Beverage Giants Under Fire

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Beverage Giants Under Fire

NEW YORK -- Beverage giants Coca-Cola Co. and PepsiCo Inc. are both being investigated for "channel-stuffing," a legally murky practice in which a company convinces clients to accept unwanted or early deliveries of a product. It can be used to pad revenue and help a firm meet quarterly financial targets.

A federal probe of Coca-Cola Co. has intensified as a federal grand jury was scheduled and regulators subpoenaed employees, the Wall Street Journal reported.

The grand jury will begin to hear testimony in the case around May 25, according to WSJ, citing people familiar with the probe.

The U.S. attorney's office and the Securities and Exchange Commission (SEC) are examining whether Coca-Cola overshipped drink concentrate to distributors in some markets including Japan, thereby possibly inflating financial results.

Rebates, extended payment terms and other incentives are often provided to clients in exchange for their complicity.

Coca-Cola Co.'s chief rival, PepsiCo Inc., meanwhile, said the SEC is considering legal action against its beverage and snack units for allegedly helping Kmart Corp. inflate its revenue in 2001.

The SEC alleges that a Pepsi-Cola employee signed documents involving $3 million in payments to Kmart, allowing the retailer to improperly record the timing of the revenue. The SEC further alleges that a Frito-Lay employee signed similar documents involving $2.8 million in payments to Kmart, according to PepsiCo.

PepsiCo, based in Purchase, N.Y., said it is cooperating fully with the investigation and submitting reasons why it doesn't believe an action should be brought, according to WSJ.