Heard off the Street: Le-Nature's owner's moves suggested trust wasn't in the water
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Long before Wachovia, Merrill Lynch, Standard & Poor's and other Wall Street sophisticates discovered the risks of trusting Le-Nature's, Rabbi Jacob Blugrond knew something wasn't kosher about the Latrobe bottled water company and its founder, Gregory J. Podlucky.
Unlike the bankrupt company's 320 employees and the frenzied creditors picking over Le-Nature's carcass in the wake of what's alleged to be monumental accounting fraud, Rabbi Blugrond and his colleagues got off easy.
Federal investigators have begun the painstaking process of determining how Le-Nature's house of cards -- advertised annual revenue of $275 million is more like $32 million, according to the company's court-appointed custodian -- was built. Their job is complicated by the fact that some employees stand accused of destroying evidence. They include Mr. Podlucky, the son of late Jones Brewing owner Gabby Podlucky.
Don't be surprised if the findings of the criminal and civil investigations echo claims in the one-foot stack of pleadings gathering dust in federal archives in Pittsburgh. They detail the history of a 2001 lawsuit that pitted the rabbi against Global Beverage Systems, Le-Nature's name at the time.
The lawsuit was brought by Rabbi Blugrond's employer, the Union of Orthodox Jewish Congregations of America, a New York agency that certifies products as kosher. The union's mark is tantamount to a Good Housekeeping Seal of Approval for consumers who adhere to a kosher diet.
Although Global and Mr. Podlucky ultimately prevailed, the court record provides ample evidence that investors and creditors should have questioned Mr. Podlucky and his managers a lot more doggedly than they apparently did.
Among the evidence is a reference to the state Department of Environmental Protection shutting down the Latrobe plant in 2000 for bottling water without a state permit. The violation came to light after customers were sickened by e-coli-infected water produced at the plant. Global paid a $50,000 fine and contributed $150,000 to an environmental project to get the state off its back.
The company's inclination to circumvent necessary approvals didn't escape the Jewish agency's attorneys.
"Global Beverage's conduct in this case is part of a pattern and practice of bypassing applicable licensing requirements, disregarding the rule of law and disregarding the welfare of the consumers of its products," they alleged.
According to court records, Global approached the Union of Orthodox Jewish Congregations of America about being certified in May 1999.
What the union didn't know at the time was that Global previously had used the kosher symbol of Brooklyn, N.Y.-based Organized Kashrus Laboratories, another certifying agency, without its approval. Court records show Mr. Podlucky agreed to stop doing that at about the same time he approached the union.
When Rabbi Blugrond inspected the Latrobe plant in August 1999, he found a non-kosher grape extract being used and suggested how to bring the plant into compliance. Global never pursued certification after the inspection.
But court records indicate that the same day Rabbi Blugrond showed up, Le-Nature's told the company that produced its labels to start printing ones with the union's symbol on it. More than 4 million labels eventually were printed.
Mr. Podlucky later claimed the rabbi gave oral approval to use the union's symbol during his inspection. The rabbi disputed the claim and Mr. Podlucky later said he couldn't remember making it.
It took the rabbis nearly two years to discover that Global was using its symbol without permission. When they finally did in February 2001, there was an exchange of letters that led to a settlement a month later. Global agreed to pay $10,000, stop using the labels and to not allow the sale of products bearing them.
The settlement lasted two months. In May, shoppers commissioned by the union discovered kosher labels on Le-Nature's products sold at Shop 'n Save. It filed suit in federal court in Pittsburgh, seeking to rescind the settlement and collect damages related to the unauthorized use of its symbol.
Global claimed it did everything in its power to live up to the terms of the settlement, including destroying nearly 1 million bottles. It also claimed the grocery store wasn't its customer and the bottles still on the shelves were isolated incidents.
Three years later, a jury ruled in Global's favor. The decision was based on its interpretation of the March 2001 settlement agreement, which released Global from paying further claims if it lived up to the terms of the agreement.
Rabbi Howard Katzenstein, who wrote the agreement for the union, testified that he intended it to mean that if any more kosher-labeled bottles were found after the agreement was signed, the union could sue Global. But the language of the agreement didn't make that clear.
"Why didn't you put that in there?" Global's attorney asked him.
"Because I'm not a lawyer. I should have," the rabbi testified.
The rabbi shouldn't have been so hard on himself.
In retrospect, the union got off relatively cheaply -- about $200,000 in legal fees. No matter how many high-priced attorneys they hire, Le-Nature's creditors and minority shareholders can expect to pay far more and walk away with far less if the fraud is as massive as advertised.
First Published November 12, 2006 12:00 am
