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Chipotle Execs Accused of Shady Stock Deals in Wake of E. Coli Scandal

The company is alleged to have "artificially inflated stock prices" and reaped the dividends

Jason Kempin/Getty Images

Add yet another lawsuit to the pile directed at fast-casual burrito chain Chipotle. A group of shareholders has filed suit against the company in Denver District Court, alleging mismanagement in the wake of last year's food safety debacle.

As Colorado Public Radio notes, the lawsuit is a shareholder derivative suit, "meaning the shareholders in this case are bringing the action on behalf of the company itself against the executives."

The suit, uploaded by CPR, alleges executives "abused their control of the company, and dealt themselves excessive compensation worth hundreds of millions of dollars through a corrupt stock incentive plan" between April 6, 2011, and December 31, 2015 — just around the time the company began feeling the ramifications from a rash of E.coli outbreaks.

Forty-three Chipotle locations in Washington and Oregon were closed in November 2015, due to the first reported illnesses from E. coli. The company's stock shrank from more than $750 a share in October 2015 to $404 in January 2016.

Chipotle stock history

The shareholders filing the suit say that, starting February 4, 2015, and continuing through the date of the filing (April 6), the company has issued "false and misleading statements and omissions of material fact." Among those misrepresentations, they say, were that the company adhered to "industry standards for food safety."

Those misrepresentations began to unravel "when a viral outbreak occurred at a Chipotle restaurant in Simi Valley, Calif., around August 18, 2015, and forced the store's closure. The company concealed the true nature behind the Simi Valley incident and the restaurant's closure." The Simi Valley norovirus outbreak, which sickened nearly 100 diners, eventually led to a criminal investigation.

And despite a rash of E.coli outbreaks at other stores — which sickened hundreds more and eventually led to a federal inquiry — the company maintained its food was safe to eat. It did so, say shareholders, in an effort to keep stocks artificially inflated. "During the period when the price of Chipotle stock was artificially inflated," reads the suit, "a majority of the board of directors (and a supermajority of the individual defendants) engaged in lucrative insider sales, reaping millions of dollars in net proceeds."

Founder and chief executive officer Steve Ells, who is named among the defendants in the suit, owned about $280.4 million worth of Chipotle stock on August 17, 2015 — the day before the first contamination issue became public. Beginning in February 2015 and lasting until at least July, Ells sold some 119,057 company shares — for which he received more than $78.3 million — based on "inside information," say shareholders.

The suit makes similar claims against other Chipotle executives, alleging the directors granted themselves "excessive compensation that far exceeds the compensation of their peers and ignores the company's increasingly poor financial performance."

Despite having their pay cut in half in 2015 (Ells' salary went from $28.9 million to $13.8 million), Chipotle directors made much more than other company executives. According to the suit, CEOs in the Standard & Poor's 500 were paid $10.6 million on average in 2014.

The company continues to feel the aftershocks of last year's food safety crisis. Sales were down 30 percent in the first quarter of 2016. Earlier this week, Chipotle's stock dropped to its lowest point in three years.

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