By Chris Lane
By Jeff Balke
By Aaron Reiss
By Angelica Leicht
By Dianna Wray
By Aaron Reiss
By Camilo Smith
By Craig Malisow
On September 27, 2006, federal agents surrounded the offices and warehouse of Houston's American Grocers, Inc., an exporting business that shipped food to the Middle East and worked, in part, off lucrative military contracts. Located in a business park along the Beltway on the city's northwest side, next to companies that built transmissions for diesel trucks and distributed linoleum flooring, American Grocers existed the same as the rest. Unnoticed and quiet, except for the delivery trucks growling to and from its loading bays.
The agents approaching the building that morning weren't the typical raiders. They weren't FBI, not bullish G Men or battle-tested SWAT officers by any means. Many of the men, from the Department of Defense's Criminal Investigative Service and the Food and Drug Administration, didn't carry weapons, and those who did certainly hadn't fired shots in the field. In terms of raids, this one was low key.
But when agents rushed through the doors, they found an operation that was nothing short of evil: workers, surrounded by vats of chemicals, hunched over pallets of expired food and using acetone and Dremel tools to erase expiration dates from packaging. The expired food was destined for American military troops serving in the Middle East, according to court documents.
News of Samir Itani's arrest went national, grabbing headlines because a "Muslim businessman in Texas..." was ripping off the government and putting American soldiers in danger in the process. Itani initially pled not guilty to the criminal charges filed against him.
"Samir Itani did not engage in any intentional wrongdoing and looks forward to his day in court," Itani's lawyer, Paul Nugent, told The Wall Street Journal in 2007.
Court documents, alleging that Itani sent, among others, expired peanut butter, turkeys and chocolates to the troops, summed it up differently: "This is an appalling case of corruption that directly harms American military men and women serving overseas...Expired food, like [ammunition] shells filled with saw dust [sic] or useless small arms, endangers our military operations."
As the investigation continued, agents discovered that the case stretched far past Itani, unraveling to include food wholesalers in rural Texas, a Saudi sheik living in California, the largest commercial "merchant family" in Kuwait and some of the most prominent food companies in the United States. In fact, the U.S. government is involved in ongoing litigation with other military food contractors, and the cases are calling into question the entire process of how food contracts are procured, paid out and delivered to troops in the Middle East.
The civil settlement and criminal sentence of Itani were made public in November and December of this year, marking the end to one of the biggest white-collar crime cases to come out of Houston in recent years.
The government's case, however, started and was made by an unlikely whistleblower: 42-year-old Delma Pallares, a single mom and former employee of American Grocers who, according to her attorneys, simply "wanted to do the right thing." And in the middle of the investigation, when the feds wanted to put Pallares and her family in the Witness Protection Program, she wanted to get as far away from the case as possible.
Tracing back the life of Samir Itani is next to impossible. He didn't have a criminal record before this case. He didn't donate to political campaigns. (His wife gave $1,100 to California Congressman Darrell Issa in 2007, in the middle of the government's investigation.) He stayed off social circuits. And his company — perhaps because of the criminal operations — kept an extremely low profile.
Itani and members of his family refused to speak to the Houston Press for this story, and so did federal agents and prosecutors. Pallares's lawyers at Houston's Berg & Androphy firm didn't talk much about details outside the court filings, and Pallares herself had little to say about her former boss.
Nugent, however, says this of his client: "Samir Itani is a dedicated small businessman. He runs the kind of business that's good for America. He took American-made products and shipped them to foreign countries. With most companies, it's the other way around."
Doing so made Itani money. Lots of it. While "$20 million in sales" on a court document is simply a number on paper, tangible proof of Itani's financial worth sits on the outskirts of Houston's Tanglewood neighborhood that's famous for residents George and Barbara Bush. Itani's estate is valued at $2.85 million on Harris County tax rolls, and with almost 10,000 square feet, the place has five bedrooms, six baths, two rec rooms, five fireplaces and two elevators.
If nothing else, the house is a symbol of the wealth Itani built with his company, and based on information the Press has gathered, here's how he did it.
