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MANAGEMENT I

COCKTAIL'
"FRAUDULENT CHEMICAL
HARIE, N.Y ., CHU RNE D OUT MILLIONS OF JARS OF
FACTORY IN CANAJO
SCENE OF THE CRIME: THE

WHAT LED BEECH-HUT

GRACE
DOWH THE ROAD TO DreISd wa rnings of adulterated juice y igno
Under financial pressure, the compan adul- The "smoking gun" memo, as prosec
u-
products, its best-selling line, were"100% tors later termed it, was key evi den ce in
n Aug. 5, 1981, Jerome J. LiCari

O sent off a memorandum that

would significantly change his
life and that of his company. The me
would help bring about one of the ngdo-
mo
most
terated. The juice was labeled re not
fruit juice." But while lab tests we ap-
conclusive, LiCari suspected that the
ple concentrate Beech-Nut was buy
ing
was
a federal grand jury investigationBeech-
led to a 470-count indictment of in No-
Nut and its two top executives
vember, 1986. Last November, Bee
that

serious admissions of criminal wroclassic
ing by a major corporation "a irre-
case of big corporate greed and U. S.
sponsibility," according to assistantalso a
Attorney Thomas H. Roche. It is ble of
case of how even the most reputa , can
companies, through poor judgment
suffer an ethical breakdown.
LiCari was director of research and
development for Beech-Nut Nuytritfood
ion
t U. S. bab
Corp., the second-larges
Swiss
manufacturer and a subsidiary of rs he
food giant Nestle. For several yea juice
had worried that Beech-Nut's apple
22,1988
124 BUSINESS WEEK/FEBRUARY
to make its juice and other products ts a
a blend of synthetic ingredien
an
"100% fraudulent chemical cocktail,"
associate later testified.
soft-
•SMOKING GUN.' By 1981, LiCari, aBeech-
spoken, intense food scient ist at
.,
Nut's main plant in Canajoharie, N.Y
was convinced. In the memo, sent "tre-
to se-
t the
nior executives, he said tha
mendous amount of circumstantialcase"
evi-
dence" constituted a "grave r. Yet
against the concentrate's supplie
ari
his superiors took no action, and LiC
resigned a few months later.
ch-
Nut pleaded guilty to 215 felony cou
nts
lati ons of the
and admitted to willful vio
food and drug laws by selling adulter
at-
1983.
ed apple products from 1981 to L.
Beech-Nut's president, Ne ils Hoy-
Joh n F.
vald, and its operations head,
Lavery, pleaded not guilty and areWhile
cur-
rently on trial in New York. ed on
Breech-Nut's guilty plea was bas ploy-
the "collective knowledge" of its emyvald
ees that its juice was impure, Ho
dge
insisted he had no personal knowlerney
of the adulteration. Lavery's atto
THE CORPORATION
 da that while Lavery was aware of good to be true: an agreement in 1977 to Presiding over the operation was Zeev
evidence the juice might be impure, he buy apple concentrate from Interjuice Kaplansky, who& ran its distribution
e Universa l Juice Co.,
had no proof. LiCari, the government's Trading Corp., a wholesaler whose arm Interjuic
star witness, testified that he had prices were about 20% below market. an affiliated company that later became
warned not only Hoyvald and Lavery With rumors of apple juice adultera- Beech-Nut's supplier. His chief partner
but also senior Nestle" scientists, includ- tion already widespread in the industry, was Raymond H. Wells, who owned
ing Richard C. Theuer, who has replaced the low price raised suspicions among Food Complex Co.,the the Queens facility
Hoyvald. Theuer and the Nestle" scien- chemists in Beech-Nut's R&D depart- that manufactured fake concentrate.
tists denied that LiCari talked to them ment. At the time, though, there was no Its chemists had learned how to repli-
about the problem. official, sure adulteration test a fact cate precisely apple juice's numerous
Beech-Nut's admission that it had sold defense lawyers for Hoyvald and Lavery components with less costly substitut es.
millions of jars of apple juice it knew have stressed repeatedly. But there Several Beech-N ut scientists , especial-
was phony shocked industry executives were several procedur es that could pro- ly LiCari, said the company should stop
and company employees who were un- vide strong evidence of fake ingredients buying from Universal Juice. But senior
at Beech-Nu t, notably operation s
aware of what was going on. Ever since such as corn sugar. The chemists con- people Beech-Nu t
Beech-Nut began smoking ham and ba- cluded that the Interjuice product was chief Lavery, 56, a 34-year extensive
con over beechwood fires in 1891, purity, probably extensively adulterated and veteran, disagreed mainly, Beech-Nut
