Coke Whistle-Blower Inspires SEC Probe

Former finance manager alleged he had been fired for raising concerns about accounting fraud. Also: what were banks stirring up at Parmalat?; junk default rate continues to fall; and CFOs on the move.


The Coca-Cola Co. announced that the Securities and Exchange Commission has launched a formal investigation of the soft-drink giant.

The probe stems from allegations made by former finance manager and whistle-blower Matthew Whitley, who sought a $44.4 million settlement from the company on the grounds that he had been fired in retaliation for raising concerns about accounting fraud. (For more, read “Whistle-Blower Woes.”)

The company initially dismissed his charges, calling him a disgruntled former employee. In October, however, the soft-drink giant announced that Whitley had agreed to dismiss his complaints against the company and each of the individuals named in his suit. The company, in turn, agreed to pay him $100,000, the severance benefits to which he is entitled by virtue of his layoff (approximately $140,000), and his attorney’s fees ($300,000).

Whitley, formerly the finance director for supply management in Coca-Cola’s fountain division, reportedly charged that from approximately 1998 to 2001, the company overstated net revenue and gross profit by recording marketing allowances to some customers as expenses rather than as rebates. The lawsuit also alleged that Coca-Cola fabricated a market survey in order to convince a customer to take part in a frozen-beverage campaign.

In June, the company tacitly confirmed Whitley’s charges when it admitted that it improperly influenced a “Frozen Coke” marketing test at Burger King. Coca-Cola also issued a public apology, adding that “further examination was warranted regarding the financial arrangements between the fountain division and certain equipment suppliers.” Coke offered to pay Burger King $21 million and took a $9 million pretax write-down.

In July, the Department of Justice also announced it was launching a criminal investigation of the alleged fraud.

Earlier this week, the SEC also launched a formal probe of Lancer Corp., a supplier of soda fountain equipment to Coca-Cola.

Lancer stated that its audit committee is conducting its own investigation of allegations raised by Whitley as well as allegations raised in certain press articles. The company added that it intends to continue to cooperate fully with the SEC in its investigation.

What Were Banks Stirring Up at Parmalat?

A number of the world’s largest financial services companies continue to face scrutiny for their role in the turmoil surrounding Italian food and dairy giant Parmalat.

The Wall Street Journal Thursday reported that Goldman Sachs reaped a nearly $2 million profit when it brokered a sale of Parmalat bonds by Aflac Inc. to a group of investors, including hedge funds. The transaction took place two days before the food and dairy giant admitted it had a $5 billion cash shortfall, and the bonds nearly halved in price.

Meanwhile, Bank of America Corp., which is buying FleetBoston Financial Corp., announced that its exposure to Parmalat totaled $274 million as of the end of 2003, including direct loans and letters of credit totaling $244 million and derivative exposure of $30 million.

And regulators continue to investigate a Citigroup unit for its role in setting up a special-purpose vehicle called Buconero — Italian for “black hole” — the Journal reported.

The arrangement was classified as a form of investment on Parmalat’s balance sheet. However, the structure was effectively a loan offered at rates far below the level that Parmalat would have paid in the public markets, allowing it to dramatically reduce its financing costs, according to the paper.

European regulators are looking into financial dealings in the Netherlands, where Parmalat used a group of shell companies to raise at least $6.64 billion from bond investors around the world, taking advantage of special Dutch tax laws, according to The New York Times.

Parmalat had at least five subsidiaries in the Netherlands that existed almost entirely on paper, the Times explained. Most of the companies had no employees, sold no goods, and had headquarters consisting of post-office boxes. Yet they played a vital role in raising capital for Parmalat, selling at least 30 bond issues managed by at least 10 major investment banks over the last decade, added the Times.

Meanwhile, the Netherlands’ top accounting body announced that it had launched a preliminary investigation into two auditing firms that may be involved in the Parmalat scandal, reported Reuters.

“The facts brought to us indicate that there are two accountants from one firm with one carrying out auditing tasks and the other having a management job at one of Parmalat’s subsidiaries in the Netherlands,” said Berry Wammes, spokesman for a professional body, the Royal Netherlands Institute of Registered Accountants, according to the wire service report. Wammes would not identify the firms.

Reuters noted, however, that a source at a top Dutch accountancy, who spoke on condition of anonymity, told the wire service that investigators are looking at two local divisions of global accounting organization HLB International — HLB den Hartog and HLB van Daal & Partners.

