A recent outbreak of E coli and norovirus left over 500 Chipotle customers ill across 12 states. In August, 100 patrons and employees of one Chipotle restaurant in California became ill. Similar events occurred in Minnesota, Oregon, Washington, and Massachusetts. With each new incident Chipotle’s stock price fell significantly.
Then, following an outbreak of E Coli in December, sales at Chipotle dropped over 30% in the month of December. Chipotle has already been sued by those affected by the E Coli breakout. However, the drop in sales and accompanying approximately $200 drop in stock price since the outbreak was made public in November has lead investors to file a class action suit against the company. The suit was filed in a U.S. District Court in New York against the Denver-based company, and is called Susie Ong v. Chipotle et al.
The lawsuit accuses Chipotle executives of making false statements and omitting material information in order to mislead investors and personally benefit from the sale of Chipotle securities. The suit specifically says Chipotle failed to disclose that its quality controls were inadequate to safeguard consumer and employee health. The class includes anyone who bought shares in Chipotle since February, 2015, up until January 6, 2016. The class period begins on February 4, 2015, when Chipotle announced its 2014 earnings while stating that it uses “high-quality raw ingredients” and their “objective is to find the highest quality ingredients we can”.
On January 6 ,2016, Chipotle announced that the company was served with a federal grand jury subpoena as part of a criminal investigation of the norovirus outbreak in its California restaurant. This announcement caused the stock price to drop another 5%.
Many experts believe that Chipotle will have a harder time recovering than other fast food restaurants because they emphasize their quality of food. Something that now seems dubious in the eyes of consumers. Chipotle declined to comment on this suit. However, it has said that they changed their food preparation methods in order to increase food safety moving forward.
Some of the questions of law that will be litigated if this case makes it to trial include:
-Whether federal securities laws were violated by defendants’ acts;
-Whether statements made by defendants to the investing public during the class period misrepresented material facts about the business, operations, and management of Chipotle;
-Whether Chipotle executives issued false and misleading financial statements during the class period;
-Whether defendants acted knowingly or recklessly in issuing false and misleading statements;
-Whether the prices of Chipotle securities during the class period were artificially inflated due to defendants’ conduct; and
-Whether the members of the class have sustained damages and, if so, what is the proper measure of these damages.