online.wsj.com | 2/15/08 | David Kesmodel
For years, Chris Balsiger ran the nation's biggest clearinghouse of discount coupons redeemed by consumers at supermarkets. But he still didn't care too much for the industry. "It's a lying, cheating, dirty business," he says. Now the 54-year-old multimillionaire is facing a 27-count federal indictment, charged with leading a scheme that bilked some of the nation's largest coupon-issuers out of at least $250 million. He denies the charges.
The case provides a look at a little-known, multimillion-dollar industry, and one of its veterans. Mr. Balsiger is an intensely competitive man who has climbed the highest mountains on six continents. Was he so driven to conquer coupon processing, a business he says he never liked, that he broke the law? Even in the Internet age, the century-old practice of clipping coupons survives. Americans redeemed about three billion coupons in 2006, representing about $2.6 billion in discounts. Processing all those coupons is usually done by middlemen.
Mr. Balsiger, formerly chief executive of International Outsourcing Services LLC, was one of 11 men indicted in a federal court in Milwaukee last year, accused of using bogus coupons to defraud consumer-products manufacturers. In an August 2007 letter to an IOS lawyer, prosecutors said they believe Mr. Balsiger and others used the company "to steal massive amounts of money from their victims to line their pockets."
Mr. Balsiger and others also face a civil lawsuit by Kraft Foods Inc., PepsiCo Inc. and other coupon issuers charging racketeering and fraud. He denies those charges. The criminal charges could put Mr. Balsiger behind bars for years.
His former company, IOS, was indicted last year on charges of wire fraud, but prosecutors dropped the charges after the company agreed to install new management and cooperate with investigators. Mr. Balsiger, who is free on bond, stepped down from IOS last spring but remains on the company's board and retains an 18% ownership stake. He calls the allegations "bizarre" and says he's innocent.
"I have seen my reputation destroyed, I have seen my firm raped and destroyed, and I am not happy," he says. "We are proceeding to go to trial because I want the truth to come out."
From an early age, Thomas Christian Balsiger was steered toward a life in business. His late father, Roy Balsiger, ran a distributorship in Memphis, Tenn., for diesel-engine maker Cummins Inc. When Chris was just 6, his father bought him a blue suit and red tie and began taking him to business meetings. On weekends, the family hunted, fished and hiked. Because Chris was born in 1953, the year men first topped Mount Everest, his father thought the boy was destined for the same. "He said, 'You are the Mount Everest Kid,"' Mr. Balsiger recalls. "It was business and Everest, business and Everest. That's all we talked about." His father was tough and direct, Mr. Balsiger says. "If you didn't like it, grow up."
Mr. Balsiger brought his father's no-nonsense style to his own career after earning an MBA at Indiana University. In 1980, he moved to El Paso to manage a coupon-processing plant in neighboring Juarez, Mexico. For years, coupon processors have run plants in Mexico, so they can hire low-cost labor needed to sort through all the coupons.
The first consumer coupon, an offer for a free glass of Coca-Cola, was issued in the mid-1890s, according to the Promotion Marketing Association, a trade group. Coupon clipping became common in American households during the Depression. Supermarkets and retailers, not wanting to deal with all the paperwork, turned to middlemen; in 1957, the first coupon clearinghouse was created.
Coupon use peaked in 1992 and has declined in recent years, in part, industry experts say, because younger people find clipping coupons cumbersome. Some manufacturers have experimented with getting rid of coupons. But when Procter & Gamble Co. tested that idea in New York in the mid-1990s, a consumer backlash resulted, and the company resumed issuing coupons.
Coupons are still a good marketing tool, industry experts say, attracting consumer attention even if they never actually are used. Despite low redemption rates -- about 1% -- manufacturers issued 279 billion coupons in 2006, the most in a decade. That means there are a huge number of unused coupons in circulation -- representing discounts worth billions of dollars. But coupons have expiration dates, usually within two to three months, so "that money is just not sitting out there forever," says Bud Miller, head of Coupon Information Corp., a group that helps manufacturers fight fraud. In addition, companies that print sheets of coupons inserted into newspapers use safeguards, he says, such as shrink wrapping an entire pallet so they're not as easy to take.
U.S. postal inspectors busted a nationwide ring in 1986 that clipped coupons from newspaper inserts and sent them to manufacturers for refunds -- pretending they'd been legitimately redeemed. Though controls have been implemented since, "You are dealing with an industry that's built largely on trust," says Rick Bowdren, a retired postal inspector who spearheaded that probe.
