Consent Decree Cites Overvaluing of Inventories : SEC Charges Pepsico Inflated Profits Overseas

NEW YORK —  The Securities and Exchange Commission on Monday accused giant Pepsico and five of its former employees of overstating pretax profits of an overseas soft-drink business by $92 million.

The agency also claimed in a civil lawsuit filed here that the assets of the unit, United Beverages International, were overstated by $79 million, mostly because of overvaluing of inventories. Without admitting or denying the allegations, Pepsico immediately agreed to the entry of an order settling the case by enjoining it from future securities law violations.

The problem was originally discovered by the Purchase, N.Y.-based soft-drink firm and reported to the SEC in 1982. At that time, Pepsico was forced to restate its net income downward by $151 million for the period 1979-82.

The SEC suit said that no company money was illegally diverted by employees. The object, it said, apparently was to make it look as if operations in Mexico and the Philippines had been more successful than they really were.

Numerous techniques, including false expenses and failure to write off broken or unuseable bottles and uncollectible accounts receivable and false valuation of inventories, were used to inflate profits.

“We were victims,” said James Griffith, Pepsico director of public affairs. “But we did report financial results that were incorrect because of the fraudulent action of a small group of former employees. What the consent order says is exactly what we revealed publicly in November, 1982.”

A class-action suit filed by several shareholders accusing Pepsico of filing false and misleading financial statements was settled in March with the company paying $16.8 million, Griffith said.

12 Fired

But he added that there will be no effect on the company’s financial results because it is insured against such liabilities.

Pepsico fired about a dozen people after it discovered the problem. All of those involved were based overseas with the exception of Richard I. Ahern, a Pepsico vice president and president of United Beverages International.

He pleaded guilty last year to criminal charges in connection with the irregularities, was sentenced to probation and has since died. He had been fired two weeks after the affair was discovered.

Others who agreed to the consent order Monday were Mark W. Stewart, 33, a former United Beverages executive; James Brian Rees, 43, a former vice president and chief financial officer of Pepsi Philippines, and Joseph Uses, 61, who had been United Beverages’ comptroller.

Also named in the suit were Colin Walker, former president of the Mexican unit, and Cosme Ma de Aboitiz, former president of Pepsico’s subsidiary in the Philippines. They did not agree to the consent order.

None of the individual defendants could be reached for comment Monday.