The Securities and Exchange Commission announced charges against alcohol producer Diageo plc for failing to disclose its knowledge of high-pressure sales tactics to ship excess products to distributors to meet internal sales targets at its North American distributors. Diageo has agreed to pay $5 million to settle the enforcement action.
According to the SEC’s order, employees at Diageo North America (DNA), Diageo’s largest and most profitable subsidiary, pressured distributors to buy products in excess of demand in order to meet internal sales targets in the face of declining market conditions. The resulting increase in shipments enabled Diageo to meet performance targets and to report higher growth in key performance indicators that were closely followed by investors and analysts.
The SEC order finds that Diageo failed to disclose the trends that resulted from shipping products in excess of demand, the positive impact the overshipping had on sales and profits, and the negative impact that the unnecessary increase in inventory would have on future growth. The order further finds that investors were instead left with the misleading impression that Diageo and DNA were able to achieve growth in certain key performance indicators through normal customer demand for the company’s products.
‘Creating a Misleading Picture’
“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.”
The SEC’s order finds that the company violated the antifraud provisions of Section 17(a)(2) and (3) of the Securities Act of 1933, as well as certain reporting provisions of the federal securities laws. Without admitting or denying the findings in the SEC’s order, Diageo agreed to cease and desist from further violations and to pay a $5 million penalty.
“Diageo is pleased to have resolved this legacy matter, which relates back to fiscal years 2014 and 2015. Diageo regularly reviews and refines its policies and procedures and is committed to maintaining a robust and transparent disclosure process,” the company said in a brief statement.
According to the SEC Order, Diageo was not required to follow a consent decree or make changes to controls or internal audit procedures to ensure the violation doesn’t happen again in the future. 