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Milk Bilk: Probe of School Milk Scam Involves 16 States

September 5, 1991

ATLANTA (AP) _ A federal investigation of bid-rigging on school milk contracts has spread to 16 states in a scandal that has victimized school children and cost taxpayers millions of dollars.

In the latest turn of events, Pet Inc. pleaded guilty Wednesday to violations of the Sherman Antitrust Act for fixing bids for milk contracts in South Carolina.

″In the short run, the kids at school are the victims. If you’re having to spend more on milk, you don’t have as much to spend on other food for them,″ said Paul McElwain, chief of school nutrition in Kentucky. ″In the long run, the taxpayers are the victims.″

Since the investigation began in 1988, the Justice Department has filed 40 criminal cases against some 50 dairy companies and executives, including some of the nation’s biggest dairies.

Thirty-eight dairy companies and executives have entered guilty pleas and 18 people have been sentenced to prison. Seven companies and executives have been acquitted; charges have been dismissed against two others.

Dairy companies have been slapped with almost $19 million in fines and damages, and the Justice Department was seeking another $6.1 million in damages, a spokeswoman said.

The investigation began when federal officials learned that dairy marketers were fixing milk prices in Florida schools to undercut competition.

″Somebody talked in Florida and it’s been spreading northward and westward ever since,″ said Jim Gulick, head of the North Carolina Justice Department’s antitrust division.

Federal investigations have been conducted or are pending in Alabama, Florida, Georgia, Illinois, Kentucky, New Jersey, North Carolina, Pennsylvania, South Carolina, Texas, Virginia and five other states the Justice Department would not identify.

Federal prosecutors said the probe could extend to other states. In addition, some states are taking action against the dairy companies.

″It’s quite widespread ... and quite appalling,″ said Judy Whalley, deputy assistant attorney general in the Justice Department’s antitrust division.

Officials at Pet, one of the larger dairies that has pleaded guilty in the scam, said the St. Louis-based company is trying to distance itself from the fresh dairy business. Pet sold its fresh dairy division in 1985, but the sale was unrelated to the federal probe, spokeswoman Beatrice Miller said.

″We’re concerned about the issue and we’re concerned about our good reputation,″ Ms. Miller said. ″No employees that were involved in the fresh dairy division are with Pet at this time.″

In its plea agreement Wednesday, Pet was fined the maximum $1 million recommended by the U.S. Attorney’s Office.

Officials at Coble Dairy, another large dairy that has pleaded guilty, refused to comment. As part of its plea agreement, Coble has agreed to help the Justice Department unravel the complicated scheme, federal prosecutors said.

In a typical bid-rigging case, dairy companies in competition with each other agree to let one company win a school system’s milk contract, federal prosecutors said. The other companies then submit higher bids to ensure that the chosen company wins the contract at an inflated price. The companies divide up the school systems in a particular region, ensuring each a share in the profits.

In a southern Georgia school system, milk prices dropped from 15.8 cents a half-pint in 1987 to 12 cents a half-pint in 1988, the year the federal probe began. The school system saved more than $50,000, or about 20 percent of its total milk bill, said senior assistant attorney general George Shingler.

″Basically, Glynn County went from having one of the highest prices in 1987 to having the lowest price in the state of Georgia,″ Shingler said. ″The investigation had begun and the conspirators stopped talking to each other.″

The school milk market represents about 7 percent, or about $200 million, of the U.S. dairy companies’ annual business, according to International Dairy Foods Association president Linwood Tipton. He said bid-rigging by some salesmen shouldn’t taint the entire industry.

″It’s a very limited kind of thing,″ Tipton said.

The nation’s public schools serve more than 24 million lunches a day, and most of those include milk. The U.S. Department of Agriculture subsidizes the meals to ensure that children, especially those from poor families, get at least one nutritional meal a day.

State education officials said they are helping school systems standardize bidding procedures and become more knowledgeable about the milk market. They acknowledge, however, that it’s difficult to protect schools from bid-rigging scams.

″Sometimes even if you knew everything about the milk market, that wouldn’t help you in something like this,″ McElwain said. ″But it may well be that we didn’t know enough. We saw inflated milk prices, but didn’t recognize them.″

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