Itani, now 51, immigrated to the United States and Texas sometime in the 1980s, finding a job as a salesman at Grocers Supply Company, a Houston-born company that ships food to grocery stores and schools primarily in the state. The contacts he developed in Texas would later become invaluable to Itani's business plan. Itani and his wife, Suzanne, had their first child in 1988, and five years later, Itani quit his job at Grocers Supply and started his company.
American Grocers began as a small operation. The principals were Itani, brother Ziad and sister-in-law Lilly Patenotte; Suzanne Itani handled the accounting work. From the beginning, Itani's model involved shipping food to contacts solely in the Middle East, and, small company or not, doing so with massive volume. According to company documents, the "choice of the Middle East as a primary market area was based on extensive experience, cultural understanding, linguistic skills and personal contacts in Middle Eastern countries." The company ran under the motto, "Grocers to the world."
The choice proved wise. The Gulf War in the early 1990s increased the American presence on military bases and, more important to Itani at that time, in the oil fields of the Middle East. The demand mushroomed for food from the United States, and American Grocers secured shipping lines with contractors in Ad Dammam, the capital of the Eastern Province of Saudi Arabia. The city also rested on the country's main port, providing a direct pipeline to the oil fields and Riyadh, the largest city in Saudi Arabia. About 60 percent of Itani's business, according to court documents, came from shipping to corporations such as Exxon, Shell and Aramco in the Middle East, for "consumption by Americans living on civilian compounds."
Military contracts made up the rest of Itani's business. He shipped food to American soldiers stationed in Egypt, Iraq, Kuwait, Saudi Arabia and the United Arab Emirates. Food exporters in the United States aren't allowed to ship directly to military bases in the Middle East, but Itani positioned himself with contractors in Kuwait's The Sultan Center, a massive retail center in the country that is, according to court documents, "a leading supplier of supermarket items, perishables, and general merchandise in the Middle East."
Itani worked at a manic clip, Pallares says, as a perfectionist who allowed little room for error. In the workplace, it was stressful for Pallares, almost to a fault, but from a business standpoint, it paid off.
"He had a lot of exclusive lines [to the Middle East]," Pallares says. "He basically had a monopoly."
And, in fact, if food was shipped from the United States to the Middle East during the last two decades, there's a good chance it was routed through Houston and American Grocers. Court documents say Itani received "a constant stream of phone calls from domestic vendors" wanting to cash in on the company's leverage in the Middle East. Itani's list of American clients was long, but it included, to name a few, Kraft Foods, General Mills, Frito-Lay, Oscar Mayer, Betty Crocker and Blue Bell.
In May of 2003, as the initial push into Iraq by the U.S. military was winding down, the Department of Defense "awarded a multi-million dollar contract" to Public Warehousing Company, a "Kuwait-based company that operated warehouses and freight management services in the Middle East and around the world," according to Itani's criminal indictment. Public Warehousing, now the subject of its own federal probe, procured many of its food products from the United States through The Sultan Center, making American Grocers a "first-tier sub-contractor" to the military.
As American troops dug deeper into the battlefields of Iraq, business couldn't have been better for Itani, and all it took, court documents say, was "false promises, a warehouse, and a few hundred buckets of nail polish remover."
Delma Pallares's intersection with Itani started with her first husband, a Muslim man of Syrian descent. Pallares knew little of Middle Eastern culture and she wasn't a Muslim. She started attending Houston's El Farouq Mosque, just off I-10 and Gessner, to study Arabic and Islamic traditions.
She soon met and developed a relationship with Suzanne Itani, who herself had married into the religion. It was 1995, and even though Pallares had little experience or training in business, and certainly none in food exporting, Suzanne asked Pallares to work for her husband at the newish American Grocers. Pallares accepted.
The company was still in upstart mode, with only a few employees and none, besides Pallares, outside Itani's family. Pallares worked primarily as a "logistics manager," making sure food packages arrived and were shipped out on time. She worked long days, learning on the fly, getting trained by Itani and Lilly Patenotte. Itani was "very demanding," Pallares says, enough to make her want to quit, but she had little choice but to stay put. Her marriage had fallen apart and Pallares needed the job to support herself and her son, who at that time was entering elementary school.
