Cowabungle.

• Author: Wittebort, Suzanne
• Position: Fixing bids in North Carolina's milk and dairy products companies - Includes related articles - Cover Story

How the school-milk scandal earned milk processors pints of pennies and gallons of grief.

Summer 1982 was just beginning when some North Carolina executives from Flav-O-Rich and Pet Inc. met in a Piedmont restaurant. According to federal prosecutors, they discussed their upcoming bids to supply milk to local school districts. In that and subsequent meetings and phone calls over the next five years, they and executives from other milk processors divvied up most of the state's 130-some districts. They decided which company would bid lower and which would bid high or refrain from bidding.

Ten years later, one week before Christmas 1992, pale winter sunlight filters into Courtroom 3 in U.S. District Court in Greensboro. The well-dressed crowd filling the pewlike wooden benches sits in breathless stillness. Ollie Wood, former division, district and sales manager in Greensboro, and Joe McMillan, former Wilkesboro division and district sales manager, have pleaded guilty to bid-rigging, a felony. They are two of three Flav-O-Rich officials to do so in North Carolina. They didn't instigate the conspiracy, their lawyers say, but carried it through on orders from superiors.

His voice thick with emotion, Wood addresses Judge Frank W. Bullock: "Your honor, I'm ashamed and embarrassed to be here. I made a foolish but serious mistake. I know what I did was wrong. Even under the pressure I was subjected to, I shouldn't have done it. I'm sorry. I regret it more than words can say. This is something that will haunt me for the rest of my life. I'm ashamed and embarrassed at the pain I've caused my family. ..."

The stocky, gray-haired Wood chokes up and, at the judge's bidding, sits down. He presses his handkerchief to his mouth as family and friends wipe their eyes, sniff and discreetly blow their noses. Humiliation and destroyed careers plainly compound the sentences: in this case, six months in a community corrections center, three years' probation and 300 hours of community service.

To date, 10 men and five companies -- Pet Inc. of St. Louis, Flav-O-Rich of Louisville, Ky., Pine State Creamery of Raleigh, Land-O-Sun of Johnson City, Tenn., and Coble Dairy Products Cooperative of Lexington -- have pleaded guilty or no contest to bid-rigging in North Carolina. Total fines within the state exceed $3 million, which eventually will be returned to the school districts. The investigation is continuing, with two other companies, Maola Milk and Ice Cream of New Bern and Carolina Dairies of Kinston, having been implicated in court hearings. (An attorney for Maola has denied that the company was involved.)

The scheme began with a small group of dairymen and rippled out to touch most of the major processors providing milk to nearly every school district in the state between 1982 and 1988. Prosecutors and newspapers have portrayed it as a sinister conspiracy that bilked the school-lunch program of millions of dollars through inflated prices. Its victims: North Carolina's schoolchildren.

But the true picture is far more complex. Not even the prosecutors claim that the conspirators profited personally from the crime. It was a matter of survival, a desperate ploy to stay afloat that pushed them to make the ultimate bad business decision: to break the law.

The milk industry is a strange economic animal. Raw milk's price and supply are controlled by the government, but processors' prices are supposedly set in a perfectly competitive market. As free marketers, processors are subject to the Sherman Act, the trust-busting federal legislation passed in 1890 to outlaw monopolies, conspiracies and price-fixing. First used decisively against a Western railroad trust, it has been applied in recent years against companies from highway builders to AT&T.

But for processors and middle managers such as Ollie Wood and Joe McMillan, the Sherman Act put them between a rock -- fierce market competition mandated by law -- and a hard place -- a government-supported milk glut exacerbated by plant overcapacity and powerful new competition as supermarkets decided to process their own milk. Food-industry giants Kraft, Borden and Pet got out of the business in North Carolina. But for some processors that remained, the schools at least provided a market for their milk, albeit an all-but-unprofitable one dominated by a disruptive bidding system.

State investigators contend that the conspiracy added an average overcharge of a penny and a half on 540 million half-pints of milk sold to schoolchildren during the period, siphoning $8.1 million from school lunch programs. Some milk-company officials privately question the figure.

Nationally, "it's not really clear whether bid-rigging raised prices or not," says Nicholas Iammartino, spokesman for New York-based Borden, which has been involved in cases in other states. "There are some indications it was more a matter of convenience. No one makes a lot of money in the school milk business."

But because federal support to lunch programs is allocated on a per-child basis, more money for milk meant less money for more or better food, equipment or salaries.

"It's outrageous conduct," says James Gulick, special deputy attorney general and director of the consumer-protection and antitrust section of the N.C. Department of Justice. "It's not accidental. It's not in the heat of passion. It's not somebody having a bad day. It went on for a long time, so it's an unusually calculated kind of crime."

"It's taking money out of child-nutrition programs at the expense of hungry children," says Kevin Dando, government-affairs specialist for the American School Food Service Association in Alexandria, Va. "Those fractions of pennies per meal can add up very quickly."

But they weren't adding up quickly enough for the processors to make much, if any, money. If school milk earned the industry's average return (and many suggest it earns less), processors were making less than two-tenths of a penny on each half-pint sold to the schools for 15 cents.

"From Mr. Wood's perspective, he thought school bids were fair," says his lawyer, Nicholas Lotito of Atlanta. "His perception at the time was that he wasn't hurting people." Many of the winning bids were as much as 30% below wholesale milk rates, Lotito said at Wood's sentencing. It has been suggested that the collusion enabled remote districts to get...