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Chicago Retailer Accused of Taking Kickbacks

Allegations could jeopardize Sam's alcoholic beverage license

H. Lee Murphy
Posted: December 8, 2004

Illinois regulators have charged Sam's Wine & Spirits in Chicago with numerous violations--ranging from accepting kickbacks from wholesalers to operating a warehouse illegally--that could jeopardize the company's alcoholic beverage license.

The Illinois Liquor Control Commission served Sam's management with a 15-count citation late last week and says that more citations will also be served later this week to at least a dozen wholesalers and two dozen retailers that, it says, colluded in Sam's schemes. The retailers bought alcoholic products directly from Sam's, a violation of the state's three-tier distribution policy, the agency cites. It will likely seek fines against the wholesalers and retailers.

Michael Malone, executive director of the ILCC, says that Sam's could face either fines or revocation of its license, with negotiations towards a settlement likely to start soon. "If the retailer won't agree to a fine or some other action we propose, then they could elect to go to a full hearing before our seven commissioners," Malone notes. "If they do that, then we'll seek full revocation. These are very serious violations."

Executives at Sam's refute the claims against the company. "We've always complied with all commission regulations and will continue to do so," says Darryl Rosen, president of Sam's. "The state has decided to study retailer-distributor relationships. We welcome any clarity that can be added as a result of their investigation."

Sam's is charged with creating a separate business called Skyline Marketing Co. in 1995 and using it to solicit payments from distributors that were subsequently used to pay for computer equipment and travel expenses for Sam's employees and even to pay some employee salaries. Skyline also solicited payments from distributors to guarantee floor space for their products, according to one citation.

The company is also charged with setting up in 1998 a warehouse less than a block from its main store with no license and then conducting wine tastings at the facility. Regulators also said that Sam's had a policy of not paying its distributors within 30 days as required by state law. They alleged that the company received special pricing on product that was not offered to other retailers.

Rivals have long complained that Sam's was selling its products below wholesale cost and suspected the store was getting special deals from suppliers. "They've sold so many things cheaper than we could," says Johnson C. Ho, owner of Knightsbridge Wine Shoppe in Chicago's Northbrook suburb. "It was clear to us that they were pushing the envelope in pressuring suppliers for deep discounts." He believes that other retailers will eventually be implicated. "Liquor retailing in Chicago has been known for a variety of illegal practices," Ho notes. "There are probably more skeletons hidden within the network."

ILCC's Malone confirms, in fact, that other retailer investigations are underway, though he wouldn't identify any targets by name. The Sam's probe had been ongoing since last spring, he revealed. "You're likely to see more citations against other retailers here. We're moving as fast as our investigational resources will allow," Malone says. "We want to see an orderly and compliant marketplace. My job is to ensure that happens."

Paul Jenkins, executive director of the Wine & Spirits Distributors of Illinois, a lobbying group of 29 wholesalers in the state, says that other retailers have set up marketing companies to solicit payments from distributors. Under certain circumstances--funds must be used purely for merchandising purposes--the marketing entities are legal, he explains.

"These new citations are a wake-up call for the entire industry. Some practices have gone too far," Jenkins says. "A few retailers have become very powerful, and they've squeezed wholesalers for more and more special considerations as a result."

Though Malone would not confirm it, sources say that the ILCC will seek a fine of $1 million or more against Sam's and its management. Each wholesaler cited in the probe could face fines upwards of $100,000, sources say.

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