Friday, May 14, 2004

Annals of securities litigation: Krispy Kreme 

Since TigerHawk has been known to dabble in securities law and, among other things, keeps tabs on the law department of a public company, I take a certain amount of interest in securities litigation. The highly-publicized case of the week is against Krispy Kreme, the "White Castle" of donut purveyors.

It is not surprising that Krispy Kreme should find itself staring down the barrel of several different lawsuits, including one from Milberg Weiss. The price of its stock has tumbled roughly 60% from its all-time high last summer, at a time when the broader market is generally up. I don't follow the stock, but the company's growth seems to have suffered from the currently popularity of low-carb diets, which would seem to prohibit even smelling the delectible odor wafting out of the back of a Krispy Kreme store. The stock price has therefore tumbled, and the sharks are circling as a result.

The interesting thing about this matter is the apparent basis for the claims against Krispy Kreme. According to today's press coverage, which seems to be cobbled together from a press release issued by the Schiffrin Barroway firm, the facts alleged against Krispy Kreme and its management add up to a claim that the management of the firm made some mistakes:
The complaint names members of Krispy Kreme's senior management as defendants, and charges that they disregarded signs that the company had expanded too quickly, that its wholesale business undermined sales at its retail stores, and that it faced stiff competition from rival doughnut chain Dunkin' Donuts.

According to the statement, the suit also alleges that "the company ineptly accounted for how their bottom line would be affected by the popular low-carbohydrate diets; first by claiming that the trend would have no influence, and then by over-exaggerating the effect of the diet fad."

Whatever you think of corporate America in general or Krispy Kreme in particular, it is ridiculous that claims such as these aren't laughed out of court. Apparently, Krispy Kreme's management -- which is alleged first to have underestimated, and then to have overestimated, the impact of the Atkins Diet on its business -- is given no credit for changing its thinking as new facts developed. Instead, it is held to a standard of perfection in its predictions that nobody could possibly match. And what about the claim that the management disregarded "stiff competition" from Dunkin' Donuts? Its most recent 10-K suggests otherwise: "We compete against Dunkin’ Donuts, which has the largest number of outlets in the doughnut retail industry, as well as against regionally- and locally-owned doughnut shops."

Does anybody honestly think that the Krispy Kreme management doesn't worry about Dunkin' Donuts every day of the week?

There are no allegations of wrong-doing in any commonly understood sense. The only claims are that executives erred in the management of the business.

Lawsuits such as this are nothing but a shakedown for fees, serve neither the public nor the defendant's stockholders, and are every bit a financial and moral burden on our system as murky accounting, overpaid CEOs and knucklehead directors.

UPDATE (5-15 10:45 p.m.): Professor Bainbridge is on the case.

UPDATE: (5-16 10:50 a.m.): Slate's Daniel Gross argues that the Atkin's Diet has little to do with the decline in Krispy Kreme stock (via Newmark's Door). Maybe, but Gross misses the fairly basic point that when a stock is as highly valued as Krispy Kreme's was last year, even a small decline in the rate of growth of revenues can have a huge impact on the stock price.


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