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A Pistachio Farmer, Pom Wonderful, and the FTC

 
By Susan Berfield
     Nov. 11 (Bloomberg BusinessWeek) -- On an unexpectedly rainy
October day in Los Angeles, Stewart Resnick looks out the window
of a third-floor conference room and shrugs. It's midway through
California's biggest-ever pistachio harvest and the rain is yet
another reminder, should anyone need it, of how important water
is to his business. He helps himself to a half a vegetable wrap
and a bottle of Fiji Water—one of the four big consumer brands
Resnick owns—and takes his place at the head of the table, where
senior executives of his private company, Roll International,
have gathered to discuss how to sell 300 million pounds of
pistachios.
     Resnick, 72, is short, trim, and tanned, dressed in jeans
and a blue-and-white striped shirt. He and his wife and business
partner, Lynda, are quintessential Beverly Hills billionaires,
with a sumptuous mansion and a new $54 million pavilion named
after them at the Los Angeles County Museum of Art. They diverge
from the Beverly Hills norm, however, in this respect: The source
of their wealth is one of the biggest farms in California's
agricultural heartland—188 square miles of land, a holding four
times the size of San Francisco—aptly named Paramount. There they
grow oranges, almonds, pistachios, and pomegranates; their Pom
Wonderful juice launched the pomegranate superfood craze.
     Dave Szeflin, who manages Paramount's processing plant,
throws a bag of raw pistachios on the table and sits down
heavily. The plant has been operating 24 hours a day for the past
21 days.
     "Well, the growers should be happy," says Resnick.
     "The growers should be very happy," says Szeflin.
     "They should be beyond happy—ecstatic," says Resnick.
     Szeflin tells him a grower they both know stopped by the
plant to say just that. "He said, 'The sound of money is when a
harvester goes next to a tree in an orchard with 7,000 pounds of
pistachios and shakes it. That sound, when the pistachios hit the
catch frame, that's the sound of money.'"
     Everyone in the room knows that sound.
     "It's like a Vegas slot machine," says one executive.
     "Record prices and record deals," says Szeflin.
     "It's good for Stewart. He's got both," says another.
     The giddy, money-really-does-grow-on-trees attitude in the
conference room belies trouble. In the past few months the
Resnicks have been hit with two major legal challenges that have
exposed them to unflattering scrutiny. There is a floor at Roll
headquarters just for the lawyers preparing to fight on behalf of
the Resnicks, in courts of all kinds and for many years to come.
     The first suit, filed by several environmental groups and
water agencies, threatens a crucial element of Paramount's
business: its sizable stake in an enormous underground water bank
in the San Joaquin Valley. The second, brought by the Federal
Trade Commission, accuses the Resnicks of making false health
claims about Pom Wonderful.
     Stewart calls the environmentalists' lawsuit "a nuisance"
and the FTC's actions "foolish." But if the allegations are
proven, they may affect businesses worth $2 billion. Already,
they have begun to undermine an image of beneficence that Lynda,
in particular, has worked hard to cultivate: The Resnicks are
generous philanthropists and boast that Roll's products either
"are good for you or make you feel good."
     All of which may help explain why Stewart Resnick agreed to
give Bloomberg Businessweek a rare look inside Roll
International, which includes Fiji Water, the bottled water
shipped from the remote South Pacific island; Teleflora, the
flower delivery service; and Suterra, an environmentally
sensitive pesticide. To hear Resnick tell it, though, he's not
concerned about public perception. "If I think I'm right, I don't
care what people say. It's their problem," he says. "Lynda can't
take negativity. I told her, 'There's just one thing in life you
have to understand, and then nothing will bother you: If you're
successful, no good deed goes unpunished.' "
     The Resnicks are the biggest citrus, pomegranate, almond,
and pistachio growers in the U.S. They are also processors,
buying from other farms, and their Paramount plant, set in the
fields of the San Joaquin Valley, 140 miles northeast of Los
Angeles, cleans, roasts, and packages 60 percent of the domestic
pistachio crop, or about 30 percent of the pistachios in the
world. With a commanding share of the $2 billion global market
and the advantage of being both a buyer and a seller, Resnick
puts enormous upward pressure on the price of pistachios.
