Tough times at Office Depot Depot CEO Steve OdlandBy Suzanne Kapner, writer

(Fortune Magazine) -- In the midst of a recession that has hit business and consumer spending especially hard, it may not be so surprising that retailer Office Depot is having a rough go of things: The No. 2 office-supplies chain lost money in each of the past five quarters and is expected to lose $96 million this year.

But the company, based in Boca Raton, Fla., is facing troubles that go deeper than reduced demand for paper and pens: namely, an investigation by the SEC that's in the final stages of settlement and a fresh round of probes into whether the company overcharged government customers.

Office Depot CEO Steve Odland, who has run the $14.5 billion (in revenue) chain since 2005, says Office Depot (ODP, Fortune 500) is a victim of attacks by disgruntled ex-employees. Indeed, Odland, 51, who previously served as CEO of Autozone under investor Eddie Lampert, is beloved by his board and many investors -- one of which, venture capital firm BC Partners, agreed to throw Office Depot a lifeline in the form of a $350 million investment last June.

"Steve has a strong record on cost control and putting together a loyal team," says James Rubin, a senior partner (and son of former Treasury Secretary Robert Rubin). But government audits are starting to verify some of the accusations -- and some customers are starting to pull their business.

This past December, Office Depot said it had agreed to pay a civil penalty to settle an SEC investigation that began in 2007. The inquiry primarily involved allegations that Office Depot leaked information to financial analysts, violating Regulation FD, which prohibits selective disclosure of financial information. It also involved separate inquiries into vendor payments, intercompany loans, and other accounting issues.

Office Depot won't comment on the investigation; as part of the settlement, which is still awaiting approval, it would neither confirm nor deny wrongdoing.

Now a new round of allegations accuse the company of overcharging city and state municipalities by as much as $100 million a year. The charges stem from an ex-employee, David Sherwin, a former senior account manager who was fired in 2008 (and who has admitted to accepting payments from Office Depot competitors for his whistleblowing efforts).

But his allegations, which began in 2008, sparked investigations by the attorneys general of six states as well as the Department of Justice -- and government audits have started to verify his claims. Office Depot has since repaid several municipalities, from Lee County, Fla. ($121,000), to the state of California ($2.5 million). That's far from Sherwin's $100 million estimate, but the numbers are getting bigger: In December, San Francisco released audit results that showed $5.75 million in overcharges.

Odland says that the price discrepancies were caused by a few rogue employees, who have been terminated, and that the company is a victim of a smear campaign. He points out that Office Depot has a new centralized ordering system and has added ethics training and an "open door" policy to encourage employees to report misbehavior.

But San Francisco and Lee County have already switched their contracts, valued at more than $18 million, to industry leader Staples (SPLS, Fortune 500); the state of California has put its contract out to bid. With the stock at $7, down from the mid-30s in 2007, the changes had better pay off soon.

Reporter associate Marilyn Adamo contributed to this article. To top of page

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