Feds Settle Wine Kickback Case in Illinois

Illinois' wine business is looking about as clean as its politics now. While the state legislature prepares for an impeachment trial of Gov. Rod Blagojevich, accused of trying to put President Barack Obama's senate seat up for auction, the state's liquor trade is grappling with legal problems of its own.

Last week 10 of the largest alcoholic-beverage distributors in the state agreed to pay a total of $803,000 in fines to the federal Alcohol and Tobacco Tax and Trade Bureau (TTB). The penalties were levied by federal regulators following a six-year probe into abuses at Sam's Wine & Spirits Inc. in Chicago, which was caught accepting kickbacks from wholesalers and running an unlicensed warehouse for the storage of surplus inventory.

The 10 wholesalers were accused of giving Sam's executives money and free cases of goods in return for favored shelf positioning. So-called slotting allowances are a common practice in the grocery trade, but illegal in the retailing of alcohol in Illinois. The wholesalers also apparently gave Sam's preferred lower pricing on goods that wasn't available to other retailers.

The long legal battle has taken its toll on Sam's, which settled with regulators more than two years ago by paying a $300,000 fine and closing down for three business days. The Rosen family, which had owned the company since its founding just after World War II, sold the business in 2007 to a local private-equity firm, Arbor Investments. The last family member still working at Sam's, Brian Rosen, 38, the company's president, departed the company just before Christmas.

Arbor did not return phone calls, but since the sale the four-store Sam's chain has taken on a very different image. Once known for the biggest selection and lowest prices in wine anywhere in the Midwest, and perhaps the entire country, Sam's has narrowed its inventory and is increasingly concentrating on high-profit private-label wines. In Chicago, rivals such as Costco and Binny's Beverage Depot now offer the lowest prices on most wine labels. Most of the longstanding sales force of Sam's is now working elsewhere.

"It's very sad to see this," said Darryl Rosen, a former president of Sam's who left the company to his brother Brian in a rift two years ago. "Sam's used to be a Chicago institution. For whatever reason, it's not that anymore."

The biggest distributor in the state, Southern Wine & Spirits of Illinois Inc., was fined $225,000 by the TTB, while the No. 2 distributor, Judge & Dolph Ltd., paid $130,000 in fines. Glazer's Distributors of Illinois Inc. was also fined $225,000, while Johnson Brothers Liquor Co. of Illinois was fined $40,000.

Randy Stoller, the owner of Stoller Wholesale Wine & Spirits Inc., which was fined $18,000, denied that he ever wrote checks for cash to Sam's, but did admit that he supplied free cases of wine. "We'd ask them to buy 10 cases from us and then give them a free case, and we offered the deal to other customers we had," said Stoller. "Unfortunately, Sam's was asking for a lot of extras beyond that. But now I think this sort of thing is over with. The industry is cleaned up."

Other defendants maintained their innocence. Seth Allen, the chief executive of Vin Divino Ltd., which was fined $30,000, said that his firm was caught up in a wide net cast by the Illinois Liquor Control Commission. "Citations were originally sent to 25 companies, but we weren't guilty of the activities they alleged," said Allen. "It cost us tens of thousands of dollars to defend ourselves and the federal government was holding our license over our heads. In the end it was in our best interest to settle."

Manfred Bauer, owner of Wein-Bauer Distributing Inc., which was fined just $3,000, said, "Apparently regulators found that we had shipped a couple of cases to Sam's at no charge. We weren't even aware of it. We took the fine without admitting guilt. The legal proceedings had become costly and time-consuming."

Many local retailers allege that distributors are still bending the rules when it suits them. In Chicago, for instance, industry sources say it isn't uncommon for a wholesaler to pay for expensive leather-bound portfolios encasing wine lists in return for a guarantee of placing its wines on the list—an illegal practice.

"This most recent investigation by the government has put the most obvious abuses in check," said Johnson Ho, the owner of the Pantheon Wine Society shop in the Chicago suburb of Northbrook. "Wholesalers had gone way overboard at one point in accommodating the 800-pound gorilla—Sam's—in this market. Maybe this spanking from regulators will keep them in line now."

Other retailers aren't so sure. Howard Silverman, the owner of Howard's Wine Cellar on Chicago's north side, who was the chief wine buyer at Sam's back in the 1990s, calls the latest fines "nothing but a slap on the wrist. It's hard to believe that the fines were so low. I don't think it will be enough to stop this from happening again."