OFFICE OF THE ATTORNEY GENERAL

OF THE STATE OF NEW YORK

AOD # 11-015
IN THE MATTER OF AN INVESTIGATION BY ATTORNEY
GENERAL ERIC T. SCHNEIDERMAN OF CERTAIN
PRACTICES IN THE FOOD SERVICE AND FACILITIES
MANAGEMENT INDUSTRY.
REPORT, FINDINGS, AND SETTLEMENT AGREEMENT
I. Office of the Attorney General's Report and Findings
I. This Report arises out of Attorney General Eric T. Schneiderman's industry-
wide investigation of rebating practices in the food service and facilities
management industry pursuant to the provisions of Executive Law section
63(12), Article 22-A of the General Business Law, and New York's False
Claims Act (State Finance Law sections 187 through 194) (the "OAG
Investigation").
2. The Whitsons family of companies is based in Islandia, New York, and jointly
has over $98 million in annual revenue. The group includes, among other
companies, 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 Whitsons New
England Inc. (collectively, "Whitsons" or "the Company"). Two of those New
York entities, Whitsons Food Service Corp. and Whitsons School Nutrition
Corp., are food service management companies (commonly known in the
industry as "FSMC's") that provide food management services to educational
institutions in New York.
3. The Office of the Attorney General ("OAG") investigated Whitsons's school
lunch 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.
provided pursuant to contracts Whitsons entered with such schools and
school districts (the "school clients") for the period of January 1, 2002 through
the date of execution of this agreement (the "Relevant Period").
4. During the course of GAG's Investigation, Whitsons fully cooperated with the
GAG, by, among other things, responding to GAG subpoenas and producing
Whitsons's executives and members of its outside accounting firm for
interviews. Whitsons also participated in debriefing sessions through its in-
house and outside counsel.
5. The GAG's Investigation found that Whitsons entered into form contracts
with the school clients whereby Whitsons assumed operational responsibility
for the preparation and service of school meals at various Kindergardten-
through-twelth-grade schools in New York.
6. The contracts entered into by Whitsons are in a form mandated by New York
regulations. Pursuant to such regulations, the cash value of any rebates
received by the food service management company ("FSMC") from its food
vendors and distributors must be passed through to the school clients, and
further, the FSMC is required to identify clearly the value of rebates on
operating statements provided to the school clients.
7. Under its contracts with the schools clients for the provision of food services,
and pursuant to regulations, Whitsons was permitted to bill the school clients
only for the actual cost of the food acquired, net of all discounts or rebates.
Whitsons was only permitted to earn a fixed fee for its services in preparing
and serving the food.
8. The GAG Investigation determined that, in some instances, Whitsons did not
pass the cash value of rebates it received on to the school clients as required
by such contracts and by regulations.
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9. The OAG Investigation further determined that the operating statements
submitted by Whitsons to certain school clients did not, in some instances,
fully reflect the cash value of rebates Whitsons received, or otherwise may
have included impermissible charges.
10. In addition, the OAG Investigation determined that Whitsons had, beginning
in the 2009-10 school year, entered into new arrangements with some
vendors. Under these new arrangements, Whitsons would receive funds from
vendors in exchange for "marketing services," which according to the
"marketing agreements" could include various programs related to the
vendors' products.
11. OAG reviewed the "marketing agreements" and the marketing materials
generated by Whitsons under those agreements. OAG determined that the
funds Whitsons received under the "marketing agreements" did not correlate
to whatever services Whitsons performed for the vendors.
12. In some instances, Whitsons failed to produce to OAG any documentation
relating to particular "marketing" arrangements. In other instances, OAG
determined that the amount of money paid to Whitsons by a vendor exceeded
the fair market value of services performed by Whitsons for that vendor. In
other instances, different vendors paid Whitsons significantly different
amounts for substantially similar services. OAG determined that the funds
received by Whitsons under its vendor "marketing agreements" were actually
rebate funds, some of which should have been passed through to or allocated
to Whitsons' school clients.
13. As a result ofthe conduct described in the foregoing paragraphs, Whitsons
charged some school clients more than permitted for their food and supplies.
