Chapter 16, Part 2

By Frank Tursi, Susan E. White and Steve McQuilkin
JOURNAL REPORTERS
© Winston-Salem Journal

The $200,000 that R.J. Reynolds Tobacco Co. illegally donated to political campaigns in the 1960s and '70s was chump change compared to the almost $25 million that Sea-Land officials tossed around to customers in Asia and Europe and to the bribes executives with RJR's oil and international tobacco subsidiaries paid officials with foreign governments.

Like others in the shipping industry, executives with Sea-Land Services Inc., which Reynolds bought in 1969, tended to ignore the legal shipping fees set by the Federal Maritime Commission and secretly negotiated rates with customers that were below the commission's. Sea-Land sent the shipper a bill for the full rate, which would be paid, but Sea-Land would then rebate a portion of the rate. An RJR internal investigation would later determine that Sea-Land paid more than $19 million in illegal rebates between 1971 and 1975. Sea-Land officials kept ''off-book'' money to pay the rebates in hidden bank accounts in Hong Kong and the Netherlands.

The R.J. Reynolds Tobacco Co. was once the largest cigarette company in the United States with a powerhouse of best-selling brands: Winston, Salem and Camel. But times changed, and as the case against smoking became more pronounced in the 1960s, RJR failed to adapt to the marketplace. Its rivals would eventually rush past it, and RJR's efforts to catch up would have a profound impact on the company and the cigarette industry.

Bribery, federal investigators later found, was also a standard way of doing business overseas. Executives with Sea-Land, RJR's international tobacco subsidiary, its foods division, and Aminoil, an oil company that RJR bought in 1970, paid $5.36 million in bribes to low- and middle-level foreign government officials during 1971-1976, according to the Securities and Exchange Commission. Most of the payments were recorded on the company books as commissions to customers.

With few exceptions, everyone in Sea-Land's management was aware of the illegal rebating, but executives at RJR Industries didn't find out about it until 1975 when the head of Sea-Land's internal audit staff told Robert A. Emken, RJR's comptroller.

J. Paul Sticht, RJR's president, ordered Sea-Land executives to stop the rebating, and the RJR board moved quickly and quietly to tighten its control over Sea-Land. It replaced Sea-Land's president,made two RJR Industries executives Sea-Land vice presidents and transferred them to Sea-Land's headquarters in Elizabeth, N.J.

RJR also tried to get tighter control of its international tobacco operation in January 1976 by starting a new subsidiary, R.J. Reynolds Tobacco International Inc., that was based in Winston-Salem and would control all international trade.

J. Tylee Wilson, the president of RJR Foods Inc., was named to head the new subsidiary. Until then, most of the company's international business had been conducted in Switzerland under Jacques E. Borin, who resigned when Wilson was appointed.

The audit committee of Reynolds' board of directors, which had been informally looking into the rebating since the summer of 1975, began a more thorough internal investigation in April 1976 when committee members learned of possible violations of federal laws on political donations. The committee hired Davis, Polk & Wardwell to conduct the investigation. The New York law firm had produced Henry Ramm,RJR's first general counsel, and another lawyer from the firm, Steven F. Goldstone, would become CEO of RJR Nabisco in 1996.

The law firm immediately notified the SEC, which tended to be more lenient toward companies that voluntarily reported their transgressions. As the firm's lawyers began interviewing dozens of RJR employees that spring, the Internal Revenue Service notified RJR and hundreds of other major corporations that it would be examining them for off-book funds and illegal campaign contributions. Before 1976 ended, Sea-Land's rebates would trigger investigations by the Federal Maritime Commission and the U.S. Customs Service. Sea-Land paid a $4 million fine to the commission in 1977.

Charlie Wade, RJR's company's director of public and governmental relations, and Bill Smith, the president of the tobacco company, had some explaining to do to the board of directors in the spring of 1976. ''What I told the board was that I knew it was unlawful, but I felt it was unlawful to the same extent as driving 55 in a 50-mile-an-hour zone,'' Smith said.

