9-27-17 10:44 AM EDT | Email Article
By Andrew Ackerman, Joe Palazzolo and Jennifer Maloney 

Federal securities regulators are investigating an allegation by PepsiCo Inc.'s former top lawyer that the company fired her in retaliation for the way she handled an internal probe into potential wrongdoing in Russia, according to people familiar with the matter and internal documents.

Maura Smith, who was PepsiCo's general counsel from May 2011 to June 2012, oversaw outside lawyers hired by the company to dig into business practices at Wimm-Bill-Dann, a big Russian maker of dairy products and juices that PepsiCo spent about $5 billion to acquire in 2011, the documents show.

The Securities and Exchange Commission is looking at allegations that Ms. Smith was ousted because her work on the probe rankled others at PepsiCo, people familiar with the matter said. The inquiry is at an early stage and is focused on the circumstances of Ms. Smith's dismissal, the people said, and may not lead to any enforcement action.

"PepsiCo did not engage in any retaliatory conduct and any allegations to the contrary are untrue," the company said in a statement. "The company is cooperating with the SEC investigation." PepsiCo said Ms. Smith's departure was not related to "any dispute or disagreement" over the internal investigation.

PepsiCo said it looked into allegations of misconduct at the Russian company believed to have taken place before it bought the firm. "As soon as PepsiCo became aware of the conduct, it fully investigated and remediated the issues, none of which were material to PepsiCo's financial statements," PepsiCo said.

When PepsiCo announced Ms. Smith's departure in 2012, the company said she was resigning to pursue other opportunities. Her separation agreement, signed four months after her exit, entitled her to nearly $6 million in cash payments, regulatory filings show. The agreement prevents the company and Ms. Smith from disparaging one another.

Some people familiar with Ms. Smith's tenure at PepsiCo described it as stormy and marked by conflicts with other executives. They said that Ms. Smith's employment had been in question for months leading up to her exit.

Others familiar with Ms. Smith's time at the firm said she was an experienced general counsel who quickly endeared herself to PepsiCo Chief Executive Indra Nooyi. But executives turned on her as the Russia investigation wore on, they said. Before joining the Purchase, N.Y., company, Ms. Smith served as general counsel for eight years at International Paper Co. and for five years at Owens Corning.

PepsiCo has assembled a team of high-profile lawyers to represent the company in the SEC investigation. The team includes Mary Jo White, who stepped down as the chairman of the SEC in January and is now a partner at Debevoise & Plimpton LLP. It also includes partners at Wilmer Cutler Pickering Hale and Dorr LLP, known as WilmerHale.

Ms. Smith, 61, now in private practice, was subpoenaed this year by the SEC and met with government lawyers as part of an agency investigation of whether employment contracts at major U.S. firms discouraged employees from reporting wrongdoing, according to a memo prepared by WilmerHale and the people familiar with the matter.

The memo, which was dated Aug. 31, and other documents were mistakenly sent by a WilmerHale attorney to a Wall Street Journal reporter as part of communication to other attorneys working on the matter. The memo said the SEC "now appears to be focused on allegations by Ms. Smith that she was retaliated against in violation of the SEC's whistleblower rules."

After publication of this article, WilmerHale said it was disappointed that the Journal used material from the email. "We are taking additional measures designed to ensure that emails are not misaddressed to unintended recipients," the firm said in a prepared statement.

PepsiCo bought a majority stake in Wimm-Bill-Dann in February 2011 and took full control in September of that year.

In August 2011, a Wimm-Bill-Dann employee used a PepsiCo tip line to report an allegation that senior managers at the Russian company concealed a $3 million shortfall in forecast quarterly financial results by shifting expenses and improperly capitalizing about 1,700 tons of skim milk, the documents show.

PepsiCo's regional staff began investigating, but the company's headquarters didn't learn of the matter for months, people familiar with the matter said. The tip raised concerns among PepsiCo's auditors about whether Wimm-Bill-Dann results before the takeover needed to be restated, internal documents show. The auditors concluded no restatement was necessary, one person familiar with the matter said.

Following the episode, PepsiCo engaged law firm Gibson, Dunn & Crutcher LLP to "tip over every rock" at Wimm-Bill-Dann, one of the people said. The investigation unearthed evidence of theft, improper land deals and millions of dollars in questionable consulting contracts and gratuities, including a company-owned Audi A8 sedan that was provided to a regional governor of Russia to use for free, according to internal documents. These practices had started when Wimm-Bill-Dann was an independent company, and some had continued after the PepsiCo takeover.

Gibson Dunn concluded that the car and the consulting contracts "likely constitute potential violations" of accounting provisions of the Foreign Corrupt Practices Act, a law that bars U.S.-listed companies from paying bribes to foreign officials and requires firms to maintain strong internal controls. The investigation found no conclusive evidence of more serious violations of the law's antibribery provisions, according to the documents.

PepsiCo took measures to address the findings, including removing employees involved in alleged wrongdoing and updating Wimm-Bill-Dann's financial controls and business practices to conform with PepsiCo's compliance program, the documents show.

While the investigation was ongoing, Ms. Smith asked lawyers at Gibson Dunn to help her prepare a detailed memo for the PepsiCo board that would present the major findings, according to internal documents. One of those lawyers felt uncomfortable with the request, according to one of the documents mistakenly sent to the Journal that summarized a recent conversation with her. To the lawyer, it appeared that Ms. Smith wanted to "call out names of former and current employees and place blame," while protecting her own position at the company, according to the document.

Ms. Smith had prepared a memo with the help of Gibson Dunn, and a 33-page draft dated June 7, 2012, was among the documents mistakenly sent to the Journal. Among its assertions: PepsiCo executives in Europe didn't do enough due diligence after the Wimm-Bill-Dann deal, and the company's system for escalating potential problems to headquarters had malfunctioned at times.

After the Gibson Dunn attorney reached out around that time to Hugh Johnston, PepsiCo's chief financial officer, about her concerns, Mr. Johnston told Ms. Smith to stop work on the memo, according to the people familiar with the matter and internal documents. It was never sent to the board, according to others familiar with the matter, and Ms. Smith's employment ended June 15, 2012.

Write to Andrew Ackerman at andrew.ackerman@wsj.com, Joe Palazzolo at joe.palazzolo@wsj.com and Jennifer Maloney at jennifer.maloney@wsj.com

 

(END) Dow Jones Newswires

September 27, 2017 10:44 ET (14:44 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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