrote. “The manufacturer rebates and distributor rebates fund and support our entire Purchasing & Procurement Department and network.”
The document was provided to 100Reporters by two Boston-area whistleblowers who worked for Sodexho and objected to the secret rebate policy.
Alibrio was talking about rebates from sales to hospitals and nursing homes. Unreported rebates from purchases for facilities whose patients get federal assistance violate U.S. Medicare/Medicaid rules. Jim Sheehan, until recently New York State Medicaid Inspector General, said in an interview that that the Medicare-Medicaid Anti-Kickback Act of 1987 mandates that no vendor can give “anything of value in whole or part in cash or kind in return for referral of service paid for by government.” A company providing services “can get a discount,” said Sheehan, “so long as it‘s accurately reported on the cost report.” But “a secret rebate would not meet that standard.”
Romney was not on the board of this new company, which was separate and independent from Marriott International. However, since Marriott obtained food and supplies for Sodexho, it would inevitably have dealt with the rebate issue.
There were, in addition, close social and personal ties between senior executives at the two companies. Before going to Sodexho, Alibrio had worked for Marriott International for 28 years. Romney, Marriott and Alibrio all had vacation homes at Lake Winnipesaukee, NH. Alibrio is in Center Harbor, Romney in Wolfeboro and the Marriotts have a compound of homes on Tuftonboro Neck. Steve Bush, a local real estate agent who lives “around the corner” from the Marriotts, said in an email that Romney would travel by motorboat the three or four miles from his place in Wolfeboro to visit the Marriotts in Tuftonboro.
In addition to Alibrio, at least eight top Marriott executives had moved to the new company, including Charles D. O‘Dell, president of Marriott Management Services who became president and chief executive officer of Sodexho Marriott Services and chairman of the board. Philippe Taillet, a consultant for Bain & Company 1986 to 1991 (when Romney ran Bain Capital, Bain‘s private equity spin-off), became the new company‘s senior vice president for strategic planning. And J.W. Marriott was a member of the Sodexho Marriott board.
Alibrio, who has retired, did not respond to requests for comment. Marriott also declined to comment.
In June 2001, Sodexho Alliance bought out its partner‘s controlling share, and the U.S. company became known again as Sodexho, a subsidiary of Sodexho Alliance.
Marriott thus escaped unscathed when the New York Attorney General‘s office later investigated the documented claims of the Boston-area whistleblowers, Jay and John Carciero. Former Sodexho employees, they were fired after they objected to the company policy of taking supplier kickbacks while billing clients full price. Jay worked for Sodexho/Sodexho Marriott from 1994 to 2006 and John for Sodexho from 2001 to 2007. In 2010, the New York Attorney General obtained a $20-million settlement from Sodexo (which had dropped the “h” from its name) for “illegal overcharges,” or rebates the company pocketed that legally should have been passed on to New York State school districts.
Its investigation into illegal rebates that may have been diverted from other state-supported institutions, including hospitals, is continuing.
Article on 100Reporters site.
Legal Brief: Property Owners v. Marriott
Documents below are marked to point out the allegations of kickbacks, false accounting and related complaints.
Green Isle Partners, LTD., S.E. v. Ritz Carlton, Marriott, et al. Docket number in the Delaware Court was 1:01-cv-00202-JJF (filed March 2001); docket number in Puerto Rico, to where it was transferred, was 3:01-cv-02621-JP.
In Town Limited Partnership v. Marriott International, Inc., No. 2:02-0481 (S.D.W.V. filed May 23, 2002).
Flatley v. Marriott International, Inc., No. 02-11577-RCL (D. Mass. filed Aug. 5, 2002).
RC/PB v. Ritz-Carlton Hotel Company, Marriott International and Avendra, No. 50 2011CA010071 (Circuit Ct. 15th Judicial Circuit, Palm Beach County, Fla. filed July 15, 2011).
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