SEC Notifies Pepsi-Cola and Frito-Lay of Possible Civil Charges

By May 04, 2004

Pepsi-Cola and Frito-Lay may face civil action from U.S. regulators over improper dealings of close to $6 million in vendor allowances with Kmart, PepsiCo said last week.

The Pepsi-Cola and Frito-Lay divisions of PepsiCo received notification Friday that the staff of the U.S. Securities and Exchange Commission (SEC) was recommending bringing a civil action against the divisions, Pepsi-Co said.

The SEC alleged that two non-executive employees, one at each division, signed documents in 2001 prepared by Kmart acknowledging payments of $3 million from Pepsi-Cola and $2.8 million from Frito-Lay. Kmart allegedly used the documents to improperly record the timing of the revenue from these businesses.

PepsiCo said that both Pepsi-Cola and Frito-Lay are cooperating with the investigation and plan to submit reasons why the civil action should not be recommended or brought.

PepsiCo released a statement that read in part: “Based on an internal review, no officers of PepsiCo, Pepsi-Cola or Frito-Lay are involved. The matter does not involve any allegations regarding PepsiCo’s own accounting for its transactions with Kmart or PepsiCo’s financial statements.”

Kmart said that the improperly recorded vendor allowance transactions were part of an SEC and Department of Justice investigation completed in early 2003, prior to its emergence from bankruptcy in May 2003. Kmart said that based on the findings of the investigation, it had fired all employees responsible for the improper recording of the documents. It said that financial statements for fiscal 2001 and prior years were restated to correct the improperly recorded allowances.

In January, the SEC formally opened its investigation of Pepsi rival Coca-Cola over allegations raised by a former employee that the company tampered with a Burger King promotion. The upgraded investigation allowed the SEC to issue subpoenas and interview company officials. (Xtra, Jan. 20, 2004)