Federal judge dismisses lawsuit against Chipotle

by Erica Shaffer
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NEW YORK – Plaintiffs in a securities lawsuit against Chipotle Mexican Grill Inc. failed to prove company executives made deliberately false and misleading statements regarding Chipotle’s food safety practices and quality controls, a judge for the US District Court – Southern New York, ruled on March 8.

In her opinion, Judge Katherine Polk Failla wrote: “With regard to all of the 8-K and press conference statements, there is no indication in the Complaint that Chipotle’s projections were inconsistent with or did not account for the Company’s assessments of the impact of the food-borne illness outbreaks. And “as long as the public statements are consistent with reasonably available data, corporate officials need not present an overly gloomy or cautious picture of current performance and future prospects.”

A string of foodborne illness outbreaks associated with Chipotle restaurants weighed heavily on the business. As a result of the crisis, the company implemented a new food safety program and hired Kansas State Univ. Prof. James Marsden as executive director of food safety.

The lawsuit was filed on Jan. 8, 2016 — with Metzler Investment GmbH and Construction Laborers Pension Trust of Greater St. Louis as lead plaintiffs — on behalf of buyers of Chipotle common stock between Feb. 4, 2015, and Jan. 5, 2016.

In addition to allegations of making false and misleading statements, the lawsuit alleged that company executives Steven Ells, CEO, former co-CEO Monty Moran and CFO John Hartung “… abused their control of the Company, and dealt themselves excessive compensation worth hundreds of millions of dollars through a corrupt stock incentive plan...”

The judge rejected plaintiffs’ claims that the motive for the fraud was a reduction in executive compensation.

“It may be true that Defendants sold stock during the Class Period, in quantities larger than usual, and for a profit that was larger than typical,” Failla wrote. “However, these sales were made long before the alleged misstatements that the Court has deemed actionable… To accept Plaintiffs’ theory of motive, the Court must infer that Defendants were selling off a small portion of their stock for months prior to the first outbreak of foodborne disease because they believed that such an outbreak was imminent.”

The plaintiffs can refile their class action complaint.

The case is Ong et al v Chipotle Mexican Grill Inc et al, U.S. District Court, Southern District of New York, No. 16-00141.

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