Before a judge issued a blistering ruling against Mark Arabo, the trial offered an inside look at the influential trade group he ran – and its slow demise.
Independent grocers founded the group that would become the Neighborhood Market Association in the ‘90s. It bound together the independent liquor and corner stores around the San Diego region. The network empowered them to compete with chain stores and to lobby local and state officials on policies that affected them.
Arabo took over from his brother in 2008, and became the corner store king. He swung his weight around local politics and flirted with his own run for office. Then, he leveraged the position to become an international spokesperson for Christians in Iraq and Syria fleeing genocide. It landed him in the White House and on cable TV throughout 2015.
But trial transcripts and the organization’s tax filings reveal that while Arabo was building his profile, membership – and the NMA’s finances – were crashing.
Eventually the organization was forced to sell a piece of property to prop up its finances. The sale, and a payment to Arabo related to it, would eventually become the basis for the lawsuit that led a judge to order new leadership for the NMA late last month.
Around 2011, members started fleeing the organization. It created a vicious cycle. Losing members deprived the NMA of its chief asset: the solidarity of corner stores across the San Diego market. The NMA could act as a single entity, promising vendors prime positioning for their products in corner stores around the county in exchange for special pricing that made the stores more profitable. But when members left, they lost the leverage that made them valuable, vendors dropped out of deals and membership became less attractive.
During this spiral, the organization’s board greenlit $250,000 in payments to Arabo, in addition to his $210,060 salary. Members alleged the payments were improper because they were outside the scope of his employment agreement, and because the NMA was dying.
A judge last month sided with the plaintiffs. He said not only that Arabo wasn’t entitled to the $250,000 and that it needed to be returned, but that he flatly did not believe Arabo or other witnesses who spoke on his behalf. The judge said the people running the NMA today could not be trusted to continue doing so, and ordered the nonprofit into receivership pending new board elections.
It was a stunning rebuke to a figure whose endorsement political candidates touted. Arabo had figured heavily into discussions on letting people drink on the beach, whether to ban plastic bags, to raise the minimum wage and who to elect as mayor.
Here’s what the trial taught us about Arabo and the NMA.
How the NMA Works
There are hundreds of small corner and liquor stores throughout San Diego – many run by Chaldeans, an ethnic minority from the Middle East who settled as refugees in large numbers in East County. The NMA was their voice in local and state politics.
It was a prolific lobbying group and campaign contributor.
NMA leaders fought for the things you’d expect. They wanted less restrictive liquor licensing, though they’d sometimes oppose non-member stores looking to pick up a license – or take on the role of protecting a local community’s character, as they did in opposing the opening of a Target in South Park. They fought a minimum wage hike and opposed plans to ban booze at the beach. They fought off a local attempt to restrict plastic bags. Anti-tobacco and alcohol control activists consider NMA the opposition.
The political side of the organization is the only thing that comes up in the nonprofit’s mission statement filed with the IRS: “a grocery and convenience store association that educates and updates is members regarding the laws and regulations, social and economical environment that surrounds the grocery and convenience stores industry.”
But that is not the only thing the NMA does. In fact, lobbying and education for members might not even be the primary reason members pay to be part of the group.
The NMA is better understood as a nonprofit that allows all the individually owned stores it represents to act like one big chain.
As Arabo described in part of his two-day turn on the witness stand, the NMA is a clearinghouse. The stores band together to negotiate deals with large vendors.
The stores get to buy their inventory at a cheaper price. The vendors – Coca-Cola for drinks, or Blue Bunny for ice cream – get a guaranteed placement in hundreds of stores across San Diego.
Arabo said he saw the need for such an arrangement firsthand when a Food 4 Less opened down the street from his family’s grocery store, where he grew up working, and business suffered.
He saw that independent stores can’t take on a chain – or fight in City Hall – by themselves.
“They need someone at the helm or to advocate for them to make sure they’re safe, to make sure they’re secure, to make sure their margins are protected, to make sure legislation doesn’t hurt them, to make sure that they thrive,” Arabo said, according to court transcripts.
The NMA protects its members’ profit margins by negotiating endorsement deals with its vendors.
For instance, the NMA could agree to make Frito-Lay its endorsed chip provider for the year. Frito-Lay will ask any store that takes advantage of the deal not only to carry Frito-Lay, but to set up its chip display to their liking. Frito-Lay would then cut a check for all the stores based on how much product they sold, and often a separate payment to the NMA to support its operations.
For individual stores, a membership doesn’t just pay for the NMA’s lobbying and government relations work, it also gives them access to these negotiated deals.
For the vendors, it gives them a direct line into expanding their market share in San Diego, through all the independent stores around town.
For the NMA, it proves the organization’s worth and makes membership – and the annual membership dues – an easier sale.
“One year, we’d push Coke,” Arabo said on the witness stand. “Coke would increase 2 or 3 percent market share. The next year Pepsi comes and says, ‘We want to be endorsed.’ So we’d sell Pepsi and Coke, bid on the business and so they would do another bid and then we would negotiate thousands of dollars for the members and thousands of dollars for the association.”
