FEDS CLAIM $2.5M 'HONDAGATE' AD SCAM

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Back when they were marketing the best-selling car in the U.S., American Honda Motor Co.'s executives were taking bribes and kickbacks from dealers and regional advertising associations, according to a federal indictment filed last week.

The indictment, filed in U.S. District Court in Concord, N.H., named five former Honda executives in a scheme valued at $10 million in currency, goods and services. In addition, eight other former executives agreed to plead guilty to charges of accepting illegal payments.

Of the $10 million allegedly paid or given to the former executives, $2.5 million came from an advertising kickback scam during 1991 and '92. While dealers attempted to ensure delivery of much-in-demand vehicles with offerings of Rolex watches, $1,000 suits and even a one-year lease of a Mercedes-Benz 500 SL, the indictment said, the defendants allegedly bilked Honda and the regional dealer ad associations out of discretionary funds earmarked for supplemental marketing.

The indictment names no ad agencies or agency executives.

But perhaps a bigger question is how the news of the alleged dirty dealings between former Honda executives and dealers may tarnish the gleaming image of one of the most admired Japanese car companies.

Honda executives won't comment on the indictment; competitors seem unsure how damaging the news may be.

"It all depends on how deep the investigation goes," said Jay Amestoy, VP-marketing and communications at Mazda Motor of America. "If this is all, it probably won't have too devastating an effect."

However, federal prosecutors say the investigation is continuing and many observers close to Honda believe additional charges will follow. Indeed, some are starting to call the whole affair "Hondagate."

In a prepared statement, Thomas Elliott, Honda exec VP, said: "It would be both unfair and unfortunate if the criminal activities of a small group of individuals in any way undermine the well-earned reputation for integrity and hard work that characterizes our company."

Other Honda officials declined to comment. An agency executive who works at one of Honda's national shops said the company is "measuring the severity of the problem" but at this time doesn't plan to address the issue in ads.

The indictment spells out how the alleged ad scam worked:

Honda would periodically contribute supplemental matching funds to regional dealer advertising associations. The money was offered by the defendants to the associations with the caveat that it would be turned over to a specific direct marketing agency (identified only as "Vendor A"). The agency, however, never implemented the mailings and returned most of the money to the Honda executives.

In some cases, the money would flow through the associations' general ad agency, though one such agency refused to do it.

"I didn't want to take on the tax consequences without the revenue from commissions to balance it," said the agency's president, who asked not to be identified.

As of April 1, all regional advertising will be handled by a subsidiary of Rubin Postaer & Associates, Santa Monica, Calif., Honda's national agency.

Richard Colliver, senior VP-Honda division, said when he announced the change last October that it was designed to make the regional work complement the national campaign. However, it's also clearly a sign Honda wants more oversight of how all marketing dollars are spent.

Of all the former Honda executives either indicted or charged, only one worked in the marketing department. Thomas A. Caulfield, formerly assistant advertising manager, is accused of illegally receiving $779,000 in kickbacks from advertising and sales training programs.

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