high quality, and natural ingredients had perhaps even wholly ersatz. evidence suggests, because
been its trademarks the fo- was almost insolvent.
cus of its marketing pro- Still a proud brand name,
grams as well as the founda- Beech-N ut over the years had
tion of its corporate culture. been stripped of its profitable
Frank C. Nicholas, its presi- divisions, such as chewing
dent in 1977, when evidence gum, and reduced to a single
shows the adulteration began, product, baby food, which had
was known as "Mr. Natural." almost never turned a profit
Why had Beech-Nut so egre- Frank Nicholas, a Pennsylva-
giously strayed from its repu- nia lawyer and head of a
tation and its heritage? group that bought the baby
SELF-DELUSION. The answer, foods division from Squibb
derived from trial testimony Corp. in 1973, was a charis-
and numerous interviews and matic promoter with red hair,
documents, is complex. It bushy sideburns, and lots of
sheds light on the motives be- good ideas. He promoted nat-
hind the sort of seemingly uralness and nutrition.
prosaic law-breaking that SHOESTRING. Unfortunately,
rarely makes headlines but the Nicholas group had ac-
undermines many companies. quired Beech-Nut almost en-
The Beech-Nut employees in- tirely with borrowed money
volved were not hardened and ran it on a shoestring.
miscreants perpetrating a bra- They neglected the 80-year-
zen swindle. They were hon- old Canajoharie plant. And
est and well-respected. Their with a 15% market share, they
lapse into illicit conduct re- couldn't begin to match the
quired a strong catalyst: marketing outlays of Gerber
Beech-Nut was under great Products Co., which had 70%.
financial pressure, and using Losses mounted. By 1978,
cheap, phony concentrate Beech-Nut owed millions to
saved millions of dollars. But suppliers. Products containing
it also required a pernicious FORMER PRESIDENT HOYVALD* WHAT DID HE KNOW—AND WHEN? apple concentrate accounted
climate of rationalization, self- for 30% of Beech-Nut's sales,
delusion, and denial. Beech-Nut execu- In 1978 two Beech-Nut employee s and the savings from the cheap concen-
tives apparently convinced themselves were sent to inspect Interjuice's concen- trate were helping to keep the company
that what they were doing was just a trate source, a plant in Queens, N. Y., alive. Other than saying he "didn't know
that was ostensibly importing from Isra- a damn thing about adulterat ion," Nich-
little innocuous cheating. to comment .
What they did, though, is costing el. The staff members were shown a olas refuses
Beech-Nut dearly: an estimated $25 mil- storage area but denied access to the After a desperate search for a buyer,
lion in fines, legal costs, and slumping concentrate processing facility. Nicholas sold out to Nestl6 in 1979 for
sales. Mainly because of negative public- BIGGEST CUSTOMER. That made some at $35 million. Nestl6 invested an additional
ity, its juice market share has fallen Beech-Nut even more suspicious. Years $60 million, hiked But marketing budgets,
about 20% over the past year, and later they would learn that the Queens and boosted sales. the red ink and
sources say the company racked up plant was only part of a huge bogus cost pressure LiCari decided to mount s persisted .
near-record losses in 1987. Richard concentrate complex, a coast-to-coast In early 1981,
Theuer is stressing quality internally network including wholesal ers, brokers, a major drive to improve adulteration
and in a new TV ad campaign in March. shippers, and ingredient manufacturers. testing. Continuing tocould deal with Univer-
"Feeding babies is a sacred trust," he At its peak, it probably grossed tens of sal, LiCari believed, restructu jeopardize a
says. "It's so easy to destroy a reputa- millions of dollars annually. Beech-Nut major product-line ring that
tion and so difficult to rebuild it" was by far its biggest and most promi- Beech-N ut was planning. The line, fea-
turing foods designed for different ages,
Like many business blunders, Beech- nent customer, accounting for some
Nut's began with a deal that was too of its business. would emphasize nutritional values and
BUSINESS WEEK/FEBRUARY 22,1988129
THE CORPORATION
 Q> >
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rj C
. " 3 be rt *- *3 '&
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$
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"•H-C* —« t—J 0> 13 C

