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Hedick v. The Kraft Heinz Co.

United States District Court, N.D. Illinois, Eastern Division

October 8, 2019

GEORGE A. HEDICK, JR., et al., Plaintiffs,
v.
THE KRAFT HEINZ COMPANY, et. al., Defendants. IRON WORKERS DISTRICT COUNCIL (PHILADELPHIA AND VICINITY) RETIREMENT AND PENSION PLAN, et al., Plaintiffs,
v.
THE KRAFT HEINZ COMPANY, et. al., Defendants. TIMBER HILL LLC Plaintiff,
v.
THE KRAFT HEINZ COMPANY, et. al., Defendants.

          MEMORANDUM OPINION AND ORDER

          ROBERT M. DOW, JR. UNITED STATES DISTRICT JUDGE.

         This is a securities class action against The Kraft Heinz Company, Bernardo Hees, Paulo Basilio, and David H. Knopf. Six movants requested that the Court consolidate the above-captioned cases and sought appointment as lead plaintiff in this matter: (1) Michael Guzzi, Cam Hung Diep, and James Tarsy [40]; (2) The New York City Fund (the “NYC Fund”) [46]; (3) Earl Chesson, The Chesson Limited Partnership, and Earl G. Chesson Revocable Tryst U/A DTD 4/11/2017 (together, the “Chesson Group”) [49]; (4) Arca Investments and Krupa Global Investments (together, the “Arca/Krupa Group”) [52]; (5) Sjunde AP-Fonden (“AP7”) and Union Asset Management Holding AG (“Union”) (together, the “AP7/Union Group”) [57]; and (6) Timber Hill LLC (“Timber Hill”) [61]. The motion by movants Michael Guzzi, Cam Hung Diep, and James Tarsy was terminated as moot after they filed a motion to withdraw. [See 80.] Before the Court are the remaining lead plaintiff motions [46; 49; 52; 57; 61]. Also before the Court are the AP7/Union Group's motion [106] for discovery, the AP7/Union Group's motion [114; 115] for leave to file a sur-reply to address arguments that it contends that the NYC Fund raised for the first time in its reply brief, the NYC Fund's motion [130] to take judicial notice of the master agreement between the New York City Law Department and Kessler Topaz Meltzer & Check, LLP dated February 8, 2019, and various motions to seal [103; 112; 117; 125; 129; 134].

         For the reasons set forth below, the Court consolidates the above-captioned cases. The Court further grants the lead plaintiff motion of the AP7/Union Group [57] and approves the selection of Kessler Topaz Meltzer & Check, LLP (“Kessler Topaz”) and Bernstein Litowitz Berger & Grossmann LLP (“Bernstein Litowitz”) as co-lead counsel. The Court denies the remaining lead plaintiff motions [46; 49; 52; 61] in full. The AP7/Union Group's motion [106] for discovery, the AP7/Union Group's motion [114; 115] for leave to file a sur-reply, and the NYC Fund's motion [130] to take judicial notice are denied as moot. The motions to seal [103; 112; 117; 125; 129; 134] will be referred to the assigned magistrate judge for disposition. The case is set for further status hearing on October 22, 2019 at 9:00 a.m.

         I. Background

         The above-captioned actions arise from alleged violations of the Securities Exchange Act of 1934 (the “Exchange Act”) and related rules and regulations by The Kraft Heinz Company (“Kraft-Heinz” or the “Company”), Bernardo Hees, Paulo Basilio, and David H. Knopf (collectively, the “Defendants”). Defendant Kraft Heinz manufactures and markets food and beverage products in the United States, Canada, Europe, and internationally. [1, at ¶ 7.] Kraft Heinz is a Delaware corporation maintaining its co-headquarters in Chicago, Illinois. [Id.]. Kraft Heinz's securities trade on the NASDAQ under the ticker symbol “KHC.” [Id.]

         On July 2, 2015, Kraft Heinz was formed through the merger of Kraft and Heinz. [Id. at ¶ 28.] Prior to the merger, Kraft was a publicly-traded company and Heinz was jointly owned by Berkshire Hathaway Inc. and 3G Global Food Holdings, L.P., a subsidiary of 3G, a Brazilian-American multibillion-dollar investment firm. [Id.] According to the complaint in the Iron Workers action, in conjunction with the formation of Kraft Heinz, on April 10, 2015, Heinz filed a preliminary registration statement and prospectus on Form S-4 with the SEC, with respect to the shares of Heinz common stock to be issued to Kraft shareholders pursuant to the merger agreement. [No. 19-cv-01845, Dkt. 1, at ¶ 3.] The Form S-4 praised the merger, stating that the benefits included “enhanced competitive and financial position, increased diversity and depth in its product line and geographic areas * * * and the potential to realize, according to Heinz management, an estimated $1.5 billion in annual cost savings from the increased scale of the new organization, the sharing of best practices and cost reductions by the end of 2017.” [Id.] Moreover, the Form S-4 highlighted “3G Capital's strong track record in achieving significant cost reduction and margin improvement in companies under its management.” [Id.].

