Oklahoman: Food supply company settles fraud lawsuit with Yukon Public Schools

Food supply company settles fraud lawsuit with Yukon Public Schools

Sunday, February 25, 2018 | by Randy Ellis

YUKON — Yukon Public Schools officials have approved a secret financial settlement with a food distribution company accused of fraudulently overcharging the district by more than $700,000.

Terms of the settlement were not revealed in the federal court lawsuit and a nondisclosure agreement approved by the school district and Sysco Oklahoma, the food distributor, prohibits them from discussing that information, attorneys said.

The Oklahoman has submitted an open records request to the school district for a copy of the settlement check, but the district has not yet fulfilled that request. State law requires public bodies to make their financial records available for inspection when requested.

Allegations of possible overcharges by Sysco were first brought to Yukon school administrators more than four years ago by Cost Defender — a company that audits and identifies overbillings on a contingency fee basis, court documents reveal.

Cost Defender is a local limited liability company formed by former Sysco employee Chris Mountford.

Yukon school officials were reluctant participants in the financial recovery process, ignoring for 13 months Cost Defender’s offer to assist the district in recovering overcharges in exchange for 15 percent of any money recovered, records show. That prompted the company to issue a stern warning to the superintendent that "publicity" would follow if the district didn’t respond to an open records request seeking access to food service bidding and invoice documents.

Yukon Superintendent Jason Simeroth said it is not unusual for school districts to get similar solicitations from companies that want school districts to do most of the work, and it was only when the district received the open records request that administrators realized the company was “serious” and “must have some information that was pertinent to the situation."

How many other school districts may have experienced similar overcharges is unclear, although court documents provide reason for concern and closer auditing to detect noncompliance with school cafeteria food supply contracts.

Sysco Oklahoma is a regional branch of a multinational food distribution company that does $55.4 billion in annual sales.

Although Sysco officials agreed to the settlement, they continue to deny wrongdoing.

"Recently, Sysco decided solely for business reasons to settle ongoing litigation with the Yukon School District," Camilla Zuckero, company communications director, said in a prepared statement. "Sysco made this decision to avoid costly and prolonged litigation. Sysco took the allegations and claims being made very seriously, and we dispute them in their entirety."

Lawsuit filed in 2016

The settlement resolves a lawsuit filed Sept. 22, 2016, in Oklahoma City federal court.

In that lawsuit, Yukon school officials accused Sysco of defrauding the district by overbilling for grocery products.

Sysco submitted bid prices for an array of grocery items that were supposed to be guaranteed for the duration of each school year, school officials said.

However, when the products were delivered, they were accompanied by invoices that billed the district at higher prices.

School district employees who received the products checked them against the invoices to make sure the proper quantities of each item were delivered, but failed to check the prices charged on the invoices to make sure they matched bid prices.

"We didn’t connect the dots," James Fenrick, chief financial officer for Yukon public schools, said in a deposition. "I’m not proud that we didn’t catch it."

Fenrick told attorneys the school district didn’t have the resources to scrutinize invoices and detect the overbillings.

"We don’t have an internal auditor," he said. "We’ve got a … kitchen director over there that has 11 kitchens to make meals every day, got 65 employees, has menus to produce. It wasn’t physically possible."

Overcharges went undetected for four years, resulting in more than $700,000 in overpayments from 2008 through 2012, school officials alleged.

Previous overcharging allegations

Sysco-related companies have previously been accused of overcharging government customers.

In 2014, Sysco of Oklahoma agreed to pay or credit the state of Oklahoma more than $36,000 after food contract overcharges were detected by the Oklahoma Department of Corrections, state records show.

And in 2013, the U.S. Department of Justice announced that FreshPoint Inc., a Houston-based subsidiary of Sysco Corp., agreed to pay $4.2 million to resolve allegations that it had overcharged the Department of Defense for fresh fruit and vegetables purchased under 15 separate contracts.

Cost Defender, the company that brought the alleged overcharges to the attention of Yukon school officials, is a local limited liability company formed by former Sysco employee Chris Mountford.

Mountford stated in a deposition that he became "very suspicious something was not right with the Yukon account" during the time that he worked for Sysco.

After leaving the food service industry, Mountford formed Cost Defender, which operates like an auditing bounty hunter — offering to audit food service purchasing documents in exchange for a percentage of any overcharges recovered.

In the Yukon school district’s case, Cost Defender offered to do the auditing work for 15 percent of recovered funds.

"If we find nothing, you will pay nothing," Cost Defender President James Watkins wrote in a Dec. 1, 2014, email to Yukon Superintendent Simeroth.

In that same email and an open records request the company submitted to Simeroth about two weeks later, Watkins complained that his company’s offers of assistance had been repeatedly ignored by school officials — a situation he said had been going on for 13 months.

"This is by far the most resistance we have received from a school district," Watkins wrote in the email. "We understand if the answer is ‘no’, and we understand if a district would want to take on the task themselves. What we don’t understand though is an apparent lack of concern for fiduciary duty, and a disinterest in recovering what could equate to several teachers’ salaries."

‘Little or no work’

Watkins wrote that the school district would be asked to do "little or no work."

"We are confident there is money that can be recovered," he wrote. "Simply provide us with a copy of the bids and point us in the direction of the boxes of invoices. We will do all the rest of the work which involves scanning thousands of pages, creating a database of all items purchased and verifying those items against the bid price. And we will provide a report that details invoice #s, dates, items and incorrect amounts. The amounts are totaled and a final amount due to you from the distributor is provided."

Watkins offered to be discreet, indicating his company had successfully collected overcharge reimbursements for other clients without the news media finding out.

"Our clients are able to take our report directly to their current and former Foodservice Distributors and recover money immediately," he told the superintendent. "The distributors don’t want their ‘mistakes’ being made public, so they generally settle without much of a fuss. To date not a single one of our recoveries has made the press. That is a positive for the distributor and the school district."

"We are sensitive to the fact that it might look bad for a school district to appear unable to enforce their own contracts," he wrote.

Watkins stated in the email that if the school district refused to cooperate, his company would likely seek to obtain the district’s billing invoices through an Open Records Act request and then report any overcharges it detected by filing a fraud, waste and abuse claim with the federal Government Accountability Office, since school lunch programs involve federal funds.

"We would recover up to 30 percent of the funds in that case, however it is not our desire to go that route, as that would necessarily involve a great deal of press," he wrote.

Watkins declined to elaborate on his comments when contacted by The Oklahoman.

The Yukon school board was represented in the lawsuit by Oklahoma City attorneys Michael Blaschke and S. Randall Sullivan. Sysco was represented by the Oklahoma City law firm Hall, Estill, Hardwick, Gable, Golden & Nelson.

The Yukon school district is paying its attorneys 30 percent plus costs for assisting the district with the lawsuit, and payments to Cost Defender are rolled into that amount, Simeroth said.