- Connecticut-based trading firm Timber Hill filed a lawsuit in federal court last week claiming Kraft Heinz, private-equity owner 3G Capital and outgoing CEO Bernardo Hees worked together to make money through insider trading before the company's disastrous recent earnings, according to Crain’s Chicago Business.
- The lawsuit claims that using information that was not widely available to the public, 3G Capital decided to sell shares in the months leading up to Kraft Heinz’s $15.4 billion write-down and SEC investigation, gaining $1.2 billion.
- In addition to the two companies and Hees, the complaint names six other current or former Kraft Heinz executives and board members as part of the insider trading scheme. Kraft Heinz did not respond to Food Dive's request to comment before press time.
This is not the first time that 3G Capital has had its feet held to the fire. When the Brazilian private equity giant initially agreed to take over part of Kraft Heinz with Berkshire Hathaway in 2013, U.S. Securities and Exchange Commission regulators immediately began investigating what they determined to be unusual trading.
In 2010, the company found itself in hot water over accusations that Wells Fargo advisor and Brazilian national Waldyr Prado invested in Burger King just prior to the takeover, thanks to a tip from one of his clients who worked with 3G Capital. Charges were eventually filed against Prado and a Brazilian client, but not against 3G.
In 2017, Great White North Franchisee Association, a group of frustrated Tim Hortons franchisees, filed a class action lawsuit in Canada against 3G controlled Restaurant Brands International, claiming that the $700 million that franchisees paid into the national advertising fund was improperly used to their detriment. After a messy fight, including threats to withdraw franchises and restaurant lockouts, the lawsuit is close to an amicable settlement.
Since 3G Capital is a company known for ruthless cost-cutting strategies and its history of bringing itself to the attention of authorities, there may be just cause to dig a little deeper into the accusations in the lawsuit. The ramifications of actually finding some truth to these accusations could compound the damage investors have endured after Kraft Heinz wrote down the value of its Kraft and Oscar Mayer brands by $15.4 billion in February when shares plunged 28%.
This lawsuit is separate and apart from the current SEC inquiry into Kraft Heinz, which was announced — and summarily dismissed as immaterial — with February's earnings report. The agency subpoenaed Kraft Heinz in October as part of an investigation into its procurement practices, and the company cooperated — and conducted — its own investigation. It found that $25 million should have been recorded in previous quarters. The company placed those funds all into this past quarter, which company officials said should take care of the agency's concerns.
Although the SEC routinely opens inquiries into trading activity after major mergers are announced, the governmental regulatory body does not often bring charges. When it does, the consequences can be serious. Mondelez International was investigated for bribery in association with payments its Cadbury unit made in India, both as a part of Kraft Heinz and as an independent entity. The company settled with the government for $13 million.
At the same time, other large CPG companies have been investigated where the end result was not much at all. Snyder’s-Lance was investigated before its takeover by Campbell Soup for improperly stating the financial projections used by Goldman Sachs & Co. in its analyses of the merger.
But 3G Capital is not the only potential culprit for financial misdeeds. A security guard for a Kraft Heinz board member was charged with making $43,000 by reading emails that indicated Kraft would take over Heinz in 2013. He settled with the SEC in 2018 and was required to pay back the money.
It's important to note that this latest case is just a filing at this point. There's a long way to go — the investor class needs to be certified in order for it to advance. In order to win, the investors need to prove two difficult things: the motivation behind selling $1.2 billion in shares, and that all entities in question had access to information that pushed them to sell prior to February's shocking financial announcement. It's a difficult path to climb, and if it leads anywhere, it may just divert to a settlement.
Correction: In a previous version of this article, Campbell Soup was misidentified as the company investigated for improperly stating financial projections used by Goldman Sachs. Snyder’s-Lance and its board of directors were sued before the merger between the two companies was completed.