- Diageo agreed to pay $5 million to settle an investigation by the U.S. Securities and Exchanges Commission, which accused the global alcohol giant of pressuring distributors to buy unneeded products in order to meet internal sales goals. Diageo did not admit or deny the regulator's findings, and agreed to cease and desist from further violations. In a release, Diageo said the "legacy matter" the SEC investigated was in fiscal years 2014 and 2015. According to Reuters, the company disclosed the investigation in July 2015.
- The regulator said in a release that Diageo violated antifraud and reporting provisions of federal securities law. By not disclosing it was pushing extra inventory on distributors, the SEC said that Diageo created a misleading picture of the publicly traded company's financial results.
- A statement from Diageo said the company "is pleased to have resolved" the issue. "Diageo regularly reviews and refines its policies and procedures and is committed to maintaining a robust and transparent disclosure process," the statement said.
Today, Diageo is at a point of consistent performance. In its half year earnings report filed last month, net sales were up 4.2%, operating profit grew 0.5% and organic volumes were up 0.2%.
Six years ago, however, things were different. In 2014, Diageo was fighting a global market that was not growing. According to the company's 2014 annual report, global volumes, net sales and operating profits were all down compared to the previous year. Sales were especially weak in emerging markets — which represented 39% of sales — CEO Ian Menezes wrote in the annual report filed with the SEC. The company was realigning to eliminate inefficiencies, but the U.S. market continued to deliver strong sales, which the annual report said was key to the company's earnings.
By its annual report in 2015, volumes and sales for the whole company were up. Diageo had sold nearly 58% more beverages, and sales increased globally by about 5%. In North America, volumes and sales largely held steady. During the year, the spirits giant had taken control of India's United Spirits and tequila brand Don Julio, which helped the company's books.
With the SEC settlement, it's hard to know how much of the U.S. market's strength in 2014 came from actual sales and how much may have come from this plot. There are no details about how much extra liquor may have been involved or how widespread the pressure on distributors might have been.
However, Diageo is not the first company to face accusations of artificially inflating sales. In its early days, Hampton Creek — now known as Just — was accused of ordering employees to buy large quantities of the company's Just Mayo from stores to make it seem more popular to investors. The reporting on the issue prompted the SEC and U.S. Justice Department to open investigations, which were closed without findings of wrongdoing or fines.
In the case of Diageo, settling the issue with the SEC is likely the company's best option to move forward. The London-based company has bigger matters to deal with in the near future. Last month, Menezes said he expected sales for the rest of the year to be at the lower end of its 4% to 6% annual target because of trade uncertainty with both the U.S. and the European Union from potential tariffs and Brexit.
Investors appear to remain confident in the company despite the fine. Diageo's U.S. stock price went down a little more than a dollar in the hours following the SEC's announcement and quickly started to rebound.