- The Washington Times - Friday, July 11, 2003

ATLANTA (AP) — Federal prosecutors have begun a criminal investigation and a grand jury probe into fraud accusations contained in a whistleblower lawsuit against Coca-Cola Co.

After the world’s largest soft-drink company announced yesterday that the U.S. Attorney’s Office was investigating, Burger King said it would phase out the sale of Frozen Coke at its restaurants and stop using Coke’s frozen-carbonated-beverage machines.

Among the accusations raised in the whistleblower’s lawsuit was that Coke employees rigged a market test to inflate the popularity of Frozen Coke at Burger King outlets in Virginia. The whistleblower also said some of Coke’s machines that make the frozen drinks are defective, an accusation Coke denies.

The suit says the Richmond promotion resulted in a $65 million investment by Miami-based Burger King in Frozen Coke.

A source familiar with the investigation said the whistleblower, former Coke manager Matthew Whitley, has received a grand jury subpoena.

Coke’s statement about the federal investigation did not provide any details, but said it would cooperate with the inquiry. The U.S. Attorney’s Office in Atlanta also declined to comment.

The Securities and Exchange Commission had previously initiated an informal probe of Coke.

Todd Stender, an analyst with Crowell, Weedon and Co. in Los Angeles, said Coke’s positive image has been affected by the investigations.

“Nobody likes to see such heavy duty regulators looking at a company like Coke, and it’s all coming at once,” Mr. Stender said. “That’s probably the biggest impact.”

The investigations were spurred by a lawsuit filed in May by Mr. Whitley that said Coca-Cola rigged the marketing test and artificially boosted equipment sales. Mr. Whitley’s attorney, Marc Garber, declined to comment.

Last month, Atlanta-based Coke admitted that some of its employees undermined the marketing test three years ago. Burger King is one of Coke’s largest customers.

An auditing committee investigating several charges by Mr. Whitley also found that the company’s fountain division had improperly valued some equipment. The company will take a $9 million pretax writedown to correct the value.

The committee said it found no evidence supporting other accusations in the lawsuit, including Mr. Whitley’s assertion that the division improperly shifted $4 million of capital funding to a fountain project last year.

Mr. Whitley also has said that more than 80,000 of the company’s frozen-beverage machines nationwide are defective and taint slush drinks with metal residue. Coke has denied that accusation, and on Thursday it filed a motion seeking dismissal of the lawsuits in state and federal court.

Coke officials have said Mr. Whitley sued after the company refused his demand for $44.4 million. He lost his job as finance director for supply management at the fountain division in March amid a reorganization that eliminated 1,000 jobs.

The fountain division handles sales of fountain-dispensed beverages to restaurants, movie theaters and other venues.

In its announcement yesterday, Burger King said it would phase out the sale of Frozen Coke because it is no longer “strategically relevant to the long-term vision of the Burger King brand.”

Spokesman Rob Doughty would not say whether the investigations of Coke played a part in the decision.

As part of its decision to stop selling Frozen Coke, Burger King also plans to phase out Coke’s frozen-carbonated-beverage machines, Mr. Doughty said.

Coca-Cola spokesman Sonya Soutus said Coke’s customers frequently change their product offerings, and the company looked forward to continuing its relationship with Burger King.

The Frozen Coke promotion was conducted at Burger King outlets in Richmond in March 2000. An internal company document filed as part of the lawsuit said the tactic was to hire an outside consultant to spend up to $10,000 to buy value meals at Burger Kings in Richmond, boosting demand for Frozen Coke and other frozen drinks.

The suit says the Richmond promotion resulted in a $65 million investment by Miami-based Burger King in Frozen Coke.

Coke has said its investigation confirmed that some members of the Coke fountain division’s account team improperly influenced the marketing test results, and that the employees were disciplined in 2001.

Burger King has said it is conducting its own inquiry.

Shares of Coke fell 10 cents to close at $43.91 in trading yesterday on the New York Stock Exchange.

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