Liquor Distributor Settles SEC Complaint With $5M Fine

A major worldwide beverage distributor has agreed to a $5 million fine to settle a complaint brought by the Securities and Exchange Commission that it manipulated inventory and misled investors.

Diageo Plc. did not admit or deny wrongdoing in agreeing to settle the civil charges against its North American division, based in New York City.

The London-based company’s brands include Johnnie Walker Scotch whisky, Smirnoff vodka, Tanqueray gin and Guinness beer. Diageo agreed to cease and desist from further violations, the SEC said on Wednesday.

A Diageo statement indicated the company was pleased to settle, and was "committed to maintaining a robust and transparent disclosure process."

The SEC said this "overshipping" enabled Diageo North America (DNA) to report higher growth in operating profit and net sales than analysts expected, but was unsustainable because distributors would likely eventually push back on orders. In most states, the company sold its products to third-party distributors, which in turn sold to retailers such as liquor stores, bars and restaurants.

SEC: Pressure Applied

Diageo misled investors by leaving them with the impression that normal customer demand was helping fuel its reported growth, the SEC complaint said.

“Certain DNA employees pressured distributors to purchase additional products to make up the gap to its performance targets,” the complaint said.

Some distributors eventually pushed back on the scheme, the SEC said. For example, in 2014, a DNA sales executive wrote to a distributor who wanted to cut back their order: “I know I say this every time the shipments discussion comes around….but this is a critical one for me. If you need me to get the big guns involved let me know,” the complaint recounted.

"Investors rely on public companies to make complete and accurate disclosures upon which they can base their investment decisions," said Melissa R. Hodgman, an associate director in the SEC's Division of Enforcement. "Diageo pressured distributors to take more products than they needed, creating a misleading picture of the company's financial results and its ability to meet key performance indicators."

Diageo had disclosed an SEC probe into its distribution and public disclosure practices in July 2015. In its most recent earning report, Diageo reported a “marginal rise” in profit.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com.

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