Coles yesterday ended its Supreme Court action to seek information from sacked executive Peter Scott.

The action related to alleged breaches of confidentiality in March this year, after an email (between Mr Scott and Coles Corporate Affairs Manager, Sarah McNeil) was leaked to the media.

The leaked email indicated that Coles had made false claims about sales growth at its re-badged Bi-Lo stores. While not heavily reported by the media, the Supreme Court action revealed what could become the biggest business scandal this year when Scott alleged that Coles boss, John Fletcher, ordered him inflate profit forecasts around the time of KKR’s hostile takeover bid.

The Supreme Court was told by Scott that Fletcher personally asked him to increase profit forecasts by 30%, to which Scott replied, “if the profit is not there then it isn’t there.”

Shortly after Fletcher allegedly asked Scott to sauté the books, Coles proceeded to reject KKR’s $15.25 per share offer, claiming that the offer “substantially undervalues that company and its prospects” and that “shareholder interests [would] be better served by the company pursuing its growth strategy.”

Coles’ growth strategy, which according to Scott, was based on some Enron style forecasting, involved “annualised Fy08 EPS [to be] approximately $1.00 per share.”

The earnings increase was to have been driven by the removal of support jobs, increased direct sourcing of general merchandise, a transformation program and the conversion of Bi-Lo to Coles. Unfortunately for Coles shareholders, the “transformation” didn’t go quite as well as forecast by the Coles Board.

On 23 February 2007, Coles announced that Fy08 earnings would be 10% less than forecast in October (when the company rejected KKR’s bid). Partly because “the rebadging of Bi-Lo to Coles did not achieve the earnings uplift envisaged.” (A few weeks later, the infamous leaked email revealed that converted Bi-Lo store sales rose by only 3.9% in the September quarter of 2006, rather than “seven or eight percent” as originally claimed by Coles).

Things haven’t improved since, with Woolworths continuing to steal market share from Coles and yesterday announcing a 28% profit rise to $1.29 billion (Coles is expected to earn $787 million for FY2007 and $959 million in FY2008).

If Scott’s claims at the Court hearing are correct, and Coles management prepared unjustifiably optimistic profit forecasts to stave off a hostile takeover, their actions could possibly amount to false or misleading statements under the Corporations Act.

The conduct is even more serious given that the Coles board relied on the profit forecasts in rejecting KKR’s $15.25 cash bid. Since then, Coles shares have dropped 6.5%, while the market has increased by approximately 24%.

Coles management will be very much hoping that ASIC don’t pay too much attention to Mr Scott’s comments.