- Law firms
- Company said to conceal impact of cost cuts
- Judge – allegations support inference of intent to defraud
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A federal judge said Kraft Heinz Co must face a proposed class action over the packaged food company’s failed push to aggressively cut costs, culminating in a $15.4 billion writedown and a U.S. Securities and Exchange Commission accounting probe.
U.S. District Judge Robert Dow in Chicago said shareholders sufficiently alleged that Kraft Heinz, where Warren Buffett’s Berkshire Hathaway Inc owns a 26.6% stake, knowingly concealed how belt-tightening drove away customers and suppliers, making its optimistic statements about its future false and misleading.
“Plaintiffs point to several allegations that, considered together, raise a cogent and compelling inference” of an intent to defraud, Dow wrote in a 50-page decision on Wednesday.
Kraft Heinz was formed in 2015 by the merger of Kraft Foods with H.J. Heinz, the latter of which was owned by Berkshire and Brazilian private equity firm 3G Capital.
Dow also let shareholders pursue claims against 3G and several of its officials, including Kraft Heinz’s Chairman Alex Behring and its former chief executive Bernardo Hees.
These included an insider trading claim against 3G over its sale of $1.2 billion of Kraft Heinz stock in August 2018, six months before the writedown.
Berkshire does not run Kraft Heinz day-to-day and is not a defendant.
The lead plaintiffs, Germany’s Union Asset Management Holding AG and Sweden’s Sjunde AP-Fonden, are respectively represented by lawyers including Salvatore Graziano at Bernstein Litowitz Berger & Grossmann, and Sharan Nirmul at Kessler Topaz Meltzer & Check. Neither was immediately available for comment.
Defense lawyers including Daniel Kramer at Paul, Weiss, Rifkind, Wharton & Garrison also were not immediately available for comment.
They called the complaint a “classic ‘fraud by hindsight'” pleading that was in reality an attack on 3G’s signature “zero-based budgeting” strategy.
Zero-based budgeting requires managers to justify their expenses annually from scratch, rather than use last year as a guide or pursue savings on an ongoing basis. For 3G, it requires cost controls such as making photocopies double-sided.
Kraft Heinz’s products include Kraft cheese, Heinz ketchup, Oscar Mayer deli meats, Philadelphia Cream Cheese and Jell-O.
The Chicago- and Pittsburgh-based company’s share price sank 27.5% on the day after it announced the writedown and SEC probe, prompting Buffett to admit he “overpaid” for Kraft.
Berkshire and 3G had owned H.J. Heinz before the merger, and the combined company was slow to adapt as consumers sought healthier, fresher alternatives to processed food.
Kraft Heinz has fared better in recent quarters as the pandemic left more people eating at home, though higher ingredient costs have weighed on margins.
The SEC is still probing Kraft Heinz’s accounting, as is the U.S. Attorney’s Office in Chicago, the company said in an Aug. 4 regulatory filing.
The case is Hedick et al v Kraft Heinz Co et al, U.S. District Court, Northern District of Illinois, No. 19-01339.
For plaintiffs: Salvatore Graziano, at Bernstein Litowitz Berger & Grossmann; and Sharan Nirmul, at Kessler Topaz Meltzer & Check
For defendants: Daniel Kramer, at Paul, Weiss, Rifkind, Wharton & Garrison