Chipotle Shareholder Lawsuit Blames Executives for Failing to Prevent Widespread Illnesses

A federal lawsuit filed by shareholders of Denver-based Chipotle Mexican Grill accuses company executives of failing to establish quality-control and emergency-response measures to prevent and then stop food-borne illnesses that sickened customers across the country and proved costly to the company.

The complaint filed Monday in U.S. District Court in Denver on behalf of plaintiff Sean Gubricky and other shareholders accuses Chipotle executives, its board of directors and managers of unjust enrichment and seeks compensation from Chipotle co-CEOs Steve Ells and Montgomery Moran, who each earned almost $14 million in 2015. Eight other executives also are named in the complaint.

According to second-quarter Securities and Exchange Commission report, Chipotle faces two other shareholder lawsuits filed related to outbreaks of food-borne illness that caused the company’s stock to lose nearly half of its value. Shares closed down $6.06 Tuesday at $395.10, compared with a 52-week high of $757.77 hit on Aug. 18, 2015, before the illnesses became public.

In addition to damages, the claim seeks corporate-governance reforms and changes to internal procedures to comply with laws and protect shareholders.

The plaintiffs are represented by Denver attorney Jeffrey Berens, Pennsylvania attorney Stuart Guber and New York City attorney Nadeem Faruqi.

A company spokesman said Chipotle does not discuss pending legal action.

As of Dec. 31, Chipotle operated 1,971 restaurants in the U.S., 11 in Canada, seven in England, four in France and one in Germany, the lawsuit says.

The lawsuit referred to an August 2015 norovirus outbreak in Hazel Dell, Wash., that Chipotle has never publicly acknowledged. In that case a supervisor ordered an employee who called in sick to come to work or find someone to replace her. The employee went to work for four hours while vomiting, the lawsuit says. A state health inspector called her vomiting “one of the proverbial smoking guns for this outbreak.”

The officers had failed to timely notify health authorities in California about two Chipotle employees at its Simi Valley restaurant who suffered “acute gastrointestinal illness” during an Aug. 18 food-borne illness outbreak. The restaurant served food for two more days. At least 234 people who dined at the restaurant were sickened by a resulting norovirus outbreak, the lawsuit says.

The chain shut down the restaurant and sanitized it before contacting health authorities, in violation of state laws, the lawsuit says. Still, health inspectors cited numerous violations including food handlers who didn’t have valid food handler cards and unsanitary conditions.

In August and September, a salmonella outbreak caused by tomatoes sickened about 64 people who dined in 22 Chipotle restaurants in Minnesota. Nine people were hospitalized. People were getting sick between Aug. 19 and Sept. 3, the lawsuit says.

An E. coli outbreak that began on Oct. 19, sickened 53 people in nine states across the country including 20 who were hospitalized. The company didn’t acknowledge the outbreak until Nov. 3, when it closed 43 restaurants Oregon and Washington, the lawsuit says.

The company posted signs on the closed stores saying that the closures were due to equipment or supply issues. On Dec. 4, the company publicized statements that it had instituted a program to eliminate or mitigate risks of food-borne illness to near zero, establishing “Chipotle as an industry leader in this area.”

Four days after the news release, a norovirus outbreak sickened at least 141 Boston College students who ate at a Chipotle restaurant near the campus. A dozen others were sickened because norovirus is highly contagious, the lawsuit says. Health inspectors cited health hazards at the restaurant including keeping chicken and steak below required temperatures.

Ells issued apologies in newspaper advertisements in 60 markets on Dec. 16, the lawsuit said. The outbreaks continued, it added, with E. coli reported in five people who ate at Chipotle restaurants in North Dakota, Kansas and Oklahoma. More than 500 people across the country were sickened after eating at Chipotle restaurants across the country beginning in July 2015, the lawsuit says.

“Food-safety experts say they believe that with any outbreak, the total number of people affected is at least 10 times the reported number,” the lawsuit says. “Even worse is that the sources of most of the outbreaks are yet to be determined.”

The defendants failed to implement and enforce a system of effective internal controls to ensure food safety, the lawsuit says. They failed to provide proper oversite by not monitoring the company’s compliance with restaurant procedures and federal, state and local food safety regulations.

It also accused the defendants of issuing false and misleading statements about the effectiveness of the company’s food-safety procedures. The lawsuit also takes issue with advertising that included the “Food with Integrity” slogan.

It accuses company officers of failing to recognize Chipotle had a higher risk of food-borne illnesses outbreaks than competitors because it uses fresh produce and meats.

The company also failed to accurately maintain books and records of restaurant operations and incidents involving outbreaks and food-borne illnesses, the lawsuit claims.

Source: www.denverpost.com www.denverpost.com

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