The OAG Investigation determined that Whitsons improperly failed to credit
thirty 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 its
outside counsel and outside accountants, and at its own expense, conducted a
review of its services to its school clients in New York that received food
service from Whitsons to determine whether the school clients were
appropriately credited for vendor rebates received by Whitsons during the
Relevant Period (the "Review"). Pursuant to this Review, Whitsons
submitted data, information and documents to the OAG between October
2010 and August 2011 (the "Whitsons Submissions").
15. Based on the Review and the Whitsons Submissions, the OAG determined
that Whitsons failed to properly account for and credit $807,343.50 for the
following school clients (the "Listed Schools"):
Abbott House
Blind Brook Public Schools
Briarcliff Manor School District
Bridgehampton Union Free School District
East Hampton Union Free School District
East Quogue School District
Good Shepherd Services
Graham Windham
Harrison Central School District
Hicksville Public School District
Huntington Union Free School District
Jewish Child Care Association
Kings Park Central School District
Leake & Watts Services, Inc. - Woodfield Cottage
Mamaroneck Union Free School District
MercyFirst
Mill Neck Family of Organizations
Mount Vernon City School District
Ossining Union Free School District
Pearl River Union Free School District
Peekskill City School District
Plainview-Old Bethpage School District
Pleasantville Union Free School District
Port Chester-Rye Union Free School District
SCO Family of Services - Madonna Heights
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SCO Family of Services - The Robert J. McMahon
Children's Center
South Country Central School District
Syosset Central School District
Union Free School District of the Tarrytowns
Wallkill Central School District
n. Terms and Conditions
16. The Settlement Agreement ("Agreement") is entered into by the State of New
York, acting through OAG (the "State"), and Whitsons. The State and
Whitsons shall be referred to collectively as the "Parties."
17. Whitsons does not admit or deny the OAG's Report and Findings as set forth
in this Agreement.
18. The State contends that it has certain civil claims against Whitsons under
the 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 "Covered
Conduct":
a. During the Relevant Period, Whitsons failed, in some instances,
to pass off-invoice rebates through to the Listed Schools, as
required by Whitsons's contracts and by New York regulations;
and
b. During the Relevant Period, Whitsons submitted, in some
instances, operating statements and other documentation that
failed to disclose the cash value of vendor rebates Whitsons
received on food supplies provided to the Listed Schools.
19. To avoid the delay, uncertainty, inconvenience, and expense of protracted
litigation and continued investigation relating to the OAG Investigation, the
Parties 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 of
their best interests and the GAG has agreed to accept the terms of this
Agreement and discontinue the GAG investigation of Whitsons as described
herein.
III. Payment and Compliance Terms
21. 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 six
hundred 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 written
instructions to be provided by the State of New York.
22. Whitsons further agrees that from and after the date of the execution of this
Agreement, it will allocate to its school clients any fees received for
"marketing services" pursuant to "marketing agreements."
IV. Disclosure
23. Within two weeks of execution of this Agreement, and quaterly thereafter for
the term of the engagement of the independent consultant (as provided in
Schedule C), Whitsons shall issue a letter in the form set forth as Schedule A
to all New York elementary school, high school, and other National School
Lunch Program participants.
24. Whitsons's Corporate Board Members shall execute a certification, in the
form annexed hereto at Schedule B, as to the veracity of the information
provided by Whitsons to GAG.
V. Independent Consultant
25. 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. The
engagement of the Independent Consultant shall be for and correspond to
three consecutive 12 month periods, starting with the date that commences
the first day of the calendar month following the date of the execution of this
Settlement Agreement.
26. The engagement of the Independent Consultant will terminate after two
years if Whitsons establishes to the satisfaction ofthe OAG, as evidenced by
written acknowledgement: (1) Whitsons receives during the first two years of
the 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 the
Independent Consultant); and (2) the Independent Consultant verifies that
such rebates were properly allocated to the appropriate schools in each year.
27. Whitsons's obligations and representations concerning the Independent
Consultant are explicit conditions precedent to the administrative
forbearances and relief granted by the State herein, and, in the event
Whitsons violates such conditions, the State will be relieved of the obligations
set forth herein as to Whitsons, and may pursue all remedies otherwise
available under the law. Notwithstanding such violations and action by the
State, Whitsons obligations hereunder will remain in full force and effect.
