Coca-Cola Co. shareholders sustained damages exceeding $1.3 billion after the international soft drink conglomerate improperly inflated revenues to boost stock prices artificially, a financial expert retained by suing shareholders has concluded.
The report — called “seriously flawed” by a Coke spokesman — surfaced earlier this month in a seven-year-old securities fraud suit against Coca-Cola by Carpenters Health and Welfare Fund, a union pension fund with major Coke stock holdings. The carpenters fund sued Coke in October 2000, claiming that Coke executives — former Chairman and CEO M. Douglas Ivester foremost among them — in the late 1990s had led efforts to mask faltering Coke revenues by pressuring soft drink bottlers to purchase $600 million worth of excess soft drink concentrate.
The practice, known as “channel stuffing,” was intended to persuade Wall Street that Coke stock continued to be a good investment and that the company could sustain annual 8 percent to 10 percent increases in sales despite fundamental changes in the bottled drink market, according to the suit.
Moreover, according to other court pleadings in the case, Douglas Daft, who succeeded Ivester as Coke chief executive, was fully aware of channel-stuffing practices at Coke Japan. Daft was then president of Coke’s Middle East and Far East Group.
The channel-stuffing practice in Japan was adopted in order to meet the company’s quarterly revenue projections and year-end numbers, according to an affidavit filed by a plaintiffs’ investigator in the case.
Daft was made aware of the practice by a Coke Japan manager who authored a report entitled “Killing the Goose that Laid the Golden Egg,” which allegedly described a scenario in which, within two or three years, channel-stuffing practices could ruin the company, according to shareholders’ pleadings.
The plaintiffs claim that Daft threw the report back at the manager, saying, “I was told you were a f—king genius. Figure out a way to make the numbers work.” But a lawyer for the Coke Japan manager, who is no longer with the company, disputed that claim in a later court filing.