         Under the terms of the merger, each share of outstanding Kraft common stock was converted into the right to receive one share of common stock of Kraft Heinz common stock. [Id. at ¶ 32.] Additionally, Kraft declared a special cash dividend equal to $16.50 per share of Kraft common stock to shareholders of Kraft. [Id.] The aggregate special dividend payment of approximately $10 billion was funded by an equity contribution by Berkshire and 3G. [Id.] Over the next several years, Kraft Heinz continually touted its cost cutting initiatives while simultaneously indicating its plans to grow overall revenue numbers. [Id. at ¶ 4.] At no time between 2015 and late 2018 did Kraft Heinz suggest its brands were impaired in a material way. [Id.]

         On February 21, 2019, after the market closed, Kraft Heinz announced its earnings for the fourth quarter of 2018. [1 at ¶ 34.] The Company announced an impairment charge of $15.4 billion, stating, in relevant part:

During the fourth quarter, as part of the Company's normal quarterly reporting procedures and planning processes, the Company concluded that, based on several factors that developed during the fourth quarter, the fair values of certain goodwill and intangible assets were below their carrying amounts. As a result, the Company recorded non-cash impairment charges of $15.4 billion to lower the carrying amount of goodwill in certain reporting units, primarily U.S. Refrigerated and Canada Retail, and certain intangible assets, primarily the Kraft and Oscar Mayer trademarks. These charges resulted in a net loss attributable to common shareholders of $12.6 billion and diluted loss per share of $10.34.

[Id.] That same day, Kraft Heinz disclosed that it had received a subpoena from the Securities and Exchange Commission in October 2018 in connection with the Company's procurement function, stating in relevant part:

The Company received a subpoena in October 2018 from the U.S. Securities and Exchange Commission (the “SEC”) associated with an investigation into the Company's procurement area, more specifically the Company's accounting policies, procedures, and internal controls related to its procurement function, including, but not limited to, agreements, side agreements, and changes or modifications to its agreements with its vendors.
Following this initial SEC document request, the Company together with external counsel launched an investigation into the procurement area. In the fourth quarter of 2018, as a result of findings from the investigation, the Company recorded a $25 million increase to costs of products sold as an out of period correction as the Company determined the amounts were immaterial to the fourth quarter of 2018 and its previously reported 2018 and 2017 interim and year to date periods. Additionally, the Company is in the process of implementing certain improvements to its internal controls to mitigate the likelihood of this occurring in the future and has taken other remedial measures. The Company continues to cooperate fully with the U.S. Securities and Exchange Commission.

[Id. at ¶ 35.] Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or otherwise acquired Kraft securities publicly traded on NASDAQ during the class period (the “Class”) and were damaged upon the revelation of the alleged corrective disclosures. [Id. at ¶ 39.] Six movants originally sought to be appointed lead plaintiff. Currently pending before the Court are the remaining motions for appointment as lead plaintiff and various other related motions.

         II. Legal Standard

         The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides guidelines for the appointment of a lead plaintiff in a securities class action case. The PSLRA requires that the Court “appoint as a lead plaintiff the member or members of the purported plaintiff class that the court determines to be most capable of adequately representing the interests of the class members[.]” 15 U.S.C. § 78u-4(a)(3)(B)(i). The PSLRA establishes a rebuttable presumption that the “most adequate plaintiff” is the “person or group of persons” who “has either filed the complaint or made a motion in response to a notice, ” “has the largest financial interest in the relief sought by the class, ” and “otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure.” 15 U.S.C. 78u-4(a)(3)(B)(iii)(I)(aa); (bb); and (cc). This presumption may be rebutted, however, if a member of the purported class establishes that the “presumptively most adequate plaintiff will not fairly and adequately protect the interests of the class” or “is subject to unique defenses that render such plaintiff incapable of adequately representing the class.” 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II)(aa) and (bb). The PSRLA further provides that the “most adequate plaintiff shall, subject to the approval of the court, select and retain counsel to represent the class.” 15 U.S.C. § 78u-4(a)(3)(b)(v).

