Class action: KraftHeinz allowed investors on board to insider trade, dodge billions in stock losses

By Jonathan Bilyk | Apr 26, 2019

Kraft Heinz

KraftHeinz has been hit with a class action brought by a group of investors who accuse the company of allowing one of its leading investors to engage in insider trading, using information not available to other investors to avoid billions of dollars in losses to the value of the company’s stock.

On April 25, lawyers with the firm of Entwistle & Cappucci LLP, of Austin, Texas, and New York, and Moirano Gorman Kenny LLC, of Chicago, filed suit in Chicago federal court on behalf of named plaintiffs Timber Hill LLC against KraftHeinz, its officers, and one of its leading investors, 3G Capital, accusing them of violating federal insider trading law.

The complaint identifies 3G Capital as a “Brazilian-American private equity firm known for its cost-cutting strategies.” 3G has also taken ownership positions and deployed turnaround strategies at other major food and beverage companies, including Anheuser-Busch InBev and Burger King.

3G acquired Heinz in 2013, and in 2015, merged the company with Kraft, a move they estimated at the time would result in about $1.5 billion annual savings. 3G Capital founder Alexandre Behring served as chairman of the KraftHeinz board of directors, and three 3G partners served on the KraftHeinz board.

However, the complaint asserts the company has only struggled financially since, culminating most recently in a KraftHeinz stock plunge driven by a $15.4 billion “goodwill impairment” in February. Essentially, such an impairment charge involves the company writing off a sum of money against the reputation of its brands. In this case, the company primarily applied the charge to its Kraft and Oscar Mayer brands, according to the complaint.

The company also announced other unsettling news at the same time, the complaint asserted, including disclosing it had received a subpoena from the federal Securities and Exchange Commission “related to an investigation into the Company’s accounting and controls.”

Following those disclosures, stock prices dropped from $48 a share to $35 a share, “erasing more than $16 billion in market capitalization.”

However, the complaint alleges not all KraftHeinz investors took a bath in the plunge. The plaintiffs said KraftHeinz shareholder 3G Capital “just months prior” to the goodwill impairment had “reaped enormous profits through its sale of 20.6 million shares of Kraft Heinz common stock when it was trading at approximately $59 per share.”

“Collectively, 3G Capital received approximately $1.232 billion in illicit proceeds from its sale of Kraft Heinz common stock, avoiding millions of dollars in losses,” the complaint alleged.

The complaint asserts 3G Capital was able to make those trades in advance of the impairment charge because its members serve in high-ranking positions within the KraftHeinz organization, and had access to knowledge and information not available to outside investors.

Further, the complaint accuses the company of misleading investors with alleged misinformation concerning the health of its brands, even as their value declined significantly through 2018.

The complaint noted KraftHeinz stock fetched as much as $74 per share as recently as February 2018.

“Defendants’ misstatements and omissions of material facts caused the price of Kraft Heinz common stock to be artificially inflated” from 2017 to early 2019, the complaint asserts.

The plaintiffs have asked the court to allow the lawsuit to proceed as a class action, including all other KraftHeinz shareholders. The lawsuit asks the court to award unspecified compensatory damages and attorney fees.

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Organizations in this Story

Entwistle & Cappucci LLC Moirano Gorman Kenny LLC The Kraft Heinz Company U.S. District Court for the Northern District of Illinois

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