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ATLANTA -- Federal prosecutors have begun a criminal investigation into fraud allegations against Coca-Cola Co., including claims that the beverage giant rigged a market test at Burger King outlets to inflate the popularity of its slush drink Frozen Coke.
Coke announced Friday that the U.S. attorney's office was investigating, but it did not provide details. Also on Friday, Burger King said it would phase out the sale of Frozen Coke at its fast-food restaurants and stop using Coke's frozen carbonated-beverage machines.
The fraud allegations were raised in a whistleblower's lawsuit against Coca-Cola. The suit included accusations that Coke manipulated the Burger King market test to inflate the popularity of Frozen Coke.
The whistleblower also said some of Coke's machines that make Frozen Coke are defective, a claim Coke denies.
Coke's statement about the investigation said the company would cooperate with the inquiry. The U.S. Attorney's Office in Atlanta refused to comment.
A source familiar with the investigation said the whistleblower, former Coke manager Matthew Whitley, has received a grand jury subpoena. Whitley's lawyer, Marc Garber, 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 the investigations have tainted Coke's positive image. "Nobody likes to see such heavy-duty regulators looking at a company like Coke, and it's all coming at once," Stender said. "That's probably the biggest impact."
The investigations were spurred by the lawsuit filed in May by Whitley, who claimed Coca-Cola rigged the marketing test and artificially boosted equipment sales.
Last month, Atlanta-based Coke admitted that some of its employees undermined a marketing test of Frozen Coke three years ago at Burger King restaurants in Virginia. 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, boosting demand for Frozen Coke and other frozen drinks.
The lawsuit says the promotion resulted in a $65 million investment by Miami-based Burger King in Frozen Coke. Coke said the employees were disciplined; Burger King has said it is conducting its own inquiry.
The fast-food chain, one of Coke's largest customers, said Friday it was phasing out Frozen Coke because it was no longer "strategically relevant" to Burger King's long-term plans. Spokesman Rob Doughty would not say if the investigations of Coke affected the decision. 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.
A Coke auditing committee investigating several allegations by Whitley also found that the company's fountain soda division had improperly valued some equipment. The company will take a $9 million pre-tax writedown to correct the value.
The committee said it found no evidence of other allegations in the lawsuit, including Whitley's claim that the division improperly shifted $4 million of capital funding to a fountain project last year. Whitley also has alleged that more than 80,000 of the company's frozen beverage machines nationwide are defective and tainting slush drinks with metal residue. Coke has denied that claim, and on Thursday it filed a motion seeking dismissal of the lawsuits in state and federal court.
Coke officials have said 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.