Administration October 3, 2005

Krispy Kreme Hit with Company Stock Suit

March 10, 2005 (PLANSPONSOR.com) - Krispy Kreme top executives kept mum about the doughnut company's fiscal mismanagement - a fact that caused the company's workers to lose million of dollars from their retirement accounts, a new lawsuit alleges.

Reported by

Fred Schneyer

A Greensboro News & Record news report said that the lawsuit was filed in US District Court in Greensboro for all employees who have owned stock in the company’s retirement or stock ownership plans since January 1, 2003.

According to the suit filed by Seattle law firm Keller Rohrback, Krispy Kreme employees didn’t know that buying company stock was a risky investment that was likely to face a precipitous drop in value, so they bought shares for their K plans or were paid stock as part of bonus programs.

The lawsuit alleged that:

The information executives withheld included details of mismanagement and “highly risky and inappropriate accounting practices” that artificially inflated the value of Krispy Kreme stock. Such practices included shipping double the amount of doughnuts actually ordered by customers to produce higher sales figures and meet Wall Street earnings expectations, knowing the over shipments would be returned later.
The executives’ actions caused the plans to have “enormous losses” because they continued to hold Krispy Kreme stock that was suddenly losing value

The suit said that plaintiff Paul Smith, an assistant supervisor with the company, participates in the Krispy Kreme Doughnut Corp. Retirement Savings Plan, a 401(k), and the Krispy Kreme Profit Sharing Stock Ownership Plan. The defendants include former Chief Executive Officer Scott Livengood, former board member Jack McAleer, former Chief Financial Officer Randy Casstevens and current Chief Financial Officer Michael Phalen.

Plan Losses

Under the 401(k) plan, employees were allowed to contribute up to 15% of their gross income, a portion of which would be matched by Krispy Kreme contributions. Company stock was one of the options employees could choose for investment.

The lawsuit says that as of December 31, 2002, just before the company’s sales began to fall, the plan had 3,300 participants and assets of more than $21 million, including more than $3.9 million in company stock. That stock would be worth about $866,000, according to the news report.

Meanwhile, under the company’s profit-sharing plan, Krispy Kreme makes contributions to eligible employees. At the end of 2002, the lawsuit says, the plan had 2,500 participants and net assets of more than $19.3 million. More than $18.8 million was in company stock. Today, that stock would be worth about $4.2 million.

According to the lawsuit, the company’s sales began slowing by early 2003. Krispy Kreme blamed the low-carbohydrate diet fad. On May 7, the company said slowing sales were due to market saturation and that it would not be able to deliver on high earnings predictions.The lawsuit says that as a result of the company’s announcement, investors on the open market sold 20.5 million shares of the stock in one day, causing a decline of more than $9 a share.

The lawsuit is the latest in a string of legal and financial troubles for the Winston-Salem, North Carolina company. The company is facing a criminal inquiry by a US attorney in New York and an investigation by the Securities and Exchange Commission (SEC) into financial irregularities. The company also is defending itself against investor lawsuits.

Keller Rohrback announced last summer that it would investigate potential improprieties in Krispy Kreme’s retirement plans. (See Krispy Kreme Being Investigated For Company Stock Problems ).