But the crash course at American Grocers also helped Pallares gain an intimate knowledge of the business in a relatively short period of time. Itani taught her how to order a large shipment of food and create a "container," preparing and getting it approved for export. Patenotte trained Pallares on the paperwork — how to create order forms, invoices and shipping codes — and how to file properly. And because the company's offices were located in the same building as the warehouse, Pallares got hands-on experience in every aspect of the export chain. She excelled at the job, and by 1999, Pallares was promoted to the position of general merchandising manager.
And that year, she witnessed the darker side of Itani's business for the first time. According to court documents, it started when a shipment of meat and dairy, mainly cheese and hamburger patties and frozen dinners, was denied entry into Saudi Arabia because the packaging didn't have an official export certificate or stamp from the United States Department of Agriculture. Basically, Itani obtained a blank form from the feds, made copies, forged it and sent it to the Saudi Embassy. The shipment was cleared.
"It was just a way he cut corners. He didn't have time for shipments to be denied or even delayed," Pallares says. "He had to move so many containers to keep up."
Erasing expiration dates had also become a part of business. The scheme was quite simple: A food wholesaler in Brenham would contact Itani with an extremely cheap quote on soon-to-expire food. According to court documents, "Itani would usually take the product if [the wholesaler assured him that the product date was easy to manipulate." (That company, Brenham Wholesale Company, was never prosecuted or charged with anything. It's not unusual for vendors to unload old food for ranchers and farmers looking to feed livestock on the cheap.)
Itani, his brother and Pallares, along with other workers at American Grocers, used several methods to get rid of the expiration dates. Sometimes they would simply use spray paint, sometimes they would use a Dremel tool to scrape the dates off packaging. Acetone, however, became the preferred method. The chemical, used in nail polish remover, was an easy way to remove ink from labels and leave an undisturbed place on the packaging to print a new date.
The operation ran in plain sight, Pallares says, on the floor of the warehouse or sometimes outside, and in the early days, everyone, at least at American Grocers, was involved.
"The truck drivers [delivering food and acetone] would come in and out every day, but they never figured out what was going on," Pallares says. "I knew it was wrong, but I got to the point where I didn't think twice about it, seeing it daily. It's hard to explain, but getting out was a hard decision."
The breaking point for Pallares came in 2003, when Itani landed the deal to send food to American troops. Pallares wanted no part, and about a month after the contract was signed, she quit. She tried to start her own food exporting company but didn't have much luck competing with Itani; she could only deal with the vendors she knew. The business failed, and Pallares decided to take her information to the authorities.
She had contacts at the Department of Agriculture, but she didn't get much of a response when she presented the case. A friend advised her that if she wanted to pursue Itani through the muck of federal bureaucracy, she should find her own attorney. Even that proved difficult; Pallares was turned away time and again by lawyers who didn't know how, or didn't want, to deal with Pallares's case. Eventually, she was referred to Joel Androphy, who knew almost immediately it was a big case.
Androphy had worked similar whistleblower cases before. He represented one of nine plaintiffs in a lawsuit against a pharmaceutical company that made the antipsychotic drug Zyprexa, landing the government last year a settlement of $1.42 billion. He won another settlement of about $46 million against Pfizer in 2002, dealing with the drug Lipitor. Three years later, Androphy settled with drug company King Pharmaceuticals for $124 million, on charges involving Medicaid fraud. And each of those cases, like what Androphy potentially saw for Pallares's case, was filed under the "Qui tam" writ.
"Most attorneys have probably heard of Qui tam, but there aren't many who know what it actually means," says Sarah Frazier, a partner at Berg & Androphy. "And there really aren't too many who would take one on."
Basically, the case works like this: A citizen (Pallares) acts as a whistleblower when she believes a company (American Grocers) is ripping off the government, and a lawyer (Androphy) files a federal lawsuit on behalf of the whistleblower and the government. Sometimes federal prosecutors join the lawsuit and continue the investigation; oftentimes they don't. But the goal is to win the lawsuit or reach a settlement, get paid and take down the bad guys.
