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Chipotle Sued Again, This Time for Misleading Investors

Did Chipotle withhold information about its food safety practices?

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Another day, another lawsuit for Chipotle. The burrito chain that spurred a thousand copycats has been sued by its investors for allegedly misleading investors regarding its food safety processes, promises, and the measures it said it took to prevent and address its ongoing E. coli outbreak. According to Reuters, investors believe the company failed to disclose that its "quality controls were inadequate to safeguard consumer and employee health."

The civil lawsuit, "Susie Ong v Chipotle et al, U.S. District Court, Southern District of New York, No. 16-00141," filed in U.S. District Court for the Southern District of New York today, makes the case that Chipotle's public statements about the seriousness with which it took matters of public health were false or exaggerated.

As the case (embedded below) outlines, since February 2014 Chipotle has issued press releases and public statements meant to convince consumers it took food safety seriously. In a November press release announcing it had hired two separate public health consultants, the company stated, "Chipotle has taken important steps to make certain that their food is as safe as it can be." Subsequent announcements to shareholders were clearly meant to give the public confidence that Chipotle would immediately find the source of each outbreak and clean up its act.

In mid-December, defendant and Chipotle CEO offered apologies to the public both on television and in print. After each new outbreak, when the scare spread from two states to six, to nine, and then beyond, Chipotle's communications department sought to appease the public. At the same time, each time, its stock sunk to new lows, and, basically, Ong, who believes she invested in Chipotle's stock when it was "inflated," wants her money back.

Ong apparently decided to sue in light of the new Federal criminal investigation, announced earlier this week, which is pretty damning evidence that Chipotle may have operated with ill intent, or may simply have been sloppy in its rise to the top.

The language of the suit gets pretty nasty. Ong alleges Chipotle's spokespeople, CEO Steve Ells, and Chairman Montgomery F. Moran:

... engaged in a plan, scheme, conspiracy and course of conduct, pursuant to which they knowingly or recklessly engaged in acts, transactions, practices and courses of business which operated as a fraud and deceit upon Plaintiff and the other members of the Class; made various untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and employed devices, schemes and artifices to defraud in connection with the purchase and sale of securities. Such scheme was intended to, and, throughout the Class Period, did: (i) deceive the investing public, including Plaintiff and other Class members, as alleged herein; (ii) artificially inflate and maintain the market price of Chipotle securities; and(iii) cause Plaintiff and other members of the Class to purchase or otherwise acquire Chipotle securities and options at artificially inflated prices.

Ong, a personal wealth manager and current shareholder, is asking for a class action suit by trial and suing for "damages sustained" and "reasonable attorneys' fees, expert fees, and other costs." Depending on how much she invested in Chipotle, this could be millions of dollars.

Dan Hill, a corporate strategist based in Washington, DC believes Chipotle did too little too late, and a suit like this from shareholders shouldn't come as a surprise. "Chipotle was too slow to respond to this crisis; it appeared that they were exclusively focused on consumers, largely neglecting regulators and investors... They should have communicated more, both in terms of substance and frequency," Hill says, "Investors deserve to know the state-of-play, even if you the company don't have all the answers... which it shouldn't if it is following a deliberate process — this takes time."

He goes on: "What shareholders and markets want to know are two things, that you're taking it seriously and what the worst case scenarios are. I'm not suggesting that Chipotle should paint an aggressive negative picture for stakeholders but they should at least built some space in their messages so that they can't be accused of minimizing a serious situation."

Chipotle's stock fell below 500 for the first time in years last month. It's now close to 400 as of end of trading today.

In its filing on Wednesday, Chipotle noted that same-store sales for December were down 30 percent. On the bright side of things, no one has died as a result of eating one of Chipotle's burritos. See the court documents below.

Chipotle Shareholder Lawsuit