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Post date: September 19 2012

A.G. Schneiderman Announces $18 Million Settlement With Compass Group USA For Overcharging NYS School Lunch Programs - New York

Food Contractor Improperly Profited From Rebates Withheld From 5 New York City Schools And Educational Entities

Schneiderman: Corporations That Profit From Overcharging New York’s Schools Will Be Held Accountable

NEW YORK – In the largest recovery under the newly enhanced False Claims Act, Attorney General Eric T. Schneiderman announced today an $18 million settlement with food management services provider Compass Group USA, Inc. for improperly overcharging more than 39 New York schools and school districts statewide, including five in New York City. Compass received discounts from food vendors it worked with, but did not pass on those savings to New York’s schools, as required by law. In addition to today’s multimillion dollar settlement, the corporation will institute a nutritional code of conduct that will result in better quality food for New York school children.

In addition to school districts statewide, educational entities receiving compensation from Attorney General Schneiderman’s settlement include the Fresh Air Fund and New York School for the Deaf.

“Compass improperly profited by overcharging New York’s taxpayers and shortchanging our schools. There are no excuses for this kind of misconduct,” said Attorney General Schneiderman. “On behalf of students, parents and taxpayers, we are pleased that New York City schools will get their money back, and that this corporation will be held accountable for siphoning funds meant to benefit students.”

An Attorney General investigation found that Compass, which negotiates contracts, handles food-related procurement, and staffs and supplies culinary facilities for New York state schoolsthrough its national operating subsidiary Chartwells, failed for more than seven years – from 2003 to 2010 – to disclose or pass through to many of its educational customers cost-saving rebates paid to the company by vendors and suppliers on its food-related purchases, in violation of specific contractual obligations and state and federal regulations. This resulted in cash-strapped New York schools and school districts being charged more than was permitted for the food provided by Compass.

The investigation leading to this settlement was conducted by the Taxpayer Protection Bureau, which the Attorney General established in 2011 to combat fraud and abuse of taxpayer dollars. It is part of this Office's ongoing, industry-wide investigation of food management companies and food distributors doing business with the state of New York. The Compass agreement comes on the heels of last year's $1.6 million settlement with the Whitsons companies.

In addition to paying the $18 million settlement amount, Compass will be required, over the next two years, to make quarterly disclosures of the settlement to all of its New York state educational customers and to provide detailed semi-annual reports of the company's New York sales and rebating practices to the Taxpayer Protection Bureau. The nearly $3 million in overcharges will be returned to schools and school districts statewide, and the remaining $15 million will be returned to New York State taxpayers.

Consistent with the Attorney General's broader goal of improving the quality of food served to New York students, Compass also agreed to a first-ever nutritional Code of Conduct requiring that it work diligently to comply with the enhanced nutritional standards of the Healthy, Hunger-free Kids Act passed by Congress on January 25, 2012, ahead of the scheduled time tables and, in addition, through partnering with local suppliers of fresh products, among other measures. Paying all rebates owed to schools, so that they can better afford to deliver healthy meals to more New York students, is a critical part of this effort. 

The Attorney General’s Taxpayer Protection Bureau will continue to investigate fraudulent rebating practices in the food services industry, focusing on the conduct of other major food service companies and food distributors, and working with other states' Attorneys General to promote national reforms in this area. 

Funds from the Attorney General’s settlement will be distributed to impacted school districts and educational entities across the state. In New York City, these include:

  • Fresh Air Fund (New York, NY)
  • Magen David Yeshiva (Brooklyn, NY)
  • Manhattan Day School
  • Ramaz School
  • Salanter Akiba Riverdale Academy.

The settlement also promotes greater transparency in the contracting process by establishing built-in safeguards to ensure that Compass's customers are informed about rebates. Under its terms, Compass must:

  • Provide written disclosure to its New York state educational clients for the next two years explaining the company's rebating practices and notifying them of the review of their accounts by an independent auditor;
  • Establish a hotline for educational customers to call with any questions concerning rebates;
  • Pay for an independent auditor's review of rebating practices and submit semi-annual reports to the Office of the Attorney General for the next two years; and
  • Provide annual written reports to this Office on the progress of its compliance with the Nutritional Code of Conduct.

This investigation was pursued under the New York False Claims Act. As a state senator, Attorney General Schneiderman authored amendments to strengthen the False Claims Act.  These enhancements, known as the Fraud Enforcement and Recovery Act, allow the state to collect triple damages and between $6,000 and $12,000 per violation from corporations or people who defraud the government, or violate their obligations to pay government entities.

The Attorney General's investigation of Compass was led by Taxpayer Protection Bureau Assistant Attorney General Marvin Peguese, with assistance from Senior Counsel Emily Bradford and Investigator Erin Wolfe. It was conducted under the supervision of Bureau Chief Randall Fox and Executive Deputy Attorney General for Criminal Justice Nancy Hoppock. 

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