Southern Glazer's will pay $12.5 million over gifts that bought shelf space

Richmond —

Southern Glazer’s Wine & Spirits has agreed to pay $12.5 million and strengthen its compliance controls to resolve a federal investigation into improper payments and benefits given to alcohol-industry employees.

The Florida-based distributor entered a non-prosecution agreement with the U.S. Attorney’s Office for the Northern District of California on Sept. 10, following a joint investigation by the Alcohol and Tobacco Tax and Trade Bureau and IRS Criminal Investigation.

Southern Glazer’s acknowledged responsibility for conduct that included cash payments, prepaid gift cards, flights, golf trips, resort stays and luxury goods. According to the Justice Department, some of those benefits went to employees of alcohol retailers, including chain grocery stores, in connection with the promotion, purchase, maintenance and placement of products the company distributes.

Third-party vendors and false invoices were used to conceal some of the spending, federal officials said.

“Southern Glazer’s employees tried to distort the wine and spirits market in California through bribes and other improper conduct and in the end it was the consumer that lost out,” U.S. Attorney Craig Missakian said.

Marketing funds routed through vendors

The non-prosecution agreement and statement of facts describe how certain employees used local marketing funds established between Southern Glazer’s and its suppliers.

Those funds were meant for legitimate expenses such as brand education, displays, menu printing, discounts and promotional products, and drawing on them generally required approval from both Southern Glazer’s and the supplier whose products were involved.

Federal investigators found that certain employees and suppliers instead directed vendors to submit invoices misstating the services provided. Once Southern Glazer’s paid an invoice, a vendor could hold part of the money in an informal travel fund, buy prepaid gift cards, or arrange personal travel and entertainment.

One approved vendor, J. Go Events Inc., issued about 2,000 invoices to Southern Glazer’s totaling at least $14 million between July 2014 and March 2020, according to the agreement. The document does not say every invoice was improper.

Between at least 2017 and at least 2021, that vendor ordered millions of dollars in prepaid gift cards at the direction of Southern Glazer’s and supplier employees, worth up to $1,000 each, and mailed them out.

The statement of facts gives examples:

• Money from invoices billed as retailer educational seminars paid for suite accommodations and other expenses at a resort in Maui.
• A supplier representative bought two $1,000 prepaid cards for an assistant sales manager at a national grocery chain, tied to placement of that supplier’s brands.
• A Gucci bag worth more than $2,000 went to the same person.
• Annual trips from California to Las Vegas, running from about 2017 to January 2024, covered rooms, golf reservations, dinners, casino chips and prepaid gift cards.
• A $47,131.49 invoice for an April 2019 Pebble Beach event that the company understands never happened.
• Other vendor funds paid for first-class airfare, international travel, luxury vehicle rentals, jewelry, sporting-event tickets and resort packages.

Employees also altered invoice templates and filed documentation describing personal expenses as business meetings, meals or promotional events, according to the agreement.

The conduct described is in California

The agreement was executed on behalf of Southern Glazer’s and its operating divisions in California, Oregon and Washington. Nearly all of the conduct in the public statement of facts involves California-based executives, suppliers, vendors and grocery chain employees, with related travel to Hawaii, Nevada, Florida, Oregon, New York and Mexico.

California is Southern Glazer’s largest market, and within California the company is the state’s largest distributor of alcohol by volume, according to the agreement.

Southern Glazer’s also operates in Virginia, which it counts among its 47 U.S. markets. Neither the Justice Department announcement nor the public statement of facts identifies improper payments, participating retailers or false invoicing in Virginia. Virginia is not named anywhere in either document, and nothing in the resolution should be read as an allegation about Southern Glazer’s Virginia employees or customers.

What the rules are in Virginia

The federal provision behind a case like this is 27 U.S.C. § 205(c), which makes it unlawful for a producer, importer or wholesaler to induce a trade buyer by commercial bribery or by giving a bonus, premium or compensation to an officer, employee or representative of that buyer.

