Archer Daniels Midland and top executives concealed “adverse facts” related to its nutrition business, instead painting a misleading positive picture of the segment as a profit-driver “with the ability to capitalize on healthier eating trends and rising consumer demand for natural ingredients and flavoring,” alleges a lawsuit filed against the company Wednesday.
The proposed class action complaint is seeking unspecified damages for the agribusiness’s investors between April 30, 2020 through Jan. 22.
The Chicago-based company’s shares plunged 24% Monday after the company announced Sunday that it was placing CFO Vikram Luthar on administrative leave and that there was an ongoing investigation by its audit committee and outside counsel into accounting practices related to its nutrition group and its intersegment transactions. The company said it was cooperating with the Securities and Exchange Commission, which had issued a voluntary document request that sparked the probe.
The complaint, which was brought by a single investor named Raymond Chow, alleges that ADM, along with CEO Juan Luciano, Luthar, and ex-CFO Ray Young, gave investors and the public an inaccurate picture of its nutrition segment undergoing “impressive growth” from 2020 through 2022, and then downplayed the segment’s decline in 2023. Young served as the company’s CFO from December 2010 to April 2022, when he took the role of vice chairman before retiring at the end of that year.
“As ADM was aggressively acquiring companies to expand its capabilities in Nutrition, investors were under the impression that the segment was growing rapidly,” the complaint filed in U.S. District Court’s Northern District of Illinois states. “In reality, Defendant’s accounting practices for the segment misrepresented its true financial results and prospects, including its operating profits.”
Chow’s filing asserts that the executives were incentivized by stock awards directly tied to the performance of the nutrition part of the business. “As a result, ADM’s business and prospects were much worse than represented by Defendants, causing the price of ADM common stock to trade at artificially inflated levels during the class period.”
The lawsuit also focused on the larger role that the company was positioning the nutrition segment to play in ADM’s future.
“Over the past decade, ADM has spent billions of dollars trying to expