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Kraft Heinz faces a new lawsuit questioning why controlling shareholder 3G Capital transferred $1.23 billion of stock six months before the processed foods company stunned investors with a huge writedown and other bad news.
The proposed class-action lawsuit made public on Wednesday is among the first accusing Kraft Heinz, whose other controlling shareholder is Warren Buffett's Berkshire Hathaway, of defrauding shareholders about its business prospects.
Kraft Heinz's share price sank 27.5 percent on Feb. 22 after the company took a $15.4 billion writedown on its Kraft and Oscar Mayer brands and Canadian assets, as consumers shifted to healthier and fresher alternatives or private-label products.
The company, headquartered in both Chicago and Pittsburgh, also slashed its dividend and announced a U.S. Securities and Exchange Commission accounting probe. Kraft Heinz's stock plunge erased more than $16 billion of market value.
In his damages complaint, shareholder Steve Walling accused Kraft Heinz, Chief Executive Bernardo Hees, 3G and others of concealing damage to Kraft Heinz's iconic brands and internal controls, including from 3G's signature belt-tightening.
Walling also said the defendants had been "motivated" to engage in improper conduct to allow 3G to "sell" $1.23 billion of stock last August at artificially inflated prices. The complaint was filed in the federal court in Pittsburgh.
In an Aug. 7 regulatory filing, 3G said an affiliate had transferred 20.63 million Kraft Heinz shares worth $59.83 each to an entity called HK3 18 LP.
The Brazilian private equity firm said none of the shares sold related to 3G partners' original Kraft Heinz stake.
Hees told Reuters in a Sept. 7, 2018 interview that the transfer was made on behalf of institutional investors that had a "window to liquidity" and were exiting a 3G fund.
"It's not 3G, as we know 3G," he said. "We are very optimistic about the profile of what the investment can be for the long run."
Kraft Heinz and 3G did not immediately respond on Thursday to requests for comment. Robbins Geller Rudman & Dowd, a law firm representing Walling, did not respond to similar requests.
Berkshire and Buffett are not defendants. Buffett told CNBC on Monday the market reacted "probably quite properly" to Kraft Heinz's news.
Shareholder lawsuits are common after unexpected bad news hurts a company's stock price. They are often combined into a single lawsuit near where the company is based.
The case is Walling v Kraft Heinz Co et al, U.S. District Court, Western District of Pennsylvania, No. 19-00214.