Some board members threatened to resign if the board didn't take disciplinary action. Sticht feared that the company would be charged with a felony. ''I took the position with the board that I would not accept a felony plea for the company,'' Sticht said. ''. . . I was not personally a felon and I did not think the company should be tagged with being a felon because some of the people did things they shouldn't have done, and they were dealt with.''

John Dowdle, RJR's treasurer at the time, suspects that Sticht also saw an opportunity to get rid of David Peoples, a potential rival. Sticht, who was a board member at the time, had opposed Peoples' promotion to president of RJR Industries in 1973 and had persuaded the board to give him the job, though Peoples was next in line for it.

''He (Peoples) thought that he might yet outmaneuver them and get the thing turned around,'' remembers Dowdle. ''That's why when the opportunity was presented -- with the political slush fund -- to get those people out of there, Paul jumped at it.''

But that meant giving the boot to Wade as well. He had been one of Sticht's most loyal supporters, enticing him to join the Reynolds board and urging his promotion to president. ''I don't think he (Sticht) had any choice,'' Dowdle said. ''He couldn't get rid of Dave and keep Charlie. And I think he thought Dave was more of a threat than Charlie was an asset.''

Sticht pulled Smith aside at a management meeting in Williamsburg, Va., in the spring of 1976 and told him that he would have to resign from the board. He told Wade and Peoples the same thing. Alex Galloway, a former chairman who was also implicated during the internal investigation, had retired in 1973.

''At that time, they knew they had done something wrong,'' Sticht said. ''I think each of them in their own way kind of felt they were kind of dragged into it by somebody else. And in a way some of them I think were. I felt sorry for them because of it.''

The four also agreed to repay the company $155,000, but the resignations were partly cosmetic because Peoples, Wade and Smith remained on the payroll at reduced salaries. Wade became secretary of the company's international advisory board; Peoples became a special economic adviser; and Smith was made an adviser on marketing and consumer products.

Their resignations generated banner headlines in the Winston-Salem Journal when the news broke on Saturday, May 29, 1976. ''That was one of the saddest days in my life,'' said G. Dee Smith, a long-time tobacco executive. ''Because I really hated to see what happened to those individuals and I hated to see that they did something that dumb. . . . I'm sorry it happened but I think they just didn't use good common sense in the way they did it. I'm not saying to break the law but they could have found a legitimate way of doing what they did.''

There was no mention in the news stories of money-laundering schemes hatched at the highest levels of the company. Those details would be contained only in the report that Davis, Polk presented to the audit committee at the end of 1976. RJR wouldn't give the report to the SEC, but allowed an agency investigator to read it. Neither the audit committee's report nor the SEC summary of it was made public.

The SEC and RJR would wage a two-year legal battle over the report and other documents relating to the rebates and campaign contributions.

They reached a settlement in June 1978 when RJR allowed an independent review of its investigation. The company hired Pasco M. Bowman, the dean of the Wake Forest University School of Law, who reported in January 1979 that the Davis, Polk investigation was complete and thorough. No charges were filed against any RJR employee because the statute of limitations on campaign violations was three years, starting from the date of the infractions.

More than 160 large international companies reported similar illegalities to the SEC in 1976. Mobil Corp., for instance, said it paid $70 million in bribes in Italy alone. Few executives lost their jobs. Two Lockheed Corp. executives involved in paying $24 million in bribes resigned after they were indicted. The RJR board over-reacted, Dowdle said.

''The board of directors should have said, `Forget it, it's not that much of a big deal' and so forth. In our company they kicked the three people off the board,'' he said. ''And I have always felt, with no way to prove it, that the reason they were kicked off the board was so Paul (Sticht) could get his own people on the board in their places.''

Sticht at the time ostensibly shared power with Colin Stokes, who was the chairman of RJR Industries. He admits that appointing three new directors helped solidify his power on the board.

''Well, in fact that did happen, but I never viewed it in that context,'' he said.

Wade was devastated by the public humiliation, but he never publicly uttered a bad word about his treatment.

The Saturday that the news of his resignation broke, Wade reserved the center table in the dining room at Forsyth Country Club. That night he and his wife ate dinner surrounded by Winston-Salem's power elite. The message behind Wade's display of courage was simple: He would survive.