VI. Releases
28. 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 any
civil claim arising from the Covered Conduct that the State has or may have
against 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 equitable
theories of payment 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 York
Release Parties") from any claims (including attorney's fees, costs, and
expenses of every kind and however denominated) that Whitsons has
asserted, or could have asserted, or may assert in the future against any of
the above related to the Covered Conduct. Should, however, a New York
State governmental entity, including without limitation a New York school or
school district, bring an action against Whitsons, then this release will be
null and void to the extent of allowing Whitsons to raise any available
defenses or counter-claims in such action.
VII. Miscellaneous
30. 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 and
OAG's own factual investigation as set forth in the Findings above. To the
extent that any material representations are later found to be inaccurate or
misleading, this Agreement is voidable by OAG in its sole discretion. No
representation, inducement, promise, understanding, condition, or warranty
not set forth in this Agreement has been made to or relied upon by Whitsons
in agreeing to this Agreement. Whitsons represents that this Agreement is
freely and voluntarily entered into without any degree of duress or
compulsion whatsoever.
32. Whitsons represents and warrants, through the signatures below, that the
terms and conditions of this Agreement are duly approved, and execution of
this Agreement is duly authorized. Whitsons shall not take any action or
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make any statement denying, directly or indirectly, the propriety of this
Agreement or expressing the view that this Agreement is without factual
basis. Nothing in this paragraph affects Whitsons's (i) testimonial
obligations or (ii) right to take legal or factual positions in defense of
litigation 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 other
proceeding and is not intended, and should not be construed, as an admission
of liability by Whitsons.
34. For purposes of construction, this Agreement shall be deemed to have been
drafted by all Parties to this Agreement and shall not, therefore, be construed
against any Party for that reason in any subsequent dispute.
35. The individuals signing this Agreement on behalf of Whitsons represent and
warrant that they are authorized by Whitsons to execute this Agreement.
The State of New York signatories represent that they are signing this
Agreement in their official capacities and that they are authorized to execute
this Agreement.
36. This Agreement may not be amended except by an instrument in writing
signed on behalf of all the Parties to this Agreement.
37. This Agreement shall be binding on and inure to the benefit of the Parties to
this Agreement and their respective successors and assigns, provided that no
party, other than OAG, may assign, delegate, or otherwise transfer any of its
rights or obligations under this Agreement without the prior written consent
ofOAG.
38. In the event that anyone or more of the provisions contained in this
Agreement shall for any reason be held to be invalid, illegal, or unenforceable
in 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 Whitsons
Andrew E. Blustein
Steven J. Chananie
Garfunkel Wild, P.C.
111 Great Neck Road
Great Neck, NY 11021
of Counsel for New York
John F. Carroll
Deputy Bureau Chief, Taxpayer Protection Bureau
Office of the Attorney General of the State of New York
120 Broadway, New York, New York 10271
40. Acceptance of this Agreement by OAG shall not be deemed or construed as an
approval by OAG of any of the practices or procedures referenced herein, and
Whitsons shall make no representation to the contrary.
41. If a court of competent jurisdiction finally determines after all applicable
appeals have been exhausted, that Whitsons has breached this Agreement,
Whitsons shall pay to OAG the cost, if any, of such determination and of
enforcing 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 York
without regard to any conflict of laws principles. The Parties agree that the
exclusive jurisdiction and venue for any dispute arising between and among
the Parties under this Agreement will be the Supreme Court of the State of
New York, New York County.
43. This Agreement is effective on the date of signature of the last signatory to
the Agreement ("Effective Date of this Agreement"). Facsimiles of signatures
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shall constitute acceptable, binding signatures for purposes of this
Agreement.
44. Mter the conclusion of the OAG Investigation into Certain Practices in the
Food Service and Facilities Management Industry, the OAG will return to
counsel for Whitsons, or destroy, all Whitsons documents concerning the
OAG Investigation, including reports, documents and data produced
electronically, and provide a certification of said destruction, at Whitsons's
expense, unless inconsistent with the State's Freedom of Information Law
(NYS Public Officer's Law, Art. 6, 8490).
