Ralphs Grocery Co. could face an uphill battle in defending recent charges that the grocery chain condoned a widespread and illegal practice of rehiring locked-out employees under fake names and Social Security numbers during the 2003-04 labor strike.

But prosecutors may have difficulty pinning the blame on individual top brass.

In a 106-page indictment brought against Ralphs last month, federal prosecutors allege the company created a loosely written policy against the practice and then failed to stop store managers from illegally rehiring locked-out employees as a means to boost profits during the lengthy strike.

Prosecutors say Ralphs "engaged in a company-wide course of criminal conduct" that involved 53 counts of identity fraud, money laundering and falsifying documents to federal agencies. If convicted, Ralphs, a Compton-based unit of Kroger Co., could pay up to $100 million in fines, plus back pay to the workers who were locked out and not rehired.

But the indictment, which does not name individual defendants, could end without senior executives facing potential liability.

Prosecutors will ask, "How high up and pervasive is the conduct and how much did management know about the conduct?" said John Libby, former assistant U.S. attorney and a partner at Manatt Phelps & Phillips LLP, who doubts that Ralphs upper management condoned the behavior. "We are talking about allegations and we just don't know that they are true."

Ralphs admitted that 200 of the 50,000 temporary workers during that period were striking employees but that a few rogue managers hired them against company policy, not as part of a widespread corporate strategy.

"We strongly dispute the claim that the behavior of some store managers reflected a corporate plan devised to further the company's position during the prolonged labor negotiations," Paul Heldman, Kroger's senior vice president, said in a statement last month. "The federal prosecutors simply have this wrong."

Strike talks
The strike began on Oct. 11, 2003, after talks broke down between members of the United Food and Commercial Workers Union and Safeway Inc.'s Vons and Pavilions stores.

The chains were demanding benefit cuts and wage adjustments in what they claimed were necessary moves to compete with Wal-Mart.

Under a secret revenue-sharing agreement with Safeway, Albertson's Inc. and Ralphs, both of which negotiated under the same labor contract, agreed to lock out their grocery clerks, meat cutters and pharmacists.

But union groups criticized the agreement, stating that it should not have been kept secret and had violated anti-trust laws. California Attorney General Bill Lockyer filed a lawsuit against the grocers that still is pending.

About 19,000 employees at Ralphs' 300 Southern California stores were locked out as part of a strike that involved 65,000 to 70,000 grocery workers.

In the midst of the strike, the UFCW filed suit in Los Angeles Superior Court against Ralphs, claiming that the chain illegally hired at least 50 locked-out employees who used false names and Social Security numbers. The union also filed a complaint with the National Labor Relations Board, which rejected requests for an administrative action last year. (The union has appealed the board's decision.)

The union's complaints have been revived with the recent indictment, in which prosecutors list dozens of examples of locked-out employees who were told to use different names and Social Security numbers often the identities of their spouses, children, brothers or sisters.

They were also told to wear nametags with their fake identities, cash their paychecks at Ralphs stores, work at stores far from their home and take shifts late at night or in the back of the store so customers wouldn't recognize them, the indictment says. Ralphs also allegedly falsified payroll checks, employment eligibility forms, employee withholding allowance certificates, income tax statements and reports to trust funds that provided employee pension and health benefits.

Wishful thinking
Ralphs may have difficulty defending against those claims.

"To chalk it up to rogue managers would be wishful thinking," said Lloyd Greif, president and chief executive of Greif & Co., an investment bank with food industry clients. "It's hard to imagine the scale of hiring that occurred here was on the basis of a few independent managers operating on their own."

He noted that according to the indictment, Ralphs' top executives did not conduct routine employee audits or oversee the hiring practices of store managers during the strike. They also drafted a corporate policy against the hiring of locked-out employees that he believes left loopholes for abuse and was not enforced.

That policy "permitted, encouraged, condoned and deliberately ignored the hiring of locked-out employees," the indictment claims. In September 2003, Ralphs distributed to management employees a confidential strike manual that stated "under no circumstances should (store directors) knowingly hire members from the striking bargaining unit."

The policy, which became known to employees as the "not-knowingly policy," provided a looser restriction than the policies of Ralphs' competitors, Albertson's and Vons, which prohibited such hires outright. In addition, the senior management of Ralphs did not require store directors to sign the policy and decided against specifying what disciplinary action would be taken against violators of the policy, the indictment says.

Furthermore, Ralphs' vice president of human resources explained the "not knowingly hire" policy to district managers, one of whom used hand gestures to emphasize the word "knowingly," while another told store directors that hiring locked out employees would be OK "as long as I don't know," the indictment says.

"It's very, very difficult given the broad standard for corporate criminal liability to defend one of these cases," said Libby, who believes the corporation could likely be forced into a plea agreement.

Nods and winks
Still, prosecutors may have trouble proving individual management executives were liable.

Bert Hambleton, a food and marketing consultant in Seattle, said it would not be difficult for store directors to violate company policy without superiors knowing about it.

"A store director who got in his head to get the labor percentage by bringing in experienced people and by falsifying Social Security numbers could get away without anyone knowing what he's doing," he said.

At almost every grocery chain, store managers are under pressure to meet weekly sales and profits estimates. Typically, store managers report to regional managers, referred to as "zone managers." At Ralphs, zone managers usually oversee about 20 stores and report to the company's vice president of operations. A group vice president also oversees zone managers and reports directly to the vice president of operations, according to the indictment.

"It's not the zone managers' responsibility to check on hires of the store director." Hambleton said.

Moreover, written documentation to prove liability could be challenging, since much of the proof is offered from conversations and phone calls. The indictment relies on claims that zone managers used "code words" such as "experienced workers," "experienced help," "skilled workers" or "skilled help" when referring to locked-out employees to senior management.

"Proving that it goes to the CEO's office will be hard," Greif said. "You won't find anything in writing other than a policy that looked like it had loopholes in it. That is the most damning evidence they can find."

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