When a consumer brings in a coupon for, say, 50 cents off a box of cereal, the supermarket then sends the coupon to a middleman. At plants filled with bar-code scanners and sorting machines, processors go through the coupons. They then send a bill to each manufacturer -- usually with the coupons attached -- seeking reimbursement for the coupons' face value, plus shipping and handling fees.
Payments vary. For a 50-cent coupon, the supermarket gets 50 cents back from the manufacturer, and usually a few cents more. That is split with the processor. The retail coupon-processing industry's annual sales are more than $100 million.Manufacturers and retailers often disagree on reimbursements. Manufacturers will deny payments arguing, for example, that an offer had expired or that goods weren't sold in the area where the coupon was supposedly redeemed.
Nearly 30 years ago, when Mr. Balsiger joined Seven Oaks International Inc., a coupon-processing company, smaller retailers in particular were having trouble getting reimbursements, says Ken Judson, a former executive at Supervalu Inc., which was then mostly a wholesaler for smaller grocers and a Seven Oaks client. Mr. Balsiger left Seven Oaks in 1990, he says, because he was passed over for president. He planned to leave the industry.
"I don't like the coupon business, never did," he says. "Many of the manufacturers are not honorable." But Mr. Judson persuaded him to form a clearinghouse to handle coupons for Supervalu and other retailers. Supervalu
owned 51% of the new company; Mr. Balsiger and other investors owned the rest. "Chris was a very knowledgeable, very sharp dividual," Mr. Judson says. Mr. Balsiger courted small, independent retailers by offering low fees and aggressively fended for their interests, say several people familiar with the matter. In 1997, his firm merged with a competitor. The combined company, named International
Outsourcing Services, grew rapidly. Mr. Balsiger became CEO in 2000 while continuing as chief operating officer. He was a taskmaster, Mr. Judson says. "It probably caused more than a fair share of disgruntled ex-employees," Mr. Judson adds, but he "was very successful." Mr. Balsiger also became known for suing competitors. IOS filed at least nine lawsuits or countersuits between 1999 and 2006, alleging price-fixing, trademark infringement and slander, among other things. Most of the lawsuits have been settled or withdrawn. Several lawsuits targeted rival NCH Marketing Services Inc., a unit of Valassis Communications Inc.
At an industry conference in San Antonio in 2001, Mr. Balsiger made a presentation in which he unveiled a lawsuit that had been just recently filed, accusing NCH of making false claims that IOS overcharged manufacturers for shipping. He distributed copies of the lawsuit to the audience, causing "a big stir," says Ron Fischer, former president of the Association of Coupon Professionals, who was at the meeting. The companies later reached an out-of-court settlement. NCH, based in Deerfield, Ill., declined to discuss specific lawsuits. In an email statement, the company said, "NCH's perspective is that these unsuccessful efforts have all been aimed at deflecting attention away from IOS, including the recent allegations of fraud."
Greg Rayburn, IOS's current CEO, declined to comment. By 2001, Mr. Balsiger had built IOS into the dominant coupon clearinghouse, with market share of about 70%. It had 6,000 employees and was heading toward $200 million in annual sales, about half from coupon processing, and the other half from other outsourcing services such as processing checks for banks. Mr. Balsiger and his wife, Christy, became major donors to many nonprofit organizations, including an El Paso foundation that runs a tennis center for disadvantaged youth. But Mr. Balsiger craved a new challenge. Inspired by his father, he had long dreamed of climbing Mount Everest. In the 1980s, he read Texas businessman Dick Bass's book about being the first person, at age 55, to scale the so-called Seven Summits, the highest mountains on each continent.
In the fall of 2001, Mr. Balsiger arranged to have lunch with Robert Link, a mountaineering guide. Mr. Balsiger said he wanted to ascend the Seven Summits within five years. "I was skeptical," Mr. Link recalls. "But he became completely dedicated."
Mr. Balsiger began a rigorous training regimen. He showed his determination on a climb with Mr. Link on Washington's Mount Rainier in 2003. When a tower of ice hundreds of feet above them broke apart, Mr. Link shouted, "Run!" The ice hit Mr. Balsiger in the head and knocked him unconscious.
"That would have ended it for most people," Mr. Link says. But the next month, Mr. Balsiger climbed Russia's Mount Elbrus, Europe's tallest mountain. With his four children grown, Mr. Balsiger says he was semi-retired and devoting several months a year to climbing.
While he pursued his hobby, federal investigators in Milwaukee had begun looking into several coupon brokers, who collected coupons from small mom-and-pop stores, prompted by a tip from a local convenience-store owner.