ved that
abse nce of artifi cial ingre dien ts. LiCa ri testified that he laid out his sciences. First, they belie selling fake juice.
the
uadi ng his supe - case agai nst Univ ersal to' Hoyvald and other companies were
LiCari knew that pers
wou ld not got the impr essio n he wou ld look into What, 'then, was so bad about Beech-Nut
riors to get rid of Universal matt er. But later Hoyvald indicated doing the same thingwere to remain competi-
be easy . Othe r juice mak ers, such as the convinced that
liers of susp i- to LiCa ri that noth ing would be done. tive? Second, they
Gerber, often cut off supp
dn't demo n- Hoy vald testif ied that he didn 't remem- their apple juice, even if it was adulter-
cious materials who coul eithe r conversation. ated, was perfectly safe. "So suppose
prod uct was genu ine. ber r and
strat e that their
some time s refer red to At a budg et mee ting with Hoyvald the stuff was all water and flavo an exec u-
But Lavery, who fall, says a for- sugar," says
LiCari as "Chicken Littl e," had turn ed that tive then at Beech-
burd en of proo f arou nd. Lave ry said mer empl oyee, Lavery Nut "Why get so up-
the este d gett ing a
that if LiCari wan ted to switc h to a more sugg set about it? Who
woul d have to new apple conc entra te
expensive supplier, he even though were we hurting?"
prov e that Univ ersal 's conc entra te was supp lier Those rationaliza-
that wou ld add costs.
adulterat ed.
ry warn ed of the tions were badly
FRESH EVIDENCE. By Aug ust, arme d Lave flawed. Most compa-
he had risk that Univ ersal 's
with fresh evidence, LiCari felt entr ate was bo- nies were not selling
an all but irref utab le case agai nst Uni- conc fake apple juice. Only
tists agre ed. His gus. Hoy vald refus ed.
versal. Other R&D scien
Lave ry the 5% of the apple juice
memo said that despite the "trem endo us He told then being sold,
switc hing supp liers new budg et was al-
cost pena lty" that
too high . say industry sources,
would bring, a high -leve l meet ing shou ld read y was adulterated. And
evide nce. At the time , Beec h-
be called to discuss the new s losse s were con- while there is no evi-
When he got no resp onse , he wen t to see Nut' dence the fake juice
sent a copy of the tinu ing $2.5 milli on
Lavery, who had been of $62 milli on was a health hazard,
memo. Lavery, LiCari testif ied, com- on sales there is no assurance
ed that LiCa ri wasn 't a team play er in the late st fiscal that it was not. "We
plain Hoy vald had
and threatened to fire him. year . PRESIDEN T THEUE R: "FEED ING just don't know the
h-Nu t head - prom ised Nest l6 that TRUS T"
LiCari drove down to Beec t would be
BABI ES n A SACR ED
long-range effects of
Phila delp hia, to mee t with Beec h-Nu Maurice
quar ters, near
mee ting is critic al to the profi table in 1982 . "The pressure was the synthetic ingredients," says offic ial with
Hoyvald. That Hoy vald testif ied. Guerrette, a food inspection
prosecution's charges that Hoy vald on," State Agriculture & Mar-
knew of the adulteration problem but Why had Beech-Nut for years resort- the New York .
did nothing to remedy it. ing to law-breaking to ease that pres- kets Dept r Beec h-Nut employees, ignoring
with sure? It seem s certa in some Beech-Nu t Othe
An austere nativ e of Den mark er- the many R&D studies offering evidence
joine d empl oyee s shou ld have know n Univ
hawklike features, Hoyvald had conc entr ate was adulterated. of adulteration, took refuge in let the lack
Beech-Nu t in 1980 and repla ced Nich olas sal's y their
was reco mme nded by "Wh en it come s in at that price," says a of a conclusive test. "The
in April, 1981. He
the senio r Gerb er exec utive , "you shou ldn't have to doubts color their judgment," says Jack
Ernest W. Saunders, then You know it's fake." Hartog, a food broker who repeatedly
over seein g Beec h-Nu t. test it. ersal.
Nestl£ exec utive
fired as chair - Evid ence sugg ests that Beech-Nut em- warned the company about Univ
Last year Saun ders was
- ploy ees used two main argu men ts to jus- Still others took a head-in-the-sand at-
man of Britain's scandal-p lagu ed Guin h-Nut em-
tify their cond uct and ease their con- titude. Says a longtime Beec
ness PLC.

