Prosecutors see seedy side to seemingly tame industry

June 8, 2009

Processing supermarket coupons may sound like a sleepy, quaint industry.

Not so, according to Chris Balsiger, who helped build Bloomington-based International Outsourcing Services LLC into the nation's biggest clearinghouse for discount coupons redeemed by consumers.

"It's a lying, cheating, dirty business," Balsiger told The Wall Street Journal last year.

Balsiger was directing his ire at product manufacturers, which he claimed were sometimes dishonorable in their dealings with firms like his.

But by the time he made that remark, Balsiger and eight of his former IOS colleagues already were under assault by federal prosecutors who charged they participated in a scheme to bilk some of the nation's largest issuers of coupons out of more than $250 million.

Court records charge IOS turned in coupons that weren't actually used by consumers, mixing in the bogus submissions with legitimate coupons it processed for retailers like CVS and Winn-Dixie. Investigators charged IOS workers used cement mixers to make some coupons look worn.

Balsiger denies wrongdoing, but he and his co-defendants no longer are presenting a unified front. Two former managers of IOS plants negotiated plea agreements and admitted guilt in federal court in Milwaukee last month. Under the pacts, they promised to cooperate with investigators.

The legal attack has humbled the once-mighty IOS, whose management--spread among Bloomington, Texas and Mexico--was dominated by graduates of Indiana University's Kelley School of Business. A year ago, a private-equity firm bought IOS' coupon-processing operations and created a new business, ProLogic Redemption Services, which is based in California but retains a small Bloomington outpost.

Balsiger, who earned his MBA in finance from IU in 1977, teamed with the huge grocer SuperValu Inc. in 1990 to launch North America Data Processors, the predecessor to International Outsourcing Services. It became IOS following a 1997 merger. By 2001, the company's market share approached 70 percent.

But these days, some of the product manufacturers that funneled millions of dollars to IOS are hopping mad. Firms including Kraft Foods and PepsiCo are pressing ahead with a civil-fraud lawsuit against IOS, Balsiger and other insiders.

The Coupon Information Corp., a Virginia-based group that helps manufacturers fight fraud, hailed the two recent guilty pleas as an important step in restoring integrity to coupon processing.

"It will take time," Executive Director Bud Miller said in a statement, "but the industry must rebuild the trust these criminals destroyed."

A setback for Sensient

A federal judge has tossed out an Indianapolis flavor-maker's lawsuit aimed at keeping federal health investigators from conducting a second inspection of its Raymond Street plant.

Sensient Flavors of Indianapolis had argued that allowing the National Institute for Occupational Safety and Health to conduct another inspection of the 200-worker plant--in addition to one completed in May 2008--would violate its due-process protection under the Fifth Amendment of the U.S. Constitution.

"NIOSH is attempting to use Sensient's facility as its own personal laboratory," the company, a unit of Milwaukee-based Sensient Technologies Corp., scoffed in the July 2008 suit.

But federal Judge Richard Young late last month dismissed the case, ruling that plaintiffs can seek judicial review only after a federal agency wraps up an investigation and takes formal action. He said it was premature for Sensient to sue NIOSH, since its inquiry was ongoing.

The legal spat between Sensient and NIOSH, part of the Centers for Disease Control and Prevention, stems from the company's handling of diacetyl, a compound used in microwave popcorn and other products to create a buttery taste.

The product has created controversy in recent years. Some U.S. factory workers with prolonged exposure to diacetyl have developed a life-threatening condition dubbed popcorn lung--for which there is no cure or treatment.

The Indianapolis dispute began after the International Brotherhood of Teamsters Local 135, which represents plant workers, asked NIOSH to conduct a formal health hazard evaluation of the plant.

NIOSH wasn't satisfied with the first inspection. During the visit, "we were informed by employees that NIOSH was not viewing a normal production day," the agency said in a letter seeking the additional inspection. "We did not feel we had a chance to see many processes."

The letter goes on to cite concerns about pulmonary abnormalities found in the medical records of some Sensient employees. It says NIOSH is investigating the possibility of chronic disease.

It's not yet clear whether, in the wake of the legal setback, Sensient is prepared to swing open the doors to its Indianapolis plant. Attorneys for the company did not respond to an inquiry about whether they planned to appeal.

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