SEC Documents Show Grey Began Providing Info to Investigators a Year Ago

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Latest Development
April 1, 2002
Details in Annual Report Issued With SEC Today

NEW YORK (AdAge.com) -- Grey Global Group had been supplying information to federal investigators for the last year about allegations of bill-padding in its graphics invoices, according to the company's annual report.

Filed today with the Securities and Exchange Commission, the Grey document notes that "from March 2001, the company received a number of grand jury subpoenas primarily seeking documents of the graphics services department…relating to various vendors doing business with the department. The subpoenas were issued at the request of the (U.S.) Department of Justice Antitrust Division."

The filing also notes Grey has cooperated with authorities, which last month filed a criminal complaint against Mitchell Mosallem, former executive vice president and director of graphic services. And the filing adds "the government has also indicated that it is examining whether there is company responsibility in this matter." -- Mercedes Cardona

In-Depth Background
NEW YORK (AdAge.com) -- Procter & Gamble Co. in 1999 paid Grey Worldwide more than $100 million in commissions and fees, so there was little reason for the marketer to question a $2,000 charge from a March 30, 1999, invoice for ad production work on Cover Girl. Maybe P&G should have.

An ongoing federal investigation alleges a top Grey executive worked on a decade-long scheme that in just one 30-month period resulted in P&G and other Grey clients getting bilked out of about $500,000 through padded invoices.

It's a case with a blue chip cast: P&G, the nation's No. 3 advertiser; Grey, one of the top five U.S. agencies; and one Mitchell E. Mosallem, who until his December resignation was executive vice president and director of graphic services at Grey Global Group's Grey Worldwide, New York, and chairman of the print production committee at the American Association of Advertising Agencies. Grey has worked for more than 40 years on P&G, its largest client.

Charged with mail fraud
The government accuses Mr. Mosallem of mail fraud for orchestrating with graphics suppliers a complex scheme of bill padding. He surrendered to authorities March 21 and is free on $1.5 million bail. Mr. Mosallem's attorney said his client intends to put up a defense; he said he won't comment further until the government releases more details of its case.

Government authorities won't comment. A Grey spokeswoman said the agency is cooperating with investigators. Grey last week hired Deloitte & Touche to audit internal production procedures. P&G, the only client identified so far as losing money from the alleged fraud, said it is aware of the investigation but declined further comment.

Serious questions
The case raises serious questions for the marketing business in general and Grey in particular.

"How far will the government go?" said one legal

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Feds Allege Mitchell Mosallem Padded Invoices
expert familiar with the ad business. "I don't think they're going to stop here."

Whispered talk of agency employees accepting under-the-table gifts and kickbacks from suppliers is not new. Having the Justice Department on the doorstep of Madison Avenue is.

It's not clear how long Justice will stay. It is clear where Justice has been. Since 1996, government probes into the point-of-sale industry and marketers have led to guilty pleas from 32 people and nine companies. A Justice Department spokeswoman said Mr. Mosallem's case is a continuation of that probe.

Court papers allege Mr. Mosallem didn't act alone; two staffers who worked under him at Grey are cooperating with authorities and, according to the government's complaint, admit involvement in defrauding clients.

Alleged conspiracy with suppliers
The case alleges four unnamed New York graphics suppliers conspired with Mr. Mosallem. Grey, which prior to Mr. Mosallem's arrest had confirmed it was cooperating with authorities in an investigation of graphics supplier Color Wheel, last week severed ties to the company. Color Wheel's attorney declined to comment except to say his client had worked with Grey.

The government's complaint alleges a complex scheme of fraud: Suppliers provided Mr. Mosallem, other senior Grey employees and their families with costly perks, padding invoices to pay for them; Mr. Mosallem and colleagues spread the bills among clients.

Federal authorities haven't publicly revealed how much money they say was involved in total in the alleged scam, dating to at least 1991. But in a single year, the complaint alleges, one graphics supplier fraudulently billed Grey almost $100,000 for tickets to sporting and cultural events. One supplier allegedly gave Mr. Mosallem $1,200 in Metropolitan Opera tickets. Suppliers provided wedding invitations, holiday cards and photographs, with clients footing the bill, the government alleges.

Perk vs. crime
It's common practice in advertising for sellers of goods and services to offer perks to buyers. Done above board, it's only an ethical issue and a legal cost of doing business. The Grey case alleges a crime: defrauding clients.

The structure of the ad business -- suppliers bill agencies, which bill clients -- generates a flow of cash attractive to those who wish to engage in unscrupulous behavior. Print production has an added twist: Production departments wield considerable power in selecting vendors.

How can marketers and agencies protect themselves? There are no easy answers. The 4A's and the Association of National Advertisers declined to comment, saying they don't have guidelines.

Arthur Anderson, managing principal in advertiser consultancy Morgan Anderson, recommends marketers pay bills to agency vendors directly rather than leaving the agency as middleman. Clients should demand the right to audit agencies' billing processes, he said.

Agencies also can create controls. Omnicom Group's Merkley Newman Harty, New York, brought pre-press and re-touching work in house to gain greater control; it also requires all print jobs to be triple bid.

"My vendors know they have to compete," said Graham Turpin, head of print production.

Formal price estimates
Victor Basile, senior VP-director-print and graphic services at Bcom3 Group's D'Arcy Masius Benton & Bowles, New York, and new chairman of the 4A's print production committee, recommends agencies and clients sign a formal price estimate for each project. If additional costs arise, the client should approve them, he said. He also recommends that responsibility for picking vendors be spread among several employees. If costs are added to an invoice beyond what has been agreed upon, he said, "the costs won't be paid."

Staff writers Alice Z. Cuneo, Cara B. DiPasquale, Kate MacArthur, Jack Neff, Ira Teinowitz and Rich Thomaselli contributed to this report.

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