Ron Fong is CEO of the California Grocers Association – a similar but larger trade group that represents grocery stores throughout the state. He said he wasn’t familiar with the NMA’s specific operations, but as a veteran leading the state’s largest grocery association, said his group doesn’t do anything like the sorts of endorsement deals Arabo described.
“Our association steers clear of any pricing or deal discussions because it may violate anti-trust laws that are really important to review in any type of setting when you have competitors in the same room,” he said.
The NMA, though, had done this long before Arabo took over.
“We wanted to replicate, 7-11, AM/PM and be a chain not just have a bunch of stores just to have a bunch of stores,” he said.
Crucial to the system working, though, was maintaining unity. The organization loses leverage when it loses the buying power of bringing thousands of buyers to a vendor all at once.
“The way you do it is you show the perception of unity, to show the suppliers that we’re a chain, we’re united, we’re together,” Arabo said.
But in 2011, the NMA’s membership numbers started to tank, bringing the organization’s revenue down with it. Arabo said this was due to internal politics within the NMA and the Chaldean community. The plaintiffs alleged it was because Arabo stopped doing the work in favor of his political ambitions.
The NMA’s tax filings show it collected $429,239 from membership dues in 2011. The next year, it collected just $154,074, and things only got worse in 2013. By 2015, the most recent year available, the NMA collected just $139,607 from members.
But that number could understate the extent to which membership in the organization collapsed. Invoices from member stores, obtained by Voice of San Diego, show that a single membership in 2010 cost $250; by 2015, that had increased to $350.
That would mean the organization had roughly 1,700 members in 2011, and around 400 by 2015.
Those aren’t official figures, and business owners who own multiple stores get discounts for their second and third stores. In press releases and news reports, the NMA has said it represents over 2,000 corner stores.
Fong said membership is the key element for a successful trade organization.
“If membership continually goes down, that’s a red flag for any association,” he said.
In 2011, the NMA had a board election in which a number of business owners with long-running ties to the organization and the Chaldean community were ousted. Arabo said the community seemed fractured, and suppliers started bringing it up in meetings as reasons not to do deals with the NMA.
Eventually, some of those people would bring the lawsuit against Arabo and the NMA, alleging he had received improper payments.
But that was after a series of bad years.
In 2013, the NMA spent $251,434 more than it brought in. The next year would have been even worse, but the organization sold a building it owned in Mission Valley to stave off financial problems.
The Building
Despite its financial problems, the NMA had one nice asset: a building across from Nordstrom in Fashion Valley. It had been carrying the property as an asset for years. In 2013, the NMA reported it had over $2 million in land and building assets.
The organization was spending more money than it was bringing in, so in 2014, the board decided to sell.
One board member, Mark Kassab, said at trial that the board was specifically told it needed to sell the building because the organization was hemorrhaging money.
It sold the building for $3.3 million. In tax filings, the NMA reported it cost the organization $2.4 million to sell the building, leaving it with a $920,710 gain.
The NMA finished 2014 up about $115,000 – but that’s after it banked the $920,000 in investment income from the sale. Without that windfall, it would have lost over $800,000 that year.
That sale led to the lawsuit.
After selling the building, the board proposed giving Arabo a $210,000 bonus to show its appreciation for what it said was his role in the sale.
Kassab said in court that he was the only person in the room arguing against the payment.
“I said if six months earlier we were losing money, not having enough money, why do we have to give $210,000, a bonus to our president?” he said. “That’s one. No. 2, we are not-for-profit. How could you give a bonus for $210,000 when you are not-for-profit? I argue so many different [scenarios] why we should not give that bonus. I think I was the loneliest voice over there at that meeting for the next 45-minute to an hour.”
He said the board seemed like it had already decided to give Arabo the bonus before the chaotic discussion. Kassab said one board member approached him before the meeting and laid out what they were going to do, who would make the motion for the payment and who would second the motion.
Kassab told the judge he left the board after that.
“I felt that we failed the members,” he said in court. “We didn’t do a good job for them. We swear to protect the money and this money doesn’t belong to us. We had – and we were losing money. It’s not like our organization was a profitable $1 million or $2 million. We were losing money.”
But the next year, NMA was back in the red.
In 2015, the latest year for which NMA’s tax filings are available, the organization lost $579,703.
The judge in the case sided with the former NMA members who alleged Arabo received improper compensation. The judge has ordered the organization into receivership, with a temporary advisory board holding things steady until a new board can be elected.
Superior Court Judge Richard E.L. Strauss said the organization needs new leadership.
“I do know this,” Strauss said. “This organization should not be run by the people who are running it now.”
That’s still Arabo, though it’s unclear how – or when – the board’s leadership could actually turn over. For one, Arabo has pledged to appeal, and the order to put the agency into receivership could be put on hold pending the appeal process.
But it’s also unclear because Arabo stepped down as NMA president in 2015. His company, Refined Management, then got a seven-year contract to run every aspect of the company’s day-to-day business. It’s unclear how the judge’s ruling would sort out what happens to that contract once the company is put into receivership.
It’s the third year of that contract now, which calls for Arabo’s company to receive $44,250 a month. By the end of the deal, Refined Mangement is scheduled to make $55,500 a month.