04/07/2023, 12:42 Romney on Board: Marriott accused of cheating clients on his watch : The Komisar Scoop

Romney on Board: Marriott accused of

cheating clients on his watch
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
Romney supporters at South Carolina rally, audit committee of a global
photo by Reuters. 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.

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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.

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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

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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.)

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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.

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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.

Silent Steward

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?

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“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.”

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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,

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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

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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

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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
Romney summer home in Wolfeboro, New “around the corner” from the
Hampshire, photo by Reuters.
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.

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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.

CTF Holdings, Inc. v. Marriott International, Inc., No. 02-271-SLR

(D. Del. filed Apr. 12, 2002). (File divided because of size: part 1,
part 2)

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).

SHC Laguna Niguel I LLC v. Marriott International, Inc., No.

BC280028 (Cal. Super. Ct. filed Aug. 20, 2002). (SHC=Strategic
Hotel Capital. File divided because of size: part 1, part 2)

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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