45. Whitsons shall retain for a period of one year from the date of execution of
the Agreement a set of all produced documents in electronic media
conforming to OAG's Concordance load format, to be provided to OAG within
five (5) business days of receiving written notice from OAG should OAG
require the documents for investigative purposes, to be determined in OAG's
sole discretion.
46. This Agreement may be executed in counterparts, each of which constitutes
an original and all of which constitutes one and the same agreement.
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IN WITNESS WHEREOF, this Agreement is executed by the parties hereto.
ERIC T. SCHNEIDERMAN. ATTORNEY GENERAL
OF THE STATE OF NEW YORK
Dated: Oet.1 ,2.' 11
Joh F. Carroll
Deputy Bureau Chief
Taxpayer Protection Bureau
On behalf of Whitson's Food Service Corp.,
Whitsons Food Service (Bronx) Corp., Whitsons
School Nutrition Corp., Whitsons Ind. Food Corp.,
Whitsons Resource Management Corp., Whitsons
Food Corp., and Whitsons New England Inc.:
Name
Title
Company
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Schedule A
Model Client Disclosure Concerning Rebates
[On Whitson's Letterhead]
Dear [Client Contact]:
The New York Office of the Attorney General (OAG) is conducting an investigation
into the food service and facilities management industry and its practice of
obtaining rebates from vendors. Whitsons cooperated with the investigation, and
OAG has completed its examination of Whitsons's conduct in this arena.
Since the investigation with respect to Whitsons is now complete, we take this
opportunity to discuss and explain supplier rebates and their role in Whitsons's
business. Food service management companies ("FSMC's") like Whitsons receive
rebate payments from vendors and suppliers from which we purchase goods on your
behalf. These vendors and suppliers often provide FSMC's these rebates as part of
the overall procurement arrangement they have entered into with the FSMC.
We, in conjunction with OAG, have recently completed a review of the rebates
earned through your account to ensure that the proper amounts were credited to
you pursuant to the terms of your contract with Whitsons. We have retained (at no
cost to you) an independent consultant, Citrin Cooperman, to perform similar
reviews of your account through 2013 to ensure that you continue to receive the
appropriate rebate credits. If you have any questions about rebates you are also
welcome to call Citrin Cooperman at (800) _-__. You are also, as always,
welcome to contact your Whitsons client representative with any questions or
comments you may have with respect to rebates or any other matter.
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Schedule B
Sworn 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 Whitsons
New England Inc. (collectively, "Whitsons") to the Office of the Attorney General
("OAG") between October 2010 and August 201 I (the "Whitsons Submissions"), is
materially accurate, and
2. That Whitsons did not fail to pass through vendor rebates to any educational
entity in New York State, other than as set forth in the Whitsons Submissions.
MARY PARISI
NOTARY PUBLlCSTATE OF NEW YORK
No. 01PA6174214
QuaJIII.ci In SUffOlk County
My Commlulon Explr September 17. 201 t
Sworn to before me on
?/a,/fl
N ~
J c A ~
Beth Bunster
Chief Financial Officer, Director
Dated: ~
Dated: 7PJfil ~ ~ ~ ~ ~ ~ ~
Dougl
Presid
IN WITNESS WHEREOF, this Statement is
sworn to by the individuals listed below.
Dated: 1M- ~ .
A n d ~ WI1itCOIl1b
Director
14
w.treme on
Sworn to before me on
qjql/tl . MARY PARISI
NOTARY PUBLlCSTATE OF NEW'

/J.;.; NO.01PA6174214

Qualified In Suffolk
.... ..ton Expire. September 17
ry IC. a.,T
">
Robert Whitcomb
Chairman and CEO, Director
;tl.i/d_.

Executive Vice President, Director
Michael Whitcomb
Vice President, Director

William Whitco;;t
Director
#4iiiib
Chief Operating Officer, Director
Dated: <to J-'i I (
Dated:W
Dated: 9-),.'( -II
Dated:
15
Schedule C
Independent Consultant Terms
This document sets forth the terms of the agreement by which 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 Whitsons New England Inc. (collectively, "Whitsons"), agree to
engage the Independent Consultant ("IC") referred to in the Settlement Agreement
above.