With information and files from Pallares, Androphy filed his suit against Itani and American Grocers on August 25, 2005. The government agreed to intervene in the case, and for more than a year, federal agents and Pallares, along with Androphy, Frazier and Kathryn Nelson (another Androphy attorney), worked to build a case against Itani. After the 2006 raid, agents had all they needed.
In one e-mail, for example, an American Grocers employee asked Itani about a large shipment of SweetWorks chocolates, citing discrepancies on an invoice as well as expiration dates that had passed.
"Are we going to change dates and send or do we need to coordinate return to SweetWorks?" the employee wrote.
Itani responded: "The bad dates we will erase and ship later."
And according to amended court documents from Androphy — filed after the raid — acetone had become such an important part of Itani's daily business that it was listed as "an expense on his financial statement along with other legitimate warehouse supplies such as shrink wrap and tape." After an inspection of the warehouse, the company that insured American Grocers grew concerned with the cache of chemicals and wrote that the "quantity of acetone stored in the warehouse area currently exceeds the quantities required for daily use."
It continues, "...it was not unusual to find twenty workers or more at a time sitting together at a large table at American Grocers's warehouses erasing product dates using acetone and attaching new labels with new dates."
The investigation turned up additional allegations against Itani, including fake invoices (using two sets of invoices to "increase his profit and please customers"), forged halal certificates (using a fake certificate from a sheik in California to avoid paying a $500 fee) and fake health certificates from the USDA. (Itani, "often using the name John Bartlette," forged forms to clear food packages for export.)
Meanwhile, Pallares was getting nervous. She was constantly dealing with federal agents, conducting interviews, helping them locate invoices or e-mails to connect the dots in the case against Itani. It had been several years since she quit her job, and even after the raid on American Grocers' warehouses, the case seemed only to be getting bigger and more complex.
"It was scary dealing with the government," Pallares says. "I never knew what to expect, never knew what would happen."
To make matters worse, Pallares felt that her family could be in danger. Not long after she quit her job with Itani, Pallares says, Itani's brother began "stalking" her, following her around the city and showing up at the same places as her. The worst instance, she says, involved the brother following her to the high school her son attended. Pallares reported the incident to the police, and the harassment stopped. But when she told federal agents about the situation, they wanted to put her in the Witness Protection Program.
"I considered it, because I was scared of him. But honestly, I was having regrets," Pallares says. "I didn't want to cut ties with all my family and take my son out of school."
She refused the offer of witness protection.
"It was difficult, but I knew I was doing the right thing," Pallares says. "I had to keep telling myself, 'You're doing the right thing.'"
On July 23, 2007, a federal grand jury indicted Itani on 46 counts of stealing from the government using "contracts related to the 2003 invasion and subsequent occupation of Iraq." He was arrested that same day and held in federal custody until his wife used cashier's checks to post his $1 million bail.
In July of this year, Itani, American Grocers, Pallares and the government settled on terms to end the ongoing civil suit. Itani agreed to pay $13.2 million, a number determined by federal agents based on Itani's "ability to pay." (He was accused of selling $36 million worth of bad products to troops.) Because of the settlement, the government couldn't go after Itani's assets, including the estate near Tanglewood, or his business. And, more important, his attorney notes, it is not an admission of guilt.
"Samir Itani never once altered dates on food shipped to the United States military," Nugent says. "The allegations hold a lot of sex appeal, they're sensational and they're incendiary."
Nugent says acetone was used, but claims it was used only to remove dates and labeling that needed to be erased to make way for correct Arabic labeling. As for the e-mail in which Itani ordered his employee to "erase the bad dates," Nugent says he hasn't seen the e-mail but would be skeptical of its source. (The e-mail was obtained during the raid on American Grocers' warehouse.) The settlement, Nugent says, was simply about Itani "putting the matter behind him."