Their probe initially focused on a Florida man, Abdel Rahim Jebara. Prosecutors allege he led a multi-state ring that clipped bundles of coupons at a time from newspaper inserts -- a practice known as "gang-cutting" -- and sent them to IOS for processing, pretending they'd been redeemed by consumers. The conspirators used fake store names -- such as Jeneva Deli Grocery and Hout Corner Deli Grocery -- or recruited actual stores to participate, according to federal investigators. Mr. Jebara allegedly paid kickbacks to an IOS salesman who turned in the coupons for payment.
On Feb. 26, 2003, federal agents raided IOS's offices in El Paso and Memphis and arrested Robert MacDonald, a Memphis sales manager. At the time, the company wasn't a target of the investigation and agreed to cooperate. Mr. Jebara later pleaded guilty to conspiracy to commit mail and wire fraud, and conspiracy to commit money laundering. Mr. MacDonald pleaded guilty to making false statements to a federal agency. Both agreed to cooperate with investigators. There were 28 other defendants involved in the case who pleaded guilty to certain charges.
Investigators suspected more people at IOS might have been involved. Over the next four years, FBI and prosecutor interviews with former IOS employees, as well as internal company documents, suggested a wider scheme involving senior executives, according to federal officials. Investigators say Mr. Balsiger worked directly with several brokers to obtain coupons he knew were never used to buy products.
Even after authorities told IOS it was a target of the investigation in 2005, Mr. Balsiger says he never thought the company would be charged. "We thought we were cooperating," he says.
He continued mountaineering. By the spring of 2006, he had ascended six of the seven summits and had set his sights on 29,000-foot Everest, the world's highest mountain. For what he decided would be his final expedition, he hired a team of elite guides and spent $20,000 to hire a private chef and bring American food. He says his out-of-pocket cost came to about $250,000.
After nearly two months on the mountain, Mr. Balsiger started for the peak. On May 18, 2006, he had ascended to within 5,000 feet of the summit. The next morning, a nasty weather forecast prompted a retreat to a lower camp. While descending, Mr. Balsiger's feet slipped on the Lhotse Face, a harrowing, 4,000-foot wall of glacial ice. Only a metal clip hooked to a rope affixed to the mountain kept him from plunging to his death. Regaining his footing so sapped him that, the next day, he decided he couldn't pursue the summit. He broke down in tears. For weeks, he says, he felt "the worst depression imaginable."
Over the next few months, he began mulling the idea of trying Everest again. He worked on staying fit. Then, last March, prosecutors unsealed a 25-count indictment against Mr. Balsiger and 10 other men for alleged wire fraud. In December, prosecutors brought two additional charges against Mr. Balsiger and six other defendants, for conspiracy to commit fraud and obstruct justice. They say Mr. Balsiger tried to destroy records and coach witnesses. All the defendants have pleaded not guilty.
Prosecutors allege Mr. Balsiger and the other defendants carried out a scheme from 1997 through 2006, duping companies such as Kleenex maker Kimberly-Clark Corp. and cheese producer Sargento Foods Inc. They claim the defendants turned in coupons that weren't actually used by consumers. IOS duped manufacturers into paying for many of the coupons by comingling them with coupons from larger retailers, including Food Lion and Winn-Dixie, prosecutors say.
At times, IOS directed employees in Mexico to use a cement mixer to make unused coupons look worn, prosecutors allege. Those involved bilked manufacturers out of at least $250 million, prosecutors say, although they haven't said how much individual participants may have received.
Mr. Balsiger declines to discuss specific allegations, but says the government's case relies on information from competitors who would like to see him and his company fail. When he learned he was indicted, he says he told himself, "Those corrupt sons of b- are going to go to hell."
Mr. Balsiger's attorney, Sib Abraham, rebutted the charges and said there was never any intent to commit a crime. He said the case is a business dispute that belongs in civil court. IOS is 25.5% owned by Supervalu, the third-largest U.S. food retailer by sales. A spokeswoman for Supervalu, Eden Prairie, Minn., said the company is cooperating with the government and declined to comment further.
Now, Mr. Balsiger spends weekdays at his Western-art-themed office on a commercial strip in El Paso, consulting for a restaurant group and others. At night, he hits the exercise machines in his home gym, trying to stay in shape so that, if acquitted, he could give Everest another try. His legal challenges are nothing compared to that summit, he says. "I know who I am, and I'm at perfect peace with who I am," he says. "I can sit relaxed when all heck is coming down on me. That's what mountain climbing has taught me."