     Pistachios require a modest but regular supply of water—a
commodity sometimes so hard to come by in the Central Valley that
it can dominate all other discussions. Season after season,
Resnick has outwitted the weather, largely because of Paramount's
water bank, which is the biggest in America, if not the world. It
occupies 32 square miles in Kern County, making it larger than
Hollywood and Beverly Hills combined; it extends across the main
highways that run through the San Joaquin Valley and alongside
the California aqueduct. The bank itself is a network of 70
man-made ponds, a six-mile-long canal, and 33 miles of pipeline
that captures rain and snowmelt from the Sierra Nevada range and
can be fed by water purchased from the federal and state
governments as well as local sources. (In very wet years, the
bank can take water from the Kern River, too, which runs through
it.) Within days the water percolates through a layer of sand
into an aquifer; 85 wells pump out water when it's needed.
     Water banks are eagerly endorsed as a public resource but
are increasingly divisive as a business proposition. In
California, water means power and wealth: It is dammed and
diverted and transported hundreds of miles to let great cities
(and great pistachio orchards) blossom in bone-dry places. As a
changing climate makes the American West increasingly arid,
Resnick's water bank may someday be more important than his
orchards. "The value of the Kern Water Bank will only increase as
uncertainty over our water situation grows," says Peter Gleick,
co-founder of the Pacific Institute, a nonpartisan research
organization in Oakland.
     In 2007, before three dry years, the bank held a total of
1.5 million acre-feet of water, or 490 billion gallons, an
astonishing amount in a county that gets just six inches of rain
in a typical year. But you could drive right over parts of the
bank and not know it. The land is yellow and brown, covered in
scrub brush, dry grass, mesquite, tumbleweed, and sage.
     On a recent morning, the sound of rushing water booms in the
ordinarily quiet landscape. One member of the bank is depositing
10,000 acre-feet of water—the first time any of them has made a
deposit in three years—and it is being transported through the
Kern Water Bank Canal into some of the ponds. As they fill,
herons, coots, egrets, even a pheasant or two gather.
     The Kern Water Bank has six members in all, but Paramount is
the biggest, with a 52 percent stake. The five others are water
districts and agencies serving farmers and homeowners. Each
member maintains an underground water account, storing water in
wet years, drawing it down in dry ones, and selling it whenever
they choose. "We're like Bank of America," says Jonathan Parker,
the general manager. "We hold the money and give it back to the
participants when they want it." Except almost anybody can open
an account at Bank of America; only the members can deposit water
in the Kern Water Bank. Resnick compares it to insurance. "It
lets us do things without worrying about the ups and downs." Some
of those things include nearly doubling the number of Paramount's
pistachio trees.
     Owning the water bank has other advantages, too. During the
wet years from 2000 to 2007, California put in place a water
trading program that was supposed to satisfy environmentalists
trying to reduce pumping to protect smelt and salmon as well as
farmers wanting water for irrigation. The state sold water from
the Sacramento-San Joaquin River Delta to farmers at very good
prices, and Paramount bought and stored billions of gallons. "You
just had to ask for how much you wanted," says Jonas Minton, who
worked for the Water Resources Dept. at the time and is now an
adviser to the Planning and Conservation League, an environmental
group that earlier sued and settled with the water bank. Then the
state periodically bought back water, at much higher prices. The
deal was open to anyone, but not everyone had water to sell.
"[Paramount was] the single largest beneficiary of the scheme,"
earning tens of millions of dollars, and quite possibly more,
Minton says. William Phillimore, who has overseen Paramount's
water program since the late 1980s, says the company was "happy
to support an effort that was intended to help the environment"
and that its water "was among the least expensive" available to
the state.
     A lawsuit brought in July by three environmental groups and
two water agencies claims that in an era of growing scarcity,
such a tremendous resource should not be privately owned. They
are challenging a broad set of policies and decisions made by
California's Water Resources Dept. in 1994, one of which was the
transfer of the Kern Water Bank from state ownership to local
groups led by Paramount. Back then, Paramount and other
agricultural water users in Kern County were negotiating with the
state for more water, claiming urban areas had been given undue
preference during the drought of 1991. "We managed to get through
the year, but it took a lot of hard work," says Phillimore. "We
didn't want to go through that again. That's when we first
thought of acquiring what the state was trying to develop. They
were generally screwing it up...and they wanted to get rid of it.