"It was a business decision. He could continue to spend years and millions of dollars fighting the U.S. government or he could focus on saving his business," Nugent says. "But he admits to no wrongdoing [in the civil allegations]. He refused to make any admission. Zero."
And, in fact, the government didn't go after the expired-food allegations in its criminal case. Stephen Corso, a federal prosecutor, told a judge during a hearing that the government wasn't certain it could make the charges stick, at least criminally. Of course, Corso also called Itani a "war profiteer" and "leader of a criminal conspiracy."
"This undermines citizens' faith in government, and his conduct should be offensive, especially to families of the troops on the ground in the Middle East," Corso told the judge. "He took advantage of the American taxpayer, and we want others who contract with the government to think twice before doing the same."
To do that, the government focused its criminal investigation on bogus shipping costs. Prosecutors charged Itani with using fake invoices to overcharge the government by about $2 million. Itani eventually pled guilty, and even before his sentencing, had repaid the money along with the civil settlement.
For Pallares, it seemed like good news, but according to Androphy, the government didn't want to pay her.
"It's a shame because she basically made the case for the government, and for five years we've put ourselves on the line and invested about $1 million of our own money," Androphy says. "She took all the risk, and now the government doesn't want to compensate her for that."
And in a 34-page opinion on the matter, Judge Melinda Harmon wrote: "[Pallares] is not a parasite seeking a free ride on information previously obtained by the Government, but at minimum an equal partner, and probably more, in developing the claims against [American Grocers] for the Government's indictment..."
Worse, Harmon wrote, "the Government, claiming that it did not want to bankrupt [the Itanis] settled this suit for far less than its actual or estimated value and for far less than is customary...even though it allowed the Itanis, who own additional properties, to continue to live in an expensive home in the Memorial section of Houston and to continue in business despite the extensive fraud to which they had pled guilty. The [Department of Justice] did not respond to these criticisms nor present any evidence that [the Itanis] were unable to pay more."
With that, Harmon ordered the government to pay Pallares, and, to date, she has received the first payment on what she's entitled to. She could eventually walk away from the case with close to $4 million.
"I'm glad it's over," Pallares says. "And, yes, I have closure."
On December 3 of this year, Itani walked into a federal courtroom in Houston for his criminal sentencing, the last piece in the case against him. Nugent asked the judge to consider some "creative" sentencing, probation perhaps, that would keep Itani out of jail and help the business survive. Itani had never been in trouble, Nugent argued, had paid his restitution and fully cooperated with the government's ongoing investigations into other military food contractors.
"He's a humble man now. He's learned humility from this experience," Nugent told the judge. "He makes no excuses for what he did. He knows what he did was wrong. He's a different person."
The judge asked Itani if he had anything to say to the court before sentencing. He did.
"This case has taught me the difference between punishment and consequences," Itani said. "Punishment is jail time. Consequence is pain and suffering, both emotionally and physically. When my children think about what I've said about right and wrong, they realize that is a lie."
He continued, "My daughter dealt with the fear by running away from home and everything she knows. But she still carries a burden on her shoulders. My oldest son comes home and locks himself in his room. I watch helpless at the shame I put them through. I made them elders before their time. And perhaps the worst of all is one day soon, when I have to sit down with my ten-year-old baby and tell him what his father did. This is the biggest punishment of all."
About 20 of Itani's employees and family members had entered the courtroom during the hearing. Several of them wept.
The judge responded: "Mr. Itani spoke of punishment and consequence, and he gave one of the most eloquent statements I've heard. But these crimes were committed in staggering proportions."
"Understanding consequence isn't about committing a crime until you're caught and then giving all the money back. There's something more involved. It's determination to abide by the law. Not to rip off the government. Not send food to troops that isn't fresh. Not take money from tax payers to line your own pockets."
"I trust you'll do what you said when you get out," the judge concluded. "And live an honorable and law-abiding life."
As quietly as the case started, seven years earlier, it was over. The judge sentenced Itani to two years in prison, most likely a federal prison camp. Itani will spend the holidays with his family, arrange a date with the U.S. Marshals Service to turn himself in, and wait for a car to show up at his home and drive him off to jail.