Risk & Compliance

Coke Probes Completed by SEC, DoJ

Coca-Cola was ''basically robbing from their future earnings,'' an SEC lawyer reported asserted; ''there would have been no fraud had they made a d...
Stephen TaubApril 19, 2005

The Coca-Cola Co. announced that it has reached a settlement with the Securities and Exchange Commission relating to its failure to disclose certain end-of-quarter sales practices used to meet earnings expectations at its Japanese unit.

Separately, the Atlanta-based soft-drink giant announced that the Department of Justice closed a probe into accounting issues raised by a whistle-blower without taking any action. According to several wire-service reports, it is unclear why Justice terminated its investigation.

The SEC and DoJ probes stemmed from a lawsuit filed by Matthew Whitley, formerly the finance director for supply management in Coca-Cola’s fountain division, who asserted he had been fired in retaliation for raising concerns about accounting fraud.

Whitley had alleged that from approximately 1998 to 2001, the company overstated net revenue and gross profit by recording marketing allowances to some customers as expenses rather than as rebates. He also said that Coca-Cola fabricated a market survey in order to convince a customer to take part in a frozen-beverage campaign. Although it denied most of those charges, Coke eventually settled with Whitley for $540,000.

The SEC found that, at or near the end of each reporting period between 1997 and 1999, Coca-Cola implemented an undisclosed “channel stuffing” practice in Japan known as “gallon pushing” for the purpose of pulling sales from a future period into a current period. According to the commission, Japanese bottlers were offered extended credit terms to purchase beverage concentrate earlier than they otherwise would have.

The practice contributed about one or two pennies to Coca-Cola’s quarterly earnings per share and was the difference in 8 out of the 12 quarters from 1997 through 1999 between Coca-Cola meeting and missing analysts’ consensus or modified consensus earnings estimates, according to the commission. “Despite the impact to current earnings and the likely impact to future earnings, Coca-Cola failed to disclose its gallon pushing practice in its periodic reports,” the SEC added.

Without admitting or denying the commission’s findings, Coke consented to a cease-and-desist order finding violations of the antifraud and periodic reporting requirements of the federal securities laws, and it . agreed to take steps to strengthen its internal disclosure review process to prevent future violations.

Coca-Cola chairman and chief executive officer Neville Isdell, in a letter to employees made public, stated that the settlement does not involve a monetary fine or penalty. “Under the settlement, we have agreed to maintain certain measures that the company implemented prior to, or during the last two years and to undertake additional remedial actions in the areas of corporate compliance and disclosure,” he wrote.

“MD&A requires companies to provide investors with the truth behind the numbers,” said Richard Wessel, the SEC’s Atlanta district administrator, in a statement. “Coca-Cola misled investors by failing to disclose end of period practices that impacted the company’s likely future operating results.”

Coca-Cola was “basically robbing from their future earnings,” said SEC lawyer Kit Addleman, according to Bloomberg. “There would have been no fraud had they made a disclosure of that practice.”