Packaging Scandal Angers Whole Foods Shareholders

     AUSTIN, Texas (CN) – Shareholders claim Whole Foods board members concealed the company’s “systematic overcharging for pre-packaged foods.”
     Bryan O’Malley sued various current and former officers and directors of Whole Foods, including co-CEOs John. P. Mackey and Walter E. Robb III on Sept. 11 in Travis County Court for breach of fiduciary duty and unjust enrichment. The case was the Top Download on Wednesday for Courthouse News.
     Whole Foods opened its first store in 1980 in Austin, Texas. The company calls itself “America’s Healthiest Grocery Store” and the world’s leader in natural and organic foods. It currently has 427 stores in North America and the United Kingdom, according to the company website.
     O’Malley says that from Aug. 9, 2013 to July 30, 2015, the officer/director defendants “made false and/or misleading statements, as well as failed to disclose material adverse facts about the company’s business, operations, and prospects.”
     The complaint details how, in the quarterly and annual reports filed with the SEC and in press releases during the relevant period, Whole Foods’ board members certified that the financial information in those reports was accurate. These officer/directors were also obligated to disclose “any material changes to the company’s internal control over financial reporting,” the complaint says.
     But these statements by the Whole Foods board were false and misleading according to O’Malley, who purchased 4,549 shares of Whole Foods common stock between 2004 and 2011.
     “Specifically, defendants made false and/or misleading statements and/or failed to disclose that: (a) the company routinely overstated the weight of its pre-packaged products and overcharged customers; and (b) as a result of the foregoing, defendants’ statements about Whole Foods’ business, operations, and prospects were false and misleading and/or lacked a reasonable basis,” O’Malley’s complaint says.
     The truth emerged when the New York City Department of Consumer Affairs announced in June of this year that it discovered “systematic overcharging for pre-packaged foods” at Whole Foods’ eight New York City stores. This included thousands of potential overcharging violations, the complaint says.
     The department tested 80 different types of pre-packaged products and found all of the products had packages with mislabeled weights, according to a June 24 statement from the department. Eighty-nine percent of the packages tested violated the federal standard for the maximum amount that an individual package can deviate from the actual weight.
     “DCA’s findings point to a systematic problem with how products packaged for sale at Whole Foods are weighed and labeled, resulting in overcharges for consumers. The overcharges were especially prevalent in packages that had been labeled with exactly the same weight when it would be practically impossible for all of the packages to weigh the same amount. These products included nuts and other snack products (flavored almonds, pecan panko and corn nuts), berries, vegetables, and seafood. In some cases, this issue was found for the same exact products at multiple stores,” the department said.
     Whole Foods responded to the findings by saying there was no evidence of overcharging and that it would defend itself against the “overreaching allegations.”
     But following the report, the value of Whole Foods stock fell and during a July 29 earnings call, the “individual defendants directly attributed Whole Foods lower-than-expected quarterly results to news that the company had overcharged its customers,” O’Malley says in the complaint.
     Whole Foods’ common stock subsequently fell $4.74 per share, or 11.61 percent, to close at $36.08 on July 30, 2015.
     “As a result of the individual defendants’ materially misleading statements, failure to implement, maintain, or follow (or take reasonable steps to cause the company’s officers to follow) adequate internal controls, and failure to discharge their fiduciary duties to Whole Foods and its shareholders, Whole Foods stock traded at inflated levels during the relevant period. However, after the above revelations seeped into the market, the price of Whole Foods stock was hammered and plummeted 13.71 percent on extremely high trading volume, causing millions of dollars of losses to the company’s shareholders,” O’Malley’s complaint says.
     The complaint accuses Whole Foods’ board members of “a reckless disregard” for their duties to the company and its shareholders, adding that the company’s credibility has been “devastated” by the board’s actions.
     O’Malley adds that Whole Foods is also facing a securities fraud class action lawsuit that will cause the company to incur substantial expenses, and that the company will suffer from the so-called “liar’s discount” because it has been implicated in illegal behavior and misleading the investing public.
     “Whole Foods’ ability to raise equity capital or debt on favorable terms in the future is now impaired,” says O’Malley.
     Whole Foods Market spokesperson Michael Silverman told Courthouse News, “Whole Foods Market is committed to providing transparent, accurate pricing for all of our customers, and we back that commitment with our 100 percent pricing accuracy guarantee. We have upheld our responsibility to our stakeholders, and are confident that this complaint is baseless and without merit.”
     O’Malley seeks damages for the officers’ breaches of fiduciary duties and unjust enrichment, plus disgorgement of their profits, benefits, and other compensation.
     He also seeks an order requiring Whole Foods to reform and improve its corporate governance and internal procedures and to protect its shareholders.
     He is represented by Patrick W. Powers, Willie C. Briscoe and Cullin O’Brien.

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