Pension Fund Stock Suit against Coke Generates $1.3B Damage Estimate

July 2, 2007 (PLANSPONSOR.com) - A finance professor retained by a pension fund as an expert in its company stock suit against Coca-Cola Co. has determined that shareholders lost more than $1.3 billion when the company improperly inflated revenues.

According to the Fulton County Daily Report, the study was generated as a part of the seven-year-old securities fraud suit against Coca-Cola by the Carpenters Health and Welfare Fund. The fund has a significant amount of Coke stock, the report said.

The suit charged that the concentrate dumping practice, known as “channel stuffing,” was designed to convince Wall Street that Coke stock continued to be a good investment. It was also to demonstrate¬†that the company could generate annual 8% to 10% increases in sales despite fundamental changes in the bottled drink market, according to the suit.

Coca-Cola’s practice of forcing Coke bottlers to buy too much concentrate artificially boosted stock prices by nearly $12 a share, the study concluded.

A Coke spokesman dismissed the report as “seriously flawed” and would not release it to the Daily Report, citing a court order requiring that certain material in the case be kept secret. The document has not yet been officially filed with the court.

In his statement, according to the news story, Coke spokesman Charles Sutlive called shareholders’ claims “baseless, false and even ridiculous allegations” and also dismissed the findings of the shareholders’ expert. “Plaintiffs’ damages experts in securities cases invariably make initial damages assessments that bear little or no relation to reality. This report is no different. It is seriously flawed as our responsive expert reports have demonstrated.”

Authored by Steven P. Feinstein, an associate professor of finance at Babson College in Wellesley, Massachusetts, the study also pointed to sworn testimony from former Chairman and CEO M. Douglas Ivester, confirming that he was fired by Coke’s board of directors in December 1999 and that channel-stuffing soft drink concentrate through Coke bottlers to boost revenues had been a company practice under Ivester’s watch as far back as 1997.

The professor asserted that investors who bought Coke stock between October 21, 1999, and March 6, 2000, lost money because of Coke’s alleged misrepresentations to the Securities and Exchange Commission (SEC) and the public about its quarterly and annual sales outlook, when the company was manipulating sales revenues by channel stuffing. ¬† Feinstein was a former economist at the Federal Reserve Bank in Atlanta.

Those statements, according to Feinstein’s report, prompted investors to buy stock at artificially inflated prices that plummeted in the wake of Ivester’s sudden departure and shrinking sales revenues caused, in part, by the excessive inventories created by years of channel stuffing.

According to the news report, Feinstein’s study was prepared as part of the plaintiffs’ efforts to certify the case as a class action.

The case is Carpenters Health and Welfare Fund v. Coca-Cola Co. , No. 1:00-cv-2838 (N.D. Ga.).

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