ATLANTA Coke faces probes into finances, practices

Coke suffers from lawsuit and probes into its finances.
WASHINGTON POST
A crisis is never welcome, especially one alleging corporate impropriety. But it's the real thing for Coca-Cola Corp. these days.
Already dealing with a flat soft-drink market, a faded stock price and internal reorganizations, now Coke faces allegations of accounting fraud and manipulation of a marketing test -- giving jitters to already nervous investors.
"It's never a good time, but certainly when the financial markets are really sensitive to corporate improprieties, it can really affect the share price in an awful hurry," said Todd Stender, an analyst with Los Angeles investment firm Crowell, Weedon & amp; Co., which still rates Coke shares a "buy."
Coke revealed last week that an investigation by its audit committee had found that some employees of Coke's fountain division rigged the outcome of a marketing test for Frozen Coke three years ago. It also called for a $9 million write-down of misvalued fountain-drink equipment, and called for a further probe into the financial arrangements between the fountain division, which handles sales of soft-drink syrup to restaurants and convenience stores, and certain equipment suppliers.
Ex-employee's lawsuit
The investigation was prompted by a former Coke employee who has alleged in a lawsuit that he was wrongly fired for bringing these issues to management's attention. "We took this former employee's allegations seriously," said Ben Deutsch, a Coke spokesman.
The committee said other, larger claims made by the employee, Matthew Whitley, were unfounded. Whitley was let go in a companywide restructuring in March and filed his suit after Coke refused his demand for $44.4 million, the company said.
The impact of the suit and its aftermath has been dramatic. Coke's stock has fallen about 3 percent since Tuesday, closing Friday at $46.47, and several new investigations are under way, leaving open the question of whether another shoe will drop.
Coke is conducting its own internal probe, and other studies are being done by Burger King and fountain-equipment supplier Lancet Corp. And the Securities and Exchange Commission has launched an informal investigation into the matter, which just about guaranteed that this story would have legs.
"The market has reacted most severely simply to the connection of the words 'SEC' and 'Coca-Cola' in the same sentence," said Martin Feldman, an analyst with Merrill Lynch, which has had investment banking relationships with Coke. "The moment an investor hears an SEC official has [made inquiries about] a publicly listed company, they'll sell first and think later."
Battle for market share
It's an especially bitter turn of events for a company such as Coke, locked in battle for market share with Pepsi, industry observers say. Even a slight change of customer perception of Coke's positive image could tip business one way or the other. It's also an especially bad time to lose business in the beverage business, as soft-drink sales grew just 0.8 percent last year.
"In most of the '90s, the category was growing [annually] anywhere from 2 [percent] to 4 percent," said Gary Hemphill, senior vice president for New York-based market research firm Beverage Marketing. "When you consider how much people drink, it becomes a big amount."
And that may lend some insight into how Coke got into this mess in the first place. Consumer products analyst Bonnie Herzog with Smith Barney Citigroup, a financial adviser to Coca-Cola, says Coke's new management, especially President Steven Heyer, is pushing the company to be more aggressive, entrepreneurial and risk-taking.
With change coming so fast and forcefully from the top, might Coke have created the kind of culture that would encourage employees to behave improperly to get the results their bosses want to see? Indeed, a source at the Atlanta-based firm said the company is looking into whether the corporate culture contributed to the brazen rigging of marketing results by employees in the fountain division.