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Justice Dept. Ends Probe of Coca-Cola; Firm Settles With SEC

By Harry R. Weber
Associated Press
Tuesday, April 19, 2005; Page E02

ATLANTA, April 18 -- The Justice Department ended its criminal investigation of Coca-Cola Co. without taking action, the world's biggest soft drink maker said Monday.

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

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

It was not clear why the Justice Department dropped its investigation, which included grand jury testimony from several current and former Coca-Cola executives. Patrick Crosby, a spokesman for the U.S. attorney's office in Atlanta, declined to comment. Coca-Cola spokesman Ben Deutsch said only that the company received a letter Monday from the Justice Department saying it was terminating its probe.

Whitley alleged that Coca-Cola rigged a marketing test at Burger King restaurants in 2000 and made false or misleading statements or omissions in connection with the reporting of sales volume.

Another facet of the Justice Department investigation involved Coca-Cola's relationship with Lancer Corp. of San Antonio. Whitley claimed Coca-Cola and Lancer hid a slush fund by filing false financial information to the SEC about Lancer's sales of equipment to Coca-Cola.

Coca-Cola denied most of the allegations but admitted that some of its officials undermined the Burger King marketing test. It later settled Whitley's lawsuit for $540,000.

In a memo to employees Monday, chief executive E. Neville Isdell said that under the settlement with the SEC, Coca-Cola has agreed to take unspecified remedial actions in corporate compliance and disclosure. He said the SEC settlement does not include a monetary fine or penalty and added that Coca-Cola does not admit or deny wrongdoing.

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

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

However, from 1997 to 1999, 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 about 1 to 2 cents per share to Coca-Cola's quarterly earnings and was the difference in 8 of the 12 quarters from 1997 to 1999 between Coca-Cola meeting and missing analysts' earnings estimates.

Coca-Cola shares fell 32 cents to close at $40.97 on Monday.


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