Lawsuit: Whole Foods Overpricing Led to Securities Fraud

By Jonathan Stempel

A Whole Foods Market shareholder has accused the grocer in a lawsuit of committing securities fraud by concealing its overcharging of New York City customers, leading to bad publicity that hurt sales and drove its share price down.

In a complaint filed Thursday in federal court in Austin, Texas, the plaintiff Yochanan Markman said Whole Foods knew or recklessly disregarded that it routinely overstated the weight of pre-packaged products, causing the overcharging.

The complaint said that made the company's public statements about its operations and prospects false and misleading.

Whole Foods specializes in natural and organic goods. It has been sued several times by customers over the overcharges, which were revealed June 24, but not by shareholders.

%VIRTUAL-pullquote-We have upheld our responsibility to our stakeholders, and are confident that this complaint is baseless and without merit.%Whole Foods spokesman Michael Silverman said the grocer is committed to providing "transparent, accurate pricing" to customers.

"We have upheld our responsibility to our stakeholders, and are confident that this complaint is baseless and without merit," he added.

Shares of Whole Foods fell 11.6 percent on July 30, causing a $1.7 billion drop in market value, a day after the Austin-based company admitted that negative publicity about the overcharges had hurt its quarterly results.

Whole Foods said same-store sales growth rose 2.6 percent in the first 10 weeks of its fiscal third quarter, but less than half a percent after the overcharges were revealed.

Co-chief executive Walter Robb said in a July 29 conference call "there is no magic bullet for restoring whatever trust was lost," and that it was "just a matter of sawing wood and doing the good work day in and day out."

The New York City Department of Consumer Affairs said the overcharges ranged from 80 cents for pecan panko to $14.84 for coconut shrimp.

Robb and Co-chief executive John Mackey later apologized, calling the mistakes inadvertent. Both are defendants in the lawsuit, as is Chief Financial Officer Glenda Flanagan.

Markman seeks class action status for shareholders from Aug. 9, 2013 to July 30, 2015.

Shares of Whole Foods (WFM) were down about 1 percent Friday at $34.53.