We were kind enough to take it off their hands."
     State officials turned over the water bank—which had cost
about $74 million to develop but was not yet in use—to the Kern
County Water Agency, which in 1995 passed it to the group that
operates the bank on behalf of Paramount and others. In exchange,
the new members of the bank gave up their claim to state water
allocations, which California may or may not have been able to
deliver. Resnick says those rights could be worth $200 million
today and that the new owners spent $35 million to make the bank
operational. "We paid for it, we built the infrastructure. We
took a big risk," he adds.
     "Paramount and local water groups have been ruling the roost
for a long time. They've divided up the spoils," says Adam Keats,
a lawyer for the Center for Biological Diversity, the leader of
the group suing to return control of the water bank to
California. "They have their own philosophy and theory about how
the world should work, which involves them getting very rich on
our resources," he says.
     There are other lawsuits, too, demanding more accountability
from the water bank. A suit brought by a rival processor, Ali
Amin of Primex Farms, accuses Paramount of selling water cheaply,
though profitably, to lure away a grower crucial to his business.
The other, filed by a water storage district that lies directly
south of the water bank, blames the heavy pumping out of the
aquifer during the past three years of drought for lowering the
water table and drying up the wells of its residents. Phillimore,
who is also chairman of the Kern Water Bank Authority (which
operates the bank), says it's the district's own mismanagement
that caused the bank's neighbors to run short of water.
     Someone else might tread lightly here, realizing that
whatever the merit of each specific charge, together they are
symbolically powerful. Not Resnick. Over lunch in the Orchard,
Roll's new light- and art-filled cafeteria, he says of Amin,
whose name he won't even mention, "He wanted to be a major player
and he continues to have lot of animosity and he'll never
change." And the environmentalists' lawsuit? "They don't know
what they're talking about," he says as he tucks into a grilled
salmon salad. "The ones who are complaining are saying, 'You have
the water and we want the water.' Well, that's great. There are
guys in Beverly Hills who have land and I want that land. Maybe
they bought it for $10,000 and now it's worth a million and I'd
like some, give it to me."
     What would happen to Paramount if the environmentalists were
to prevail and it loses the water bank, the war chest it has
deployed to such great effect for the past 15 years? "I don't
know how we could lose it," Resnick says. "We bought it. We own
it." Without a reasonably priced supply of water, of course,
Resnick could find his domination of the pistachio market
compromised.
     When a metal shaker clamps on to a pistachio tree, the
ground shakes. There's a draft of air, and in one violent burst
close to 150 pounds of nuts come flying off the branches into a
huge catcher. The whole thing lasts five seconds. This year,
Paramount has had 100 of these machines operating day and night
for eight weeks.
     "It's hard to believe those fields. When you fly over the
west side [of the Valley], as far you can see it's basically all
our property," says Resnick, who sometimes enjoys the view from
his own plane. The orchards lie about 60 miles north of the water
bank. "I first bought some land in the late 1970s as a hedge
against inflation," he says. It could have been a suburban office
park for all he cared. "I thought I'd buy a piece of land for my
kids, and hopefully it would go up in value." (The Resnicks have
five children from previous marriages, but none together.)
     Stewart grew up in New Jersey and came west with his family
during California's golden age in the 1950s. He was at UCLA when
his father lost everything. "He was a very smart guy, but he was
an alcoholic and a compulsive gambler," says Resnick. "Other than
that, he didn't have any vices." He laughs. "My father was a
great example of what not to do, quite honestly. He had been
middle-class, he had a local bar, and then he was poor. I
realized I didn't want to go backwards." Resnick started his
first business, a janitorial services company, while in law
school and sold it in 1969.
     Soon after, he married Lynda, his second wife. They met when
she made an advertising pitch for a small business he had
invested in. She had grown up a child of privilege on the East
Coast; her father later moved the family to Los Angeles and
achieved some fame as the producer of the cult classic The Blob.
