U.S. Ends Its Criminal Probe of Coca-Cola

The Justice Department has abruptly ended without taking action its nearly 2-year-old criminal investigation of allegations raised in a whistle-blower lawsuit of accounting irregularities at Coca-Cola Co., the world’s biggest soft-drink maker said Monday.

Separately, the Atlanta-based company said it had reached a settlement with the Securities and Exchange Commission over its business practices in Japan.

The end to the dual investigations closes an embarrassing chapter for the company that was sparked by a 2003 lawsuit filed by former Coke manager Matthew Whitley, who claimed that he was fired in retaliation for reporting to senior management allegations of fraud and accounting mistakes.

It was unclear why the Justice Department dropped its investigation, which included grand jury testimony from several current and former Coke executives. Patrick Crosby, a spokesman for the U.S. attorney’s office in Atlanta, declined to comment. Coke spokesman Ben Deutsch said only that the company received a letter Monday from the Justice Department saying it was terminating its probe.

Among other things, Whitley alleged that Coke rigged a marketing test at Burger King Corp. restaurants in 2000 and made false or misleading statements or omitted information in connection with the reporting of sales volume.

Another facet of the Justice Department investigation involved Coke’s relationship with Lancer Corp. of San Antonio. Whitley claimed in his lawsuit that Coke and Lancer hid a slush fund by filing false financial information to the SEC about Lancer’s sales of equipment to Coke.

Coke denied most of the allegations but admitted that some of its employees undermined the Burger King marketing test. It later settled Whitley’s lawsuit for $540,000.

In a memo to employees Monday, Chief Executive Neville Isdell said that under the settlement with the SEC, Coke agreed to take unspecified remedial actions in the areas of corporate compliance and disclosure. He said in the memo that the SEC settlement did not include a monetary penalty and added that Coke did not admit or deny wrongdoing.

According to an order issued Monday, the SEC found that, at or near the end of each reporting period from 1997 and 1999, Coca-Cola implemented an undisclosed practice in Japan in which Japanese bottlers were offered extended credit terms to induce them to buy quantities of beverage concentrate that the bottlers otherwise would not have purchased until a following period.

Coca-Cola typically sells gallons of concentrate to its bottlers corresponding to its bottlers’ sales of finished products to retailers. As a result, bottlers’ concentrate inventory levels typically increase about in proportion to their sales of finished products to retailers.

However, as a result of Coke’s practice, from 1997 to 1999 its Japanese bottlers’ concentrate inventory levels increased at a rate more than five times greater than that of finished-product sales to retailers, the SEC said. That pulled forward sales from subsequent periods and made it likely that Coca-Cola’s bottlers would purchase less concentrate in the later periods.

The practice, known as “channel stuffing,” contributed 1 cent to 2 cents to Coca-Cola’s quarterly per-share earnings and was the difference between meeting and missing analysts’ earnings estimates in eight of the 12 quarters during that three-year period.

Coca-Cola shares fell 32 cents to $40.97 on the New York Stock Exchange.