USA: Diageo agrees to pay $5 mln to resolve claims of excess product shipments and misleading financial results
Diageo, the British alcoholic beverage company responsible for brands like Guinness and Smirnoff, agreed on February 19 to hand over $5 million to the U.S. Securities and Exchange Commission to resolve claims that it covered up excess product shipments and misled investors about financial results, Law360 reported.
Diageo PLC’s North American subsidiary pushed distributors to overstock their inventory in an attempt to meet performance targets as the market slumped, the SEC said in an administrative proceeding filed and settled on February 19.
“As a result, distributors in North America held substantial unneeded inventory, which was a known trend or uncertainty: the continued selling over demand was unsustainable because it was likely that distributors would purchase less product in future periods,” the regulator said. “Diageo’s periodic filings did not disclose these known trends and uncertainties to investors.”
In 2014 and 2015, Diageo employees knew the North American arm was overshipping its spirits to meet financial goals, the SEC alleged. The company pressured third-party distributors to purchase unneeded products by waiving a termination clause in their contracts and certain penalty payments it would normally charge distributors for failing to move enough product, the regulator said.
As a result of its failure to disclose these practices, Diageo’s financial filings were materially misleading to investors in violation of federal securities laws, according to the SEC.
“These omissions made it appear as if Diageo achieved reported growth through organic net sales when, in fact, the results were achieved principally through overshipping unneeded product,” the agency said.
Diageo’s North American arm is its largest and most profitable, representing about 40% of the company’s annual operating profit and a third of its net sales during the years in question, according to the SEC.
In a statement posted on its website on February 19, Diageo said it was "pleased" to have resolved the matter.
"Diageo regularly reviews and refines its policies and procedures and is committed to maintaining a robust and transparent disclosure process," it said.
Diageo is represented by Stephen Ehrenberg and Sharon Nelles of Sullivan & Cromwell LLP.
The SEC is represented in-house by Melissa R. Hodgman, Timothy N. England, Stephen T. Kaiser, Matthew Reisig, Melissa Armstrong and Fred Block.
The case is In the Matter of Diageo PLC, administrative proceeding number 3-19701, before the U.S. Securities and Exchange Commission.
21 February, 2020