Lynda had been on television as a kid and considered becoming an
artist, but instead started her own ad agency at age 19. As she
likes to say of her first encounter with Stewart, "I never got
the account. But I sure got the business."
     The Resnicks began buying companies, starting with
Teleflora, which they built into the nation's largest flower
delivery service and then, in 1985, the Franklin Mint, purveyor
of commemorative coins and other kitsch. Both were good matches
for Lynda's marketing skills. She famously paid $211,000 for
Jackie Kennedy's fake pearls, and then the Mint went on to sell
$26 million worth of replicas. More notoriously, in 1998 the Mint
was sued by The Diana, Princess of Wales Memorial Fund for
selling unauthorized dolls; the Mint won and then accused the
Fund's lawyers of malicious prosecution. The case is still in the
courts. Meanwhile, the Resnicks sold the Mint in 2006, after eBay
had (EBAY) begun taking its business away.
     In the mid-1980s, they expanded their land holdings
significantly, and cheaply, by buying orchards that Superior and
Getty Oil were unloading. Now they had oranges, pomegranates,
almonds, and pistachios. Lots and lots of pistachios. "We had
enough that we could be the market leader," Resnick says. "Our
intent was always to be the leader."
     California and Iran are the two major pistachio producers in
the world. In Iran, farmers have been planting the trees, which
take nearly six years to produce a commercial crop, for
centuries. In California, they had been doing so on a small scale
for just a few decades. Resnick saw an unlikely opportunity: a
relatively new American industry that he could shape into a
global competitor.
     One of Paramount's strategies is to maximize its profits as
a grower even if it means minimizing its profits as a processor.
That has changed the economics of the Valley, making it better
for the farmers and much worse for rival processors such as Amin.
As Paramount has proven its ability to sell more pistachios at
higher prices, farmers have been growing more. This year, in part
because Iran is recovering from a drought, California is likely
to be the world's top producer.
     An even bigger Paramount in an even bigger industry is an
unsettling prospect for some in the Valley. Resnick calls them
the "diehards"; they are the ones who are still angry that he
killed their cooperative three years ago. As he talks about those
days his voice hardens. He's agitated, as if he still can't
believe how he was treated. "It was one man, one vote," he says.
"A person with 20 acres had the same vote as we had with 30,000
acres." He suffered other perceived injustices. "The head of the
co-op, in the 10 years we were in it, she came down to visit me
once."
     Paramount filed a lawsuit against the co-op, claiming it was
violating Resnick's freedom of speech. The legal fight distracted
the co-op and drained its resources, and when a routine vote came
up, the members decided to disband. Resnick is blunt: "The
commission was wasting my money and wouldn't change. So
eventually we eliminated it and went on our own, and it's really
much better....You cannot run a business democratically."
     There are other things the Resnicks are doing on their own
now, too, most of which farmers don't usually try. Lynda and the
Paramount staff turned their pistachios into a boutique product
with a brand name, Wonderful, a premium price, and an aggressive
advertising campaign called Get Crackin'. Last year, Levi
Johnston, the on-again, off-again member of Sarah Palin's clan,
appeared in one of the television spots. A dominatrix starred in
another. Sales nearly doubled afterward.
     Paramount also cut out the middlemen that stood between it
and the supermarkets that sell its Wonderful pistachios. Now,
Paramount's merchandisers arrive at Krogers (KR) and Safeways
(SWY) and Supervalus (SVU) around the country in Toyota Priuses
emblazoned with the Get Crackin' logo and set up their own
promotional stands right in the stores. "We've learned that if
anything is important enough, we're better off doing it
ourselves," Resnick says. Lynda puts it more brightly: "What
we're saying is: 'The Resnicks planted these trees, grew these
trees, loved these trees, processed their nuts, and sent them to
you.' We're a mom-and-pop operation." Really what they've done is
build a farming empire by bringing together two parts of
California that are as distinct in psychology as they are in
geography: Hollywood and the heartland.
