It is now well-recognized, as Bloomberg columnist Matt Levine has famously said, that “Everything Everywhere is securities fraud.” Just the same, it does come as a surprise sometimes to see the things that make their way into securities class action lawsuit complaints. In the latest example of this phenomenon at work, a plaintiff shareholder has filed a securities class action lawsuit against the restaurant company Chipotle Mexican Grill, as a result of a social media campaign raising questions about the chain’s meal portions. To combat the social media chatter, the company concentrated on providing generous portions, which cut into the company’s margins – and drew a securities lawsuit. A copy of the November 11, 2024, complaint in the suit can be found here.

Background

Chipotle Mexican Grill owns and operates fast-food restaurants serving Mexican food. On May 29, 2024, the Washington Post published an article reporting on online complaints about the perceived stinginess of the burrito chain’s portions. The Post article referred to a May 3, 2024, social media influencer’s TikTok review complaining about the portions the reviewer received, which in turn led to a “virtual pile-on.” The Post article quoted a Chipotle spokesperson as saying that “there have been no changes in our portion sizes.”

On July 4, 2024, Fox Business News published an article quoting a Wells Fargo analyst, who had ordered 75 “like-for-like” burrito bowls at Chipotle restaurants in New York, finding that the bowls varied in weight from 13.8 ounces to 26.8 ounces. The article quoted a Chipotle spokesperson who cited the variability inherent in the company’s completely customizable meals, and as saying that there have been no changes in the portion size.

On July 24, 2024, in its 2Q earnings call, the company’s CEO directly addressed portion concerns that had been brought up on social media. He reported that the company was going to focus on making sure that every customer got a generous portion, which, he said, would result in a higher cost of sales in the third quarter. The company’s share price declined 1.85%.

On October 29, 2024, in its 3Q earnings call, the company did indeed report on an increased cost of sales, due in part to a focus on ensuring consistent and generous portions; however, the company also reported that the increased cost of sales was also due to increases costs for avocado and dairy, and the mixed impact of a new product. The increased costs contributed to a decline in profitability. The company’s share price declined almost 8% on this news.

The Lawsuit

On November 11, 2024, a plaintiff shareholder filed a securities class action lawsuit in the Central District of California against Chipotle and certain of its executives. The complaint purports to be filed on behalf of investors who purchased the company’s common stock between February 8, 2024, and October 29, 2024, as well as those who purchased Chipotle call options and sold put options during the class period.

The complaint alleges that during the class period the defendants made false or misleading statements or failed to disclose that: “(1) Chipotle’s portions sizes were inconsistent and left many customers dissatisfied with the Company’s offerings; (2) in order to address the issue and retain customer loyalty, the Company would have to ensure more generous portion sizes, which would increase costs of sales; and (3) as a result, the Defendants’ statements about its business, operations, and prospects, were materially false and misleading and/or lacked a reasonable basis at all relevant times.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.

Discussion

This entire situation looks like very much of a tempest in a social media tea pot. An online influencer raised concerns about the influencer’s own experience, which, in the way that social media messages can become magnified and amplified, spread to mainstream media and became a PR nightmare for the company. The company, blindsided by the bad publicity, deliberately launched an effort to ensure that every customer was getting generous portions, and expressly told the marketplace that the generous portions effort was going to cut into the company’s margins, which it did.

In America, of course, anything can result in a lawsuit. However, this isn’t a lawsuit filed on behalf of the consumers who supposedly received meagre portions. This is a lawsuit on behalf of investors who are now claiming they were somehow misled about – about what? About the size of the portions in the company’s restaurants?

This lawsuit has only just been filed and it remains to be seen how it will fare. When the time comes for the court to assess the adequacy of the plaintiff’s allegations, the court will look long and hard to find anything that even arguably satisfies the scienter pleading requirements, much less the requirements to plead falsity.

I am sure the plaintiff in this case feels aggrieved by the fact that the price of his Chipotle shares declined. To that extent at least, this is a serious lawsuit, I suppose. However, looked at from the perspective of what the securities laws are for and what they are intended to protect investors against, there is a good case that could be made that this lawsuit trivializes the entire system. Can there really be a valid claim for securities fraud (not consumer fraud, but securities fraud) based on the plaintiff’s allegations that “Chipotle’s portion sizes were inconsistent and left many customers dissatisfied with the Company’s offerings”?

It has been my privilege over the last few years to be able to travel to other countries to talk about securities laws in both the U.S. and in other countries. The U.S. system has a uniform reputation abroad as being overly litigious, involving unproductive litigation that imposes unnecessary costs on the markets and the markets’ participants. When the commentators in other countries are talking about these kinds of problems in the U.S. system, they are thinking about lawsuits like this one.

This Week: For the next few days, I will be in Chicago for the PLUS Conference. I am looking forward to seeing many old friends and making new friends as well. If you see my in the hallway or at Conference events, please take a moment to say hello, especially if we have not met before. I am looking forward to seeing everyone in Chicago.