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Post date: October 30 2006

Liquor Suppliers Settle Pay-to- Play Probe

Attorney General Spitzer and State Liquor Authority Chairman Daniel Boyle today announced an agreement to resolve an investigation of illegal marketing practices by 15 wine and liquor suppliers.

Under the agreement, the suppliers will reform their marketing practices and pay $2.3 million in fines and costs. In September, a similar agreement was reached with the eight largest wholesalers in New York who paid $1.6 million in fines and costs.

"As a result of these supplier and wholesaler agreements, the illegal schemes that benefited a favored few have ended," Spitzer said. "The result is that thousands of smaller stores, bars and restaurants will now be able to compete on a level playing field."

The Attorney General began a probe of the state liquor industry in 2005 to determine whether wholesalers and suppliers were offering inducements to liquor stores, bars and restaurants to reward favored customers and influence purchasing decisions.

Incentives, financial or otherwise, are a violation of New York's Alcohol Beverage and Control Law, which explicitly prohibits manufacturers and wholesalers of wine and liquor from favoring selected retailers, bars and restaurants with preferential discounts, rebates, allowances, free goods, and other inducements.

The investigation revealed that wholesalers were engaged in an array of illegal activities. Suppliers did so to a substantially lesser degree. However, suppliers were often aware of the illegal conduct wholesalers engaged in when selling the suppliers' products to retailers, and sometimes even reimbursed the wholesalers for a portion of their costs.

Illegal practices included providing deeply discounted or free products, gifts and cash payments to favored retailers. To avoid prohibitions against payments by suppliers and wholesalers for retailers' advertising, retailers set up display and advertising companies to to receive payments from supplier and wholesalers. The advertising companies were typically run by a spouse or other relative of the retailer.

In 2003-2005, such payments from wholesalers to liquor stores' display companies totaled over $18 million; similar supplier payments totaled over $6 million.

From 2003 through 2005, the aggregate value of the illegal benefits bestowed upon favored liquor stores, restaurants, nightclubs and bars by wholesalers exceeded $50 million, while such payments by suppliers totaled over $9 million.

Under the agreement, the suppliers must cease making such illegal inducements. They are also prohibited from subsidizing illegal conduct by the wholesalers that distribute their products. Each of the suppliers must also file an affidavit with the Attorney General's Office within 60 days of the agreement to show it's compliance with the agreement terms.

The companies entering agreements with the Attorney General are: Bacardi U.S.A., Inc; Banfi Products Corporation; Brown-Forman Corporation; Constellation Brands, Inc.; Diageo North America, Inc.; E & J Gallo Winery; Future Brands LLC; Absolut Spirits Company, Inc.; Jim Beam Brands Co.; Kobrand Corporation; Moet Hennessey USA, Inc.; Pernod Ricard USA, LLC; Remy Cointreau USA, Inc.; Sidney Frank Importing Co., Inc.; Skyy Spirits, LLC.

An investigation of the retail sector of the industry is continuing.

Spitzer acknowledged the New York State Liquor Authority for its ongoing assistance in the investigation.

The investigation underlying the agreements was conducted by the Attorney General's Buffalo Regional Office. It was led by Assistant Attorney General Dennis Rosen in coordination with Assistant Attorneys General Michael Siragusa and Stephen Gawlik, with Sr. Investigator Peter Eiss and Law Assistants Jeffery Davis and Jeffery Weimer. The investigations were supervised by Ken Schoetz, Assistant Attorney General-in-Charge of the Buffalo Regional Office, and Martin Mack, Deputy Attorney General.