SEC Questions Smirnoff-Maker Diageo's U.S. Distribution

By Martinne Geller

LONDON -- British spirits-maker Diageo (DEO) is under scrutiny in the United States, where the U.S. Securities and Exchange Commission has asked for information to see whether it shipped excess inventory to U.S. distributors, a practice known as "channel stuffing."

A spokeswoman for Diageo, the world's biggest spirits company with brands including Smirnoff vodka and Johnnie Walker whisky, confirmed the company received an inquiry from the SEC and was responding to its questions.

It was unclear if a full-scale investigation will follow.

Channel stuffing allows a company to book sales ahead of actual orders. U.S. drug company Bristol Myers Squibb paid $150 million in 2004 to settle SEC charges that the company booked $1.5 billion of excess revenue that way.

"Diageo has received an inquiry from the SEC regarding its distribution in the United States," the spokeswoman said. "Diageo is working to respond fully to the SEC's requests for information in this matter."

%VIRTUAL-WSSCourseInline-638%Nomura analyst Ian Shackleton said he understood there to have been no further inquiries to Diageo following a request in March for information on U.S. spirits sales over the past five years.

"We understand that the SEC often makes requests for information like this, which does not lead to any further action," Shackleton wrote in a note.

Confirmation of the SEC's action came after The Wall Street Journal reported the move. Diageo's shares fell 1 percent Friday in London. The SEC declined comment.

Analyst Martin Deboo at brokerage Jefferies said channel stuffing was a serious matter with a high burden of proof, requiring evidence of more than just over-optimistic planning.

"It rests on a clear deceptive intent and is usually detected on the evidence of internal whistleblowers and/or on the basis of clearly abnormal trading patterns," Deboo wrote in a note.

Deboo said he expected the probe would focus on years prior to 2014 and would therefore have no effect on current forecasts, but called it "a very unwelcome distraction, at best."

Diageo has been under pressure lately to more closely align its shipments to distributors with their sales to customers. The latter measure, known in the industry as "depletions," more closely reflects consumer demand and lets the company be more efficient and agile.

Diageo's North America President Larry Schwartz announced his retirement last month. He is to be replaced by Dierdre Mahlan, chief financial officer.

-Subrat Patnaik and Nayan Das contributed reporting from Bangalore, India.