THE SAGA OF BEECH-NUT 'APPLE JUICE'

1973 Squibb sells Beech-
Nut's 42-year-old baby-food
business to a group headed
by Pennsylvania lawyer-en­
trepreneur Frank Nicholas for
$16 million
' 1977 Tests by a company-
hired laboratory suggest that
the cheap apple concentrate
Beech-Nut is buying from a
new supplier may be adulter­
ated. Beech-Nut continues to
stress the lack of artificial in­
gredients in its product line.
The company's financial con­
dition deteriorates
'1981 Beech-Nut's research
and development depart­
ment mounts a major drive to
improve testing. R&D chief
Jerome LiCari tells superiors
he has a "tremendous
amount of circumstantial evi­
dence" that the concentrate
is adulterated. His superiors
fail to take action
1982 State and federal agen­
cies commence investiga­
tions. Beech-Nut initiates a
nationwide recall of its adul­
NICHOLAS: "MR. NATURAL1 terated apple juice
1979 Financial pressures
preclude a switch to new con­ 1986 Beech-Nut, its two top
executives, and its concen­
public by willfully distributing
phony apple juice. Its market
share begins to fall sharply
1987 Beech-Nut and senior
suppliers plead guilty. The
company pays a record $2
million fine. Beech-Nut's ex­
ecutives plead not guilty and
go on trial in New York
"BEECH-NUT
1988 LiCari testifies that the
top executives knew about
the adulteration problem, but
defendants deny any wrong­
doing. After final arguments,

Nestle
centrate supplier. Nicholas the case.goes to the jury in
sells Beech-Nut to Nestl6 for trate suppliers are indicted for
conspiring to defraud the early February
$35 million DOCUMENTS, BW
DATA: TRIAL TRANSCRIPTS, GOVERNMENT