         III. Analysis

         A. Consolidation

         All movants initially moved to consolidate the above-captioned actions under Federal Rule of Civil Procedure 42(a). Under that rule, “[i]f actions before the court involve a common question of law or fact, the court may * * * consolidate the actions[.]” Fed.R.Civ.P. 42(a)(2). “By far the best means of avoiding wasteful overlap when related suits are pending in the same court is to consolidate all before a single judge.” Blair v. Equifax Check Servs., Inc., 181 F.3d 832, 839 (7th Cir. 1999). Furthermore, the PSLRA provides that “[i]f more than one action on behalf of a class asserting substantially the same claim or claims arising under this title has been filed, ” courts shall not appoint a lead plaintiff until “after the decision on the motion to consolidate is rendered.” 15 U.S.C. § 78u-4(a)(3)(B)(ii). “In securities actions where the complaints are based on the same public statements and reports, consolidation is appropriate if there are common questions of law and fact and the parties will not be prejudiced.” Weltz v. Lee, 199 F.R.D. 129, 131 (S.D.N.Y. 2001) (citation omitted); see also Taubenfeld v. Career Educ. Corp., 2004 WL 554810, at *1 (N.D. Ill. Mar. 19, 2004) (“The court agrees that consolidation is appropriate for the six related cases insofar as each involves class action claims on behalf of purchasers of CEC stock and each asserts similar if not overlapping claims for relief.”).

         After initially asking that the above-captioned cases be consolidated, in its opposition brief, Timber Hill asks that the Court not consolidate the Timber Hill class action with the Hedick and Iron Workers common stock and notes class actions. Instead, Timber Hill contends that the cases only should be coordinated for discovery and pretrial purposes. To the extent that Timber Hill's motion [61] asks that the Court consolidate the above-captioned cases, the motion is withdrawn. Still, the remaining movants also have moved for consolidation. And Timber Hill fails entirely to explain why consolidation is inappropriate under the governing standards addressed above. The complaints here are based on the same challenged conduct and there are common questions of law and fact. Furthermore, no party has identified any prejudice that would result from consolidating these actions. Accordingly, the Court grants the pending motions [46; 49; 52; 57] to consolidate the above-captioned cases.

         B. Presumptive Most Adequate Plaintiff

         Movants the NYC Fund, the Arca/Krupa Group, and the AP7/Union Group seek to be appointed lead plaintiff in the above-captioned cases.[1] The PSLRA presumes that the most adequate plaintiff is the plaintiff who-in addition to satisfying other requirements-has the largest financial interest in the relief sought by the class. “The largest financial interest provision seeks to increase the likelihood that institutional investors will serve as lead plaintiffs by requiring courts to presume that the member of the purported class with the largest financial stake in the relief sought is the most adequate plaintiff. The PSLRA, however, does not specify how courts should measure the largest financial interest in the relief sought by the class.” City of Sterling Heights Gen. Employees' Ret. Sys. v. Hospira, Inc., 2012 WL 1339678, at *1 (N.D. Ill. Apr. 18, 2012) (internal citation and quotation marks omitted).

         Most courts consider: “(1) the total number of shares purchased during the class period; (2) the net shares purchased during the class period (in other words, the difference between the number of shares purchased and the number of shares sold during the class period); (3) the net funds expended during the class period (in other words, the difference between the amount spent to purchase shares and the amount received for the sale of shares during the class period); and (4) the approximate losses suffered.” Hospira, Inc., 2012 WL 1339678, at *4 (citing Lax v. First Merch. Acceptance Corp., 1997 WL 461036, at *5 (N.D. Ill. Aug. 11, 1997)); see also In re Cendant Corp. Litig., 264 F.3d 201, 263 (3d Cir. 2001) (“[W]e agree with the many district courts that have held that courts should consider, among other things: (1) the number of shares that the movant purchased during the putative class period; (2) the total net funds expended by the plaintiffs during the class period; and (3) the approximate losses suffered by the plaintiffs.” (citations omitted)). While courts differ on the precise weight to apply to each factor, most courts agree that fourth factor-the approximate losses suffered-is the most salient factor in selecting the lead plaintiff. See In re CMED Sec. Litig., 2012 WL 1118302, at *3 (S.D.N.Y. April 2, 2012) (“In giving weight to the four factors, courts in this District, as others, place the most emphasis on the last of the four factors: the approximate losses suffered by the movant above any weight accorded to net shares purchased and net expenditures.” (citations and quotations omitted)); In re Diamond Foods, Inc. Sec. Litig., 281 F.R.D. 405, 408 (N.D. Cal. Mar. 20, 2012) (concluding that the “fourth factor, ‘approximate loss,' is generally considered the most important factor”); Canson v. WebMD Health Corp., 2011 WL 5331712, at *2 (S.D.N.Y. Nov. 7, 2011) (concluding that “[t]he fourth factor, loss suffered, weighs most heavily in the court's analysis” (citation omitted)).

         The movants still being considered for appointment as lead plaintiff claim the following losses during the Class Period:

Movant

Claimed Financial Interest[2]

NYC Fund

$59, 257, 707.77

Arca/Krupa Group

$22, 839, 506.00

AP7/Union Group

Tens of Millions

         Although the NYC Fund claims the largest sum of financial losses, other movants argue that its ...


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