     Lynda, who declines to disclose her age, is petite and
formidable, with a brassy voice and a stand-up comic's sense of
timing. She is sitting on a silk couch in the music room at
Sunset House, her 25,000-square-foot beaux arts mansion. It is a
place of regal proportions—"Lynda says we're too short to live
here," Stewart jokes—and grand gestures. The music room is glazed
in a shade of blue that complements the sash in an 18th century
French painting by François Boucher, Leda and the Swan, which
usually hangs over the fireplace. The dining room seats 22; the
foyer can hold 100. At one end of the drawing room sits a
larger-than-life-size marble sculpture of Napoleon. The grounds
are expansive, with a lush lawn and sculptures of sheep on one
side, a pool and "victory garden" on the other. They've lived
here for 34 years. "It's not home, but it's much," she and
Stewart like to joke.
     Selected pieces from their Old Masters art collection,
including a portrait of a young Marie Antoinette, are on display
at LACMA's Lynda and Stewart Resnick Exhibition Pavilion in a
show titled "Eye for the Sensual." In the week preceding the
opening, Lynda gave several tours, saying of Marie Antoinette, "A
great deal of her bad press was manufactured by her enemies. She
needed a better publicist. And she certainly needed a stronger
husband." Tom Hanks and James Franco were among the 1,000 people
who attended the fundraiser honoring the Resnicks. Christina
Aguilera performed.
     That was Saturday night. On Monday morning, Sept. 27, the
Federal Trade Commission went public with its complaint against
the Resnicks. After failing to come to terms over a settlement,
the FTC sued them both, as well as the president of Pom
Wonderful, for making deceptive claims about the health benefits
of pomegranates. The allegations cut to the core of the Resnicks'
business strategy and identity: If you've consumed a pomegranate
martini or frozen yogurt lately, or think pomegranate juice is
good for your heart, or will help with prostrate cancer or even
erectile dysfunction, it's probably because of Lynda. She read
the lore about the pomegranate's supposed powers. She spent $34
million on dozens of research projects and clinical trials to try
to prove them. She fashioned an entire marketing strategy—and
public persona—based on the assumption that she had proof. She
wrote a book, touted as her "secrets to marketing just about
anything," and titled it Rubies in the Orchard. She calls herself
the Pom Queen.
     In its 25-page complaint, the FTC highlights some of the
more brash ads Resnick has run: "Drink to prostate health.
Sometimes, good medicine can taste great," began one in
Prevention magazine; "I'm off to save prostates! Man by man,
gland by gland...," read another in Men's Fitness. Lynda is
quoted on Martha Stewart's show saying, "It is the magic elixir
of our age and of all ages." In an interview with Newsweek, she
winked at a young reporter and told him pomegranate juice is 40
percent as effective as Viagra. "Not that you need it.
But—couldn't hoit!"
     Lynda may have made the pomegranate juice market, but she
didn't have it to herself for long. All of the big juice
companies have come out with pomegranate drinks. Pom Wonderful
had sales of $165 million in 2006, although the Resnicks say it
has never made money for them. They did not disclose more
specific numbers. Their fresh pomegranates do: They expect to
sell 3 million cases this year. The Resnicks claim that many of
these other juices, priced lower than Pom, don't have much
pomegranate in them. They've sued Coca-Cola (KO) (which owns
Minute Maid), Pepsi (PEP) (which owns Tropicana), Welch's, and
Ocean Spray for false advertising. Coca-Cola won its case on
summary judgment, though Pom is appealing. A jury found that
Welch's deceived buyers but didn't award Pom damages; Pom is
appealing that case, too. The Tropicana trial is under way. Lynda
suggests the FTC is too close to the big beverage companies and
went after the Resnicks in retaliation. "What's motivating them?
Is it our competitors, who have all these lobbyists there?" she
asks. Pom, she says, doesn't have lobbyists.
     The case against the Resnicks will be heard by an FTC
administrative law judge in May; the couple expect to appeal to a
federal court after that. They have already filed their own suit
against the FTC, claiming that preventing them from publicizing
the results of their studies violates their right to free speech.
