The SEC Is Investigating Smirnoff and Captain Morgan Maker

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The U.S. Securities and Exchange Commission is investigating liquor company Diageo Plc, which makes Smirnoff vodka and Johnnie Walker whiskey, on suspicions that the company’s been shipping excess inventory to distributors in an effort to boost sales, the Wall Street Journal reports.

By sending distributors more cases of alcohol than they’d requested, Diageo Plc would be able to report increased sales and shipments.

The liquor maker has confirmed to the The Wall Street Journal that it’s received an inquiry regarding its distribution in the U.S. from the SEC, which has been working particularly hard recently. In 2014, the SEC’s enforcement division brought 755 cases and collected an agency record $4.1 billion. In 2015, the SEC has has brought more than 140 cases.

According to a Diageo Plc spokesperson, “Diageo is working to respond fully to the SEC’s requests for information in this matter.”

Liquor producers follow a three-tier system in the United States. Producers, like Diageo, ship to wholesalers, who then ship liquor to retailers. When they ship to wholesalers, liquor companies can record the shipments as sales.

Diageo Chief Executive Ivan Menezes has said that the company has shifted its focus away from shipments, which reflect sales, to depletions, which reflect sales by distributors to retailers. He said that the company is reducing the level its inventory distributors carry to “get better visibility on customer depletions.”

The North American region is the largest and most crucial to Diageo’s bottom line. The company has a 20% share of the U.S. spirits market, and became the market leader after picking up Captain Morgan and Crown Royal in a $5 billion deal. The North American region accounted for about a third of the company’s $15.9 billion in sales in 2014, and about 45% of operating profit.

However, Diageo has been suffering slumping sales in the United States. After raising prices, the U.S. market share declined each year between 2011 and 2014. Its blockbuster brand Smirnoff has also struggled, as consumer interest in flavored vodka has waned. Captain Morgan isn’t quite as popular anymore, either. Diageo also lost interest in Crown Royal after adapting to the flavored whiskey trend later than its rivals.

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