1. This document, together with the the Settlement Agreement, constitutes the
entirety of the understanding between the Office of the Attorney General of
the State of New York ("OAG") and Whitsons concerning the IC.
2. Whitsons and OAG have selected Citrin Cooperman, to serve as IC to conduct
an examination and to report on Whitsons's rebating procedures for a period
of three consecutive 12 month periods, starting with the date that commences
the first day of the calendar month following the date of the execution of this
Settlement Agreement.
3. Whitsons hereby agrees to budget $20,000 per year for the duration of the
engagement of the IC.
4. Whitsons and the IC shall enter into an Agreement whereby the IC monitors
and reports on Whitsons's pass through of Rebates, as that term is defined
below in paragraph 5, to all of its New York clients that participate in the
National Scool Lunch Program ("Clients"). The Agreement is subject to final
approval by OAG and shall include the following terms:
a. Whitsons and the IC shall confer and agree upon a Summary of
Procedures that the IC will implement to determine whether
Whitsons is properly crediting Rebates to its Clients and the
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amount of any such Rebates. This Summary of Procedures shall
be incorported into Whitsons's Agreement with the IC.
b. IC shall meet and confer with Whitsons to consider creation of a
Policy & Procedure concerning Rebates in connection with
Whitsons's Clients.
c. IC shall establish a toll-free 800 number available to Clients for
the purpose of responding to questions concerning rebates.
d. IC shall issue annual reports on all of the above-specified
activities to OAG and Whitsons.
e. IC shall, upon request of OAG, provide OAG with information
and/or reports related to all of the above-specified activities.
5. The term "Rebates" means money or other thing of value paid to Whitsons by
a vendor, manufacturer, producer, or distributor, either directly or indirectly
concerning the purchase of products or services by Whitsons for New York
schools. Rebates include, but are not limited to cash or cash equivalents,
credits, concessions, marketing incentives, manufacturer's incentives,
allowances, volume allowances, volume discounts, volume discount
allowances, VDAs, discounts, offinvoice rebates or payments, "coupon
clipping" receipts, stocking fees, approved or preferred supplier allowances or
payments, volume purchase agreement fees, commissions, contingent
commissions, communication fees, award fees, RFP fees, consulting fees,
preferred customer fees, preferred customer bonuses, securities, loan
forgiveness, Professional Enhancement Fund (PEF) payments, Placement
Service Agreement (PSA) payments, compensation for alleged services
rendered, Market Service Agreement payments, Production Incentive Bonus
Agreement 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 form
and however denominated.
6. The IC shall review information that is reasonably necessary to accomplish
the purposes set forth in this document and the Settlement Agreement.
Whitsons shall fully cooperate with the IC, allowing the IC unfettered access
to all information requested to be reviewed or examined by the IC.
7. Access shall include access to employees, offices, work sites, computer
systems, books and records, internal accounting and systems manuals.
Satisfactory cooperation and compliance with this paragraph shall be
determined solely by OAG.
8. If the IC reports to the OAG that Whitsons potentially has not allocated
rebates appropriately in accordance with the IC Agreement, and if Whitsons
disagrees with that report, Whitsons will discuss the matter with OAG, and
the parties will attempt to agree on a resolution. If the parties are unable to
agree upon a resolution, then Whitsons reserves the right to bring an action
in a court of applicable jurisdiction requesting a judicial determination
adjudicating the IC's finding that is in dispute; provided, however, that any
resolution by the court shall not impact or affect any provision or the
enforceability of the Settlement Agreement regardless of the finding by the
court on the disputed issue.
9. In the event the IC believes that a matter involving the possible improper
retention of rebates by Whitsons warrants additional inquiry that exceeds
the scope of the engagement described in this document and in the
Settlement Agreement, the IC shall inform OAG, and OAG shall meet and
confer with counsel for Whitsons regarding the matter. OAG shall inform
counsel for Whitsons of the general nature of the inquiry and OAG and
counsel for Whitsons shall agree on additional fees to be paid by Whitsons to
the IC.
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