"We are consumed with doing good," says Lynda. "That's why this
Pom stuff is so ridiculous. Please. We are fruit. Hello? Why do
we need thousands of people in a 20-year trial for fruit? They do
it for drugs because drugs kill people, or potentially harm
them."
     Stewart, a prostate cancer survivor who takes two
pomegranate pills every morning, is no less adamant, but he isn't
likely to describe pomegranates as a magic elixir of all ages,
either. "Could we have been over the gray line a few times?
There's an argument," he says. "But what they want to do is
silly. Do we believe the science? Absolutely. And do the doctors
believe it? Absolutely. Now, do we have a 5,000-person
double-blind, placebo-controlled 12-year study on prostrate
cancer? No. How could we? But believe me, there is real evidence
this is helpful. By not saying so, it's wrong. Seriously."
     "I love using Pom research as an example of how easy it is
to design elaborate studies to give you the answer you want,"
says Marion Nestle, professor of nutrition, food studies, and
public health at New York University. "They spent $34 million
proving that pomegranate juice has antioxidant activity. I could
have told them that for free. All fruits do. What the studies
don't do is compare the effects of pomegranate juice to orange
juice, for example. They wouldn't get the answer they want if
they asked that question."
     As luck would have it, a new $10 million ad campaign for
Pom, its first on television, had been scheduled to debut the
last week in September, just as pomegranate season began. The
series of three commercials is a dramatic shift in style and
substance: Quiet, dreamy, and provocative, they hype the
centuries-old idea that pomegranates are aphrodisiacs. One of the
spots shows a naked Eve, played by Sonja Kinski, being caressed
by a snake as she reaches for a bottle of Pom Wonderful. A
breathy voice intones, "Some scholars believe it wasn't an apple,
but a ruby-red, antioxidant-rich pomegranate with which Eve
tempted Adam."
     "The FTC was after us, and we were searching for a new
concept for a long time," says Lynda.
     Back at the Orchard, lunch is over. Stewart pushes his empty
salad bowl aside and considers his four-decade-long partnership
with Lynda. "It's good to be king," he says, "but you know what?
It's also better to be queen."
     At Roll, the Queen wants to spend more money on marketing.
Lynda tried for years to persuade Stewart to launch an ad
campaign for their pistachios. It took a salmonella scare and a
recall in 2009 for him to agree. This year's $20 million Get
Crackin' commercials, featuring eight celebrities, began airing
on Halloween eve. "You want to go with people who are part of pop
culture," Lynda says. "You wouldn't want balloon dad. That was
pathetic." You would want Snooki, the star of Jersey Shore,
though. "She just sums up reality TV, and reality TV dominates
our lives." You'd want Rod Blagojevich, the disgraced Illinois
governor, too. "He's animated. He's an avatar of himself," says
Lynda. Her next big effort will be marketing Paramount's seedless
mandarins, which she's branded as Cuties.
     On the bright side, then, there is Snooki, Blagojevich, Eve,
a record crop of pistachios, and a growing share of the global
market. Stewart Resnick may be right that success is always
punished, or it may be that broken systems are sometimes fixed at
the expense of those who understand them best. One of the most
telling comments comes from an unexpected source, Keats, the
lawyer for the Center for Biological Diversity. "The Resnicks are
acting rationally," he says. "The system is rotten. It's a
mistake to think it's just the Resnicks. They're particularly
adept at exploiting the system. But anyone in their situation
would do the same."
     The Resnicks are looking ahead. Lynda says she may focus
more on the couple's philanthropy. "We're going to go through
some hard times in America," she says. "I get maudlin. I do. I
know too much." The couple spends summers in Aspen, where Lynda
is a member of the Board of Trustees of the Aspen Institute, a
self-described neutral venue for discussing and acting on
critical ideas. "Every great thinker comes out there and tells us
what's going on in the world," she says. "By the end of the
summer, I want to kill myself."
     Stewart says he wants to do nothing but what he's already
doing. "I have a great time," he says. "If something goes wrong,
it might be a headache, but it's not going to affect the quality
of our life. Also, I believe that luck evens out. So that's why
if I go to Las Vegas and lose, I don't mind. Seriously, if I win
too many times, I get nervous."

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