Food and beverage behemoth the Kraft Heinz Company, its top officers, and 3G Capital Inc. find themselves facing a proposed class action lawsuit centered on alleged violations of federal securities laws. The investor behind the suit alleges the corporate and individual defendants participated in a “fraudulent scheme and course of business” against purchasers of Kraft Heinz common stock that, through the dissemination of materially false and misleading statements, allowed an affiliate of 3G Capital to sell in excess of $1.2 billion in Kraft Heinz stock at artificially inflated prices in August 2018.
The 30-page suit out of Pennsylvania’s Western District states that when Kraft and Heinz merged, the newly formed entity was led by a group of executives that were or had been partners or former employees of 3G Capital. During the class period, May 4, 2017, through February 21, 2019, the case says, 3G Global Food Holdings, an affiliate of 3G Capital, owned approximately 25 percent of Kraft Heinz outstanding common shares.
According to the lawsuit, the defendants, throughout the process of integrating the operations of Kraft and Heinz, adopted a number of cost-reduction initiatives that “helped lower costs and drive increases in highly leveraged Kraft Heinz’s profitability” amidst declining sales. At the start of the class period, the defendants, however, allegedly “knew or recklessly ignored that” their cost reduction measures had “run their course, depleted [Kraft Heinz] of valuable resources, marginalized its internal controls,” and badly damaged Kraft Heinz’s iconic brands.
During the class period, a significant sales decline coupled with market share losses attributed to a consumer shift toward organic and lower-priced private label products led Kraft Heinz to commoditize its product categories, and left the company with little pricing power, according to the lawsuit. Moreover, while major Kraft Heinz brands, such as Oscar Meyer cold cuts, were reportedly suffering, the complaint says, the company was at the same time dealing with supply chain woes and cost inflation.
Fast forward to October 2018 when, unbeknownst to investors, Kraft Heinz was reportedly subpoenaed by the SEC in connection with an investigation into its accounting policies and controls over financial reporting. The following month, the suit continues, Kraft Heinz sold its Canadian natural cheese business for roughly $1.23 billion.
The bottom apparently fell out on February 21, 2019, when Kraft Heinz issued a press release in which it announced it had been improperly accounting for the costs of products sold and recorded impairment charges, i.e. write-offs of “worthless goodwill,” of $15.4 billion, the case says. In the press release, Kraft Heinz also reportedly announced it had received an SEC subpoena over an investigation into its accounting and financial procedures. News of all this saw Kraft Heinz common stock plummet roughly 27.5 percent, the lawsuit states, a drop that erased “more than $16 billion” in market capitalization on heavy trading volume.
Most curiously, the suit stresses, 3G Global Food Holdings, in August 2018, sold upward of $1.2 billion in Kraft Heinz common stock at fraudulently high prices. More broadly, the defendants, the plaintiff alleges, were motivated to engage in the above-alleged course of conduct all to sell off the Kraft Heinz shares for profit.