Chipotle can add yet another headache to the company’s mounting troubles that include cases of foodborne illness, federal investigations and class action lawsuits.
Several shareholders have filed suit in Denver District Court, claiming that Chipotle’s executives and board of directors conspired to unjustly award themselves, “hundreds of millions of dollars through a corrupt stock incentive plan” at the expense of investors, customers, and even the company itself.
The lawsuit is known as a shareholder derivative suit, meaning the shareholders in this case are bringing the action on behalf of the company itself against the executives.
According to the lawsuit, executives, acting on inside information, sold tens of millions of dollars in shares in the months leading up to outbreaks of foodborne illness at multiple restaurants. The Denver-based company’s share price has collapsed, down nearly 50 percent, since news broke late last year of customers sickened by E. coli and norovirus contaminated food from California to Massachusetts.
Steve Ells, the founder and co-CEO, sold $78.3 million in company shares, “while the stock price was artificially inflated and before the fraud was exposed,” according to the lawsuit.
And, at the direction of top executives, the company repurchased stock at an inflated price, costing, “$84 million more than the stock was actually worth.”
The lawsuit also alleges the company’s executives failed to protect customers from illness, and should have informed investors of, “subpar food safety standards adhered to at various Chipotle restaurants, so that the market price of the Company’s common stock would be based upon truthful and accurate information.”
“Chipotle’s image of a company that serves fresh, healthy, high-quality and clean food may never revive,” states the lawsuit filed in early April in Denver and consolidated with a similar case last month.
Representatives for Chipotle said they don’t discuss pending legal actions, but the company acknowledged the lawsuits in its most recent public filing, adding, “the Company intends to defend these cases vigorously.”
Earlier this year Chipotle was served with a subpoena in a federal criminal investigation centered on a norovirus outbreak at a Simi Valley, California restaurant. The company is also fighting a separate federal class action shareholder lawsuit and several civil claims from customers related to the illnesses.