THE CORPORATION
126 BUSINESS WEEK/FEBRUARY 22,1988
 yed or rela- Ward has been under federal investiga-
ployee: "It was something you just the entire inventory destrod it distribut- tion for his role in the Guinness scandal.
hoped would go away." Nobody serious- beled. But Hoyvald ordere discounts, a FDA investigators initially considered
ly challenged or asked for elaboration of ed "fast, fast, fast" at deepd. A lot of it Beech-Nut an innocent victim of unscru-
LiCari's adverse findings. But nobody Beech-Nut executive testifie ean. But a pulous suppliers. But the company's
ever confronted Universal. Nobody or- was exported to the CaribbPuerto Rico, stalling tactics angered them. After an
dered another inspection of the Queens sizable portion was sent to et and one investigation, they recommended to the
plant. Outside the R&D department there a major Beech-Nut mark laws. An Justice Dept. that Reech-Nut be prose-
was an almost total absence of inquiry. covered by U. S. food and drug testified cuted for knowingly shipping adulterat-
Everything changed one day in June, official with its local distributor regula- ed goods after June, 1982. A federal
1982, when a private investigator named that Beech-Nut never told him authentic- grand jury found incriminating evidence,
Andrew Rosenzweig showed up at Cana- tors had questioned the juice's he would including LiCari's 1981 memorandum, of
joharie. He had been hired to look into ity. Had he known, he said, Beech-Nut's knowledge before that date.
apple juice adulteration by Processed have refused the shipments. sell mixed The 1986 indictment also named Ka-
Apples Institute Inc., whose members Beech-Nut continued to
plansky and Wells. Both later pleaded
made products from fresh apples. He guilty and are awaiting sentencing.
told Beech-Nut officials that a new adul- SHIFTING THE BLAME. Nestl£ is financing
teration test, along with documents re- a vigorous defense of John Lavery and
trieved from a dumpster near the particularly Neils Hoyvald, who is being
Queens plant, established that Univer- represented by Brendan Sullivan, Oliver
sal's concentrate was bogus. He asked North's lawyer. James M. Biggar, chair-
them to join other juicemakers in a law- man of Nestle Enterprises Inc., which
suit against the Universal operation. oversees Nestles U. S. operations, says
•STONEWALLING.' Beech-Nut then com- that acquittal of Hoyvald and Lavery
mitted a grave tactical error. Says an would remove some of the onus of the
attorney close to the case, whose view is corporate guilty plea and properly place
shared by government officials: "They the blame on lower-level employees.'
could have nipped this in the bud, owned "They were the only ones who knew
up, paid a fine, and it would have been a what was going on," he says.
pimple for them. But they stonewalled, District Court Judge Thomas C. Platt
and the stonewalling became the issue, Jr. instructed the jury that the govern-
and the case changed from civil to crimi- ment must prove beyond a reason-
nal, and it became a nightmare." able doubt that the defendants
Beech-Nut immediately canceled its were aware of a "high probabili-
apple concentrate contracts. But its re- ty" the juice was impure and that
sponse to Rosenzweig's offer, a Pro- they intentionally violated the
cessed Apples Institute official said lat- law. He said the jury should con-
er, was "hostile and uncooperative." It sider the notion of "conscious
refused to join the PAI suit, which put avoidance," when someone has
the adulterators out of business a month a duty to seek the truth but
later. And it kept selling products made A PRINT AD AND A avoids doing .so.
from the phony concentrate. It did not BOTTLE OF "100%
The verdict may turn on the
issue a national apple juice recall until PRUIT JUICE":
USING THE BOGUS jury's view of Jerome LiCari,
October, despite warnings during the CONCE NTRAT E whom prosecutor Roche called
summer from the Food & Drug Adminis- HELPED SAVE > » "the conscience of Beech-Nut."
tration and the New York State Agricul- MONEY AT A
" Juic e® Defense lawyers pointed out
ture Dept. that samples of its apple juice CRITICAL TIME
f«>m Concentrate that LiCari admitted initially ly-
had been found to be adulterated. %,,..- NO SUGAR ADDED-
v - i*n^? ing to investigators about an
Federal and state officials later anonymous letter signed "Johnny
charged that Beech-Nut's strategy exe- Appleseed" that he sent to the FDA
cuted very effectively was to avoid in 1983 about Beech-Nut's early knowl-
publicity and stall their investigations ntrate edge of adulteration.
until it could unload its $3.5 million in- juices made from the bogus conceits re- But the most revealing evaluation of
ventory of tainted apple juice products. until March, 1983 months and after
its own LiCari and his relationship with Beech-
"They played a cat-and-mouse game call of straight apple juice operation Nut was his 1981 performance report,
with us," says one investigator. When lawsuit against the Universal company's written by John Lavery. It lauded his
the FDA would identify a specific apple in December alleging that the loyalty and technical ability but said his
juice lot as tainted, Beech-Nut would concentrate was phony. e and
quickly destroy it before the FDA could Hoyvald, who directed Beech-Nut's judgment was "colored by naivet asked by
es. He in- impractical ideals ." LiCari was
seize it, an act that could have created strategy, offered two defens e" the Justice Dept. lawye r John R. Fleder in
negative publicity. One day in August a sisted he still lacked "proof positivhe said he early January if he had been naive. "I
New York State official notified the concentrate was bogus. And e counsel, guess I was," he replied. "I thought ap-
company that a juice sample had "little, acted on the advice of outsid as J. Ward. ple juice should be made from apples."
if any, apple juice." Beech-Nut execu- mainly Nestle lawyer Thom ers, Ward Whatever the jury decides about Neils
tives worried that the state might seize A confidant of Ernest Saund strate its Hoyvald and John Lavery, it is clear that
its entire inventory. That night, they en- in 1981 had helped Nestle orche products too few people at Beech-Nut shared Je-
gaged nine trucks to move the inventory response to a boycott of Nestle formula ex- rome LiCari's ideals.
out of state to a New Jersey warehouse. stemming from its infantMore recently, By Chris Welles in New York
Some Beech-Nut employees wanted ports to the Third World.
THE CORPORATION
128 BUSINESS WEEK/FEBRUARY 22,1988