SEC Charges Diageo for Violation of Known Trends MD&A Disclosure Requirements

Kramer Levin Naftalis & Frankel LLP

On Feb. 19, 2020, the SEC announced charges against Diageo plc, an alcoholic beverages company, arising out of its failure to make required disclosures of known trends with respect to alleged unsustainable overshipments of unneeded products by its North American subsidiary to distributors during fiscal years 2014 and 2015. Diageo agreed to pay $5 million to settle the action, without admitting or denying the SEC’s findings.

According to the SEC order, employees of Diageo North America (DNA) pressured distributors to buy excess inventory to meet internal sales targets. This practice allowed Diageo to report higher growth in key performance indicators. The SEC order charged Diageo plc and DNA with giving investors the misleading impression that they were able to achieve growth in certain key performance indicators through normal customer demand.

The Form 20-F that Diageo, as a foreign private issuer, uses to file its annual report requires disclosure in the Management Discussion and Analysis (MD&A) of the most significant trends in sales since the latest fiscal year, and for at least the current financial year, any known trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on the company’s net sales or revenues, income from continuing operations, or profitability, or that would cause reported financial information to not necessarily be indicative of future operating results or financial conditions. Form 10-K contains substantially similar disclosure requirements.

According to the SEC order, “Diageo did not disclose DNA’s overshipments versus demand and the resulting distributor inventory levels; the positive impact those trends had on organic net sales and organic profit growth, and the negative impact they were reasonably likely to have on future sales; and the fact that they caused Diageo’s and DNA’s reported financial information to not be indicative of future operating results or financial condition.” The SEC also charged Diageo with not having sufficient procedures in place to consider whether DNA’s overshipping or distributor inventory builds were trends or uncertainties that needed to be disclosed.

The SEC order is available here.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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