Before ascending to the top job at Coca-Cola in late 1999, Doug
Daft held another big position: running company operations across
much of the world, including the profitable and highly competitive
Japanese market.
There, as in much of the Coke empire, Daft was under intense
pressure to boost sales. And so, according to allegations in court
documents, Daft ordered underlings to find ways to sell bottlers
more beverage concentrate -- a key ingredient used to make soft
drinks.
At one meeting, Daft was so angry at a lieutenant who objected to
a plan to overload Japanese bottlers that he threw a report across
the room and demanded that the person find a way to make the numbers
work, those court filings allege.
The allegations about Daft -- Coke's chairman and chief executive
-- have been, until recently, hidden in a little-noticed passage of
papers filed last summer as part of a suit brought against Coke by a
group of shareholders.
But in a growing federal investigation of the company, they have
taken on new life. Two people familiar with a Justice Department
probe, including one who was interviewed by the FBI, said at least
three former Coke executives have been asked about the Daft matter,
among many other things.
A spokesman for the U.S. attorney's office in Atlanta declined to
comment, and Coke denies that Daft's fiery exchange ever happened.
"These allegations are ridiculous and fabricated," said Coke
spokeswoman Sonya Soutus.
Yet that focus of questioning by investigators shows that the
formal inquiry into Coke is focused, at least in part, on whether
the Atlanta-based soft-drink giant tried to improperly inflate its
revenue.
According to individuals familiar with the probe, investigators
are examining whether Coke's unit in Japan used a practice known as
"channel-stuffing." This involves shipping more product than is
needed, which can then boost sales results at the end of a quarter.
Three unnamed finance officials told investigators they knew
about the practice of enhancing results by shipping extra beverage
concentrate to bottlers, The Wall Street Journal reported Friday.
Started with lawsuit
The Japan probe is one part of a growing investigation of Coke
that originated last year when a former company auditor, Matthew
Whitley, sued Coke because he said he was fired in retaliation for
complaining to superiors. Whitley and Coke have since settled his
lawsuits.
While Whitley's suits make references to the Japan issues, they
were first raised in detail in a shareholder lawsuit against Coke.
That matter, filed on behalf of the Carpenters Health & Welfare Fund
of Philadelphia and others, claims Coke forced several bottlers to
buy excess concentrate with the overall goal of boosting revenue,
net income, and, finally, Coke's stock price.
The suit was filed in October 2000, largely dismissed in 2002,
and then amended in June 2003. It details allegations of
improprieties at Coke in Japan and elsewhere, and is based heavily
on data from ex-staffers and executives.
"We have previously said that the claims raised in the Carpenters
complaint, which was filed in October 2000, particularly with regard
to our business in Japan, lack merit," Coke said in a statement
Friday.
Coke also said it continues to cooperate with investigators from
the Justice Department and the Securities and Exchange Commission,
which are conducting separate probes.
"The government has not yet informed us about the specific issues
it is interested in investigating, but when it does so, we will
continue to offer our full cooperation on its areas of interest,"
the company said. Coke filed months ago to dismiss the lawsuit that
includes the allegations about Daft.
Several top-level executives are mentioned in court documents;
four are listed as defendants. One of those, James Chestnut, is
retiring from Coke as of April 30 at age 53. The other
current Coke employee is Daft.
One allegation claims that, in December 1999, Coke loaded its 15
Japanese bottlers with $200 million in excess beverage concentrate.
In exchange, they were paid incentives.
Court documents also claim that Daft directed lower-level leaders
to have Japanese bottlers load retailers with "as many cases of
concentrate as possible," again in exchange for incentives.
"In essence, Coke robbed 2000 results to be able to report
favorable interim and year-end 1999 results," according to the
documents.
Daft declined to comment. But Soutus, the Coke spokeswoman,
described the sales at the end of 1999 as "valid and legitimate, and
the terms offered were a modest extension of payment from eight to
30 days."
Coke announced losses totaling 12 cents a share for the first
half of 2000 because of "inventory reduction" by "selected
bottlers."
Federal investigators have spent months trying to track down
people with knowledge of Coke's operations in Japan. The Carpenters
Health lawsuit provided a road map of sorts, although it identifies
few people by name.
One of the individuals familiar with the investigation said the
Justice Department used the suit as a way to piece together enough
information to request interviews with former Coke employees.
Investigation trail
Craig Harley, a partner with Chitwood & Harley, the Atlanta firm
that represents Carpenters Health, said some of the people his firm
spoke to in preparing its complaint had been interviewed by
investigators.
One former executive was interviewed by investigators late last
year and, according to a person familiar with the matter, was among
several people who talked to investigators around that time. Others
were interviewed as recently as this week.
The shareowners' suit also includes allegations of channel
stuffing involving a Chicago bottler, Herb Coca-Cola, which is now
part of Coca-Cola Enterprises; McDonald's; and Martin-Brower, a
distributor.
The McDonald's and Martin-Brower allegations involve $5.4 million
in excess syrup shipped at the end of 1999.
News of the ongoing probe may have rattled investors a bit on
Friday, when Coke's stock declined 35 cents to close at $49.24.
Analyst Marc Cohen of Goldman Sachs said in a report Friday that the
ongoing investigation could continue to "somewhat dampen investor
interest."
But Cohen noted that allegations involving Japan revolve around
relatively old events.
"Even in a downside case, they at first glance do not seem to be
something that should lead to significant changes in the company's
business model or operating prospects," Cohen said.
John Faucher of J.P. Morgan said in a report that he expects
short-term volatility. "Longer-term, we do not think it is a big
issue," he said.