Virginia has its own regime, and on the wine and beer side it is in some respects tighter. Va. Code § 4.1-216(C) bars a manufacturer, bottler, importer, broker or wholesaler, licensed here or not, from giving a retail licensee money, equipment, property, services or “anything of value,” and it reaches gifts made “for any other purpose” rather than requiring proof that a competitor was excluded.

The narrow exceptions live in Virginia ABC’s tied-house regulations at 3VAC5-30, with hard caps that are worth knowing:

• Business entertainment is limited to $400 per 24-hour period per retail-licensee employee, no more than six times a year from a wholesaler and six from a manufacturer, with supplier personnel present and records kept three years.
• Advertising novelties and specialties may be given away only at $10 wholesale value or less.
• Paper, cardboard and plastic point-of-sale advertising is capped at $40 per item.
• Cooperative advertising, where a supplier pays for advertising the retailer runs, is prohibited outright.

Two points matter for operators. The rules bind both sides: a retailer may not induce, attempt to induce or consent to a prohibited benefit, and one who knowingly receives a prohibited price discrimination is independently liable. And the exposure is the license rather than the fine. Civil penalties under § 4.1-227 top out at $2,000 for a first violation within five years and $5,000 for a second, but the Board may also suspend or revoke.

Virginia’s structure also changes the shape of the risk. Because Virginia ABC is the sole wholesaler and the sole retailer of distilled spirits, there is no private spirits buyer choosing shelf space the way a California grocery chain buyer does. Private distribution in Virginia is wine and beer, and that is where these rules do their work.

Questions about a specific arrangement go to Virginia ABC’s Compliance Unit, which handles tied-house guidance for manufacturers, wholesalers, importers and out-of-state shippers.

Payment and terms

Southern Glazer’s must pay in two installments: $6.25 million within 15 business days of execution and $6.25 million within 12 months. It may not seek a tax deduction or insurance reimbursement for either.

The agreement runs 24 months. If the company complies, the Northern District of California will not prosecute it for the covered conduct. The agreement binds that office, TTB and IRS Criminal Investigation, and no one else. It does not protect individual employees, executives, vendors, suppliers or retail employees, and it does not bind other Justice Department components, other federal agencies, or state or local authorities.

Southern Glazer’s must keep cooperating with federal investigators, including on cases involving current or former employees, and help determine the value of improper compensation employees received so that any required tax documents can be issued.

Compliance changes

Prosecutors credited changes the company has made since 2023. Between 2022 and 2024 it expanded compliance headcount by 85 percent and increased compliance funding by more than 65 percent. It removed certain vice presidents and managers for policy violations, disciplined other employees, and replaced senior leadership in California and in its West Region.

Other measures in the agreement include a community of “Compliance Champions” covering each state, a trade-practice compliance audit program, a centralized system for marketing and promotional spending, expanded training, more scrutiny of supplier-funded programs, vendor background reviews and documentation requirements, preapproval before vendors are paid, and contractual authority to audit vendors and remove those that fall short.

The company must report annually to prosecutors and to TTB on how those measures are working. At the end of the 24 months, its chief executive and its chief legal and compliance officer must certify that it met the agreement’s requirements.

The company’s response

Southern Glazer’s said the investigation primarily concerned former employees and conduct from years ago, and that those employees circumvented company policy by submitting fraudulent documentation through third parties.

“This conduct does not reflect Southern Glazer’s values, culture, or standards and it will not be tolerated,” President and Chief Executive Wayne E. Chaplin said.

The company said it cooperated fully and accepted responsibility for the conduct and compliance failures acknowledged in the agreement. It also said TTB agreed to take no action against it for the conduct involved. That statement is the company’s; it does not appear in the Justice Department announcement, in TTB’s announcement or in the agreement itself.

TTB, for its part, framed the case as a warning about third parties. Businesses can be held responsible for work done on their behalf by outside vendors, the bureau said, and “third parties, likewise, are responsible for any illegal activities they carry out on behalf of an industry member.” TTB added that it will continue to pursue trade practice violations actively.