The accounting source said that Herman Muus, an auditor at HLB den Hartog, was a director at Parmalat subsidiary Dairies Holding International, while HLB van Daal & Partners audited the Parmalat subsidiary’s accounts, according to Reuters.

Muus denied any irregularities to Reuters, adding: “It is totally wrong that we provided both an accountant and a director at the same time. HLB International is a global organization of accountants. They are all independent. They only use the same prefix to indicate that they belong to the same international organization.”

Junk Default Rate Continues to Fall

Here is further evidence that the economy is indeed improving.

The global corporate junk-bond default rate fell by nearly 40 percent last year, from 8.4 percent in 2002 to 5.2 percent in 2003, according to Moody’s Investors Service. And thanks to the weak U.S. dollar, the dollar-volume default rate fell by 80 percent, from 21 percent in 2002 to 5.5 percent in 2003.

Altogether in 2003, 77 Moody’s-rated corporate bond issuers defaulted on a total of $33.5 billion, compared with 2002’s figures of 141 defaults totaling $163 billion.

Among U.S.-based companies in 2003, 58 defaults totaled $26 billion.

The U.S. junk-bond default rate fell from 7.3 percent in 2002 to 5.4 percent in 2003. That’s a 1.9 percentage-point improvement — but it pales compared with the 3.2 percentage-point improvement in the global figure, which was influenced by a sharp drop in non-U.S. defaults, especially in Europe.

Moody’s expects the junk-bond default rate to improve this year as well. It forecasts the global issuer-weighted speculative-grade default rate to fall below its long-run historical average of 4.9 percent for the first time since 1999, reaching 3.4 percent by the end of 2004.

“The decline in credit rating downgrades relative to upgrades in 2003 supports lower expected default rates in 2004,” said David T. Hamilton, Moody’s director of corporate default research, in a statement.

Indeed, the ratio of downgrades to upgrades fell from four-to-one in 2002 to less than two-to-one in 2003.

“Additional help is coming from growth in U.S. industrial production, which is correlated with future credit quality, and a steep Treasury yield curve, which has historically been a harbinger of economic growth,” he added.

For the third straight year, the telecommunications sector experienced the highest total number of defaulting issuers (13) and default volume ($6.4 billion). Health care and the energy and utility sectors experienced the second- and third-highest default volumes, respectively. The year’s largest individual defaulter was HealthSouth Corp. ($3.4 billion).

CFOs on the Move

  • Tyco International Ltd. named Carol Anthony Davidson as senior vice president, controller, and chief accounting officer. Davidson was formerly vice president of audit, risk and compliance at Dell Inc.

In the newly created position at Tyco, Davidson will oversee all financial reporting as well as control and accounting policy, the company announced.

  • GEICO announced the promotions of four finance executives. Mike Campbell is now vice president of corporate financial reporting, responsible for the insurer’s major operating companies. Bill McDonald was named controller; Steve Parsons, assistant controller; and Todd Prigal, assistant controller.
  • ServiceMaster Co., a provider of lawn care, pest control, and other services, named its president Ernie Mrozek, to the position of chief financial officer. Mrozek, who was the company’s CFO from 1991 to 1996, is replacing Steven Preston, the CFO since 1997.
  • Internet marketing company 24/7 Real Media Inc. promoted Jonathan Hsu to chief financial officer, replacing Norman Blashka, who is leaving for other opportunities. Blashka had been CFO since September 1999.
  • Cable television operator Insight Communications Co. named John Abbot as chief financial officer. Dinni Jain, Insight’s chief operating officer, will relinquish the role of interim CFO he had held since October.

Abbot was formerly at Morgan Stanley, where he was a managing director in the Global Media and Communications Group of the Investment Banking Division.

  • Cincinnati Bell Inc. named vice president of finance Brian Ross as chief financial officer, effective immediately. The telecom company had been trying to fill the position for nearly five months.
  • Network security provider TippingPoint Technologies Inc. named Adam Chibib as chief financial officer. He will replace Michael Rapisand, who had served as CFO since December 2002. Chibib co-founded a broadband software firm before becoming CFO at Waveset Technologies, which was later acquired by Sun Microsystems.
  • Arden Group Inc., parent of Gelson’s markets, said chief financial officer David Oliver will be leaving the company in March. A search is under way for his replacement.

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