Kevin La Croix via LexBlog
The onset of COVID-related securities class action litigation since the initial outbreak of the coronavirus in the U.S. in March 2020 is something that I have fully documented on this site (most recently, for example, here). Even though the coronavirus-outbreak peaked long ago and even though the relevant U.S. agencies officially declared an end to the pandemic health emergency on May 11, 2023, the pandemic’s impact on the U.S. economy continues to reverberate. And the economic disruption the pandemic caused among other things continues to result in securities class action lawsuit filings, even at this late date after the pandemic ended. The latest example of this phenomenon is the lawsuit filed this week against alcoholic beverage company MGP Ingredients, whose fortunes soared during the lockdown but tailed off more recently as the company acknowledged the impact on its sales from pandemic-induced overstocking. A copy of the December 16, 2024, complaint against the company can be found here.
Background
MGP Ingredients, Inc, is a Kansas-based company that manufactures, distills, and sells alcoholic beverages. As the subsequently filed complaint alleges, “the COVID-19 pandemic drastically changed the alcohol consumption habits of consumers around the globe.” Studies, the complaint alleges, show that 25% of people consumed more alcohol after the pandemic, and that sales of hard liquors (of the type that MGPI sells) accounted for most of the increase.
MGPI benefitted from this increase in alcohol consumption, as a result of which it ramped up its production while reporting favorable results. However, the complaint alleges, the demand for alcoholic products “began to taper” in 2023, which resulted in an industry-wide “destocking.” However, MGPI reassured its investors that it was “ahead of the game,” claiming to have “sold much of, or ‘cycled through,’ its inventory.” MGPI also claimed that its exposure to overstocking was smaller than its peers’ exposure, and therefore that “destocking” was not a “core issue,” because the company had properly monitored and managed the situation.
In February 2024, while providing its guidance for fiscal 2024, the company acknowledged that destocking continued to be a problem for the wholesale alcoholic beverage industry, but reiterated that it had been working with its distributors to manage inventory, and also asserted that demand for its products remained “healthy,” as a result of which the company remained “well-positioned” and the company was “confident in the long-term sustainability of its business model.” The complaint alleges that the company “continued to downplay the situation and continued promising investors that high inventory levels were of minimal concern.”
On October 17, 2024, the company admitted that soft demand and high inventories were undermining sales. Two weeks later, on October 31, 2024, the company disclosed that excess inventories would have an “even greater impact” on 2025 sales than previously acknowledged, forcing the company to scale back certain operation to save money. The complaint alleges that the company’s stock price dropped almost 50% in the following two trading days.
The Lawsuit
On December 16, 2024, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against MGPI and certain of its directors and officers. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between May 4, 2023, and October 30, 2024.
The complaint alleges that during the class period, the defendants “repeatedly touted a strong demand and ‘normal’ inventory levels in brown goods (i.e., American whiskies and tequila), when in fact there had been a slowdown in consumption and oversupply of their products. Worse, Defendants had assured investors that they were positioned differently than their competitors, and that this was a non-issue, because the Company had already taken steps to mitigate the risk, when in fact it had not.” The complaint alleges further that “as a result of Defendants’ wrongful acts and omissions, and the sharp decline in the market value of the company’s common stock,” the plaintiff and the rest of the class had “suffered significant losses and damages.”
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.
Discussion
Even though we are now well into the fifth year since the initial coronavirus outbreak in the U.S. in March 2020, the coronavirus-related securities class action lawsuits continue to be filed. According to the Stanford Law School Securities Class Action Litigation Clearinghouse website (here), there have been a total of 16 COVID-related securities suits filed in 2024 (inclusive of this latest lawsuit against MGPI), representing about 7% of all securities class action litigation filings in 2024. According to the Stanford Clearinghouse website, there have been a total of 81 COVID-related securities suit filings (inclusive of the new MGPI lawsuit).
It is interesting not only that these suits continue to be filed but also that their influx has continued pretty steadily. Thus, of the 16 COVID-related securities suits filed in 2024, seven have been filed in the second half of the year. If there is any drop off in activity, it has been very slight, at best.
It is interesting to note the economic and financial impact the pandemic had on this company. There were of course both winners and losers from the pandemic, and like many companies this company’s fortunes rose during the lockdown. But also like many other cases, as the circumstances evolved, its fortunes changed as well. It is interesting to note, at least according to the plaintiff’s allegations in the complaint, the extent to which long-term effects of the pandemic lockdown disrupted corporate operations and financial results. The pandemic had a huge, long-term impact, economy-wide and at the individual company level. The pandemic’s disruptive effect not only has continuing reverberations, but it is also contributing to continuing securities class action lawsuit filing activity.
As we approach the end of 2024, it is interesting to consider whether or not the pandemic-related securities litigation activity will continue next year. It does seem that at some point, the pandemic and its effects will be so far in the past that they will not longer figure in companies’ reported financial results. For now at least, it seems that the pandemic’s disruptive impact continues to weigh on company’s financial results. It remains entirely possible that we will continue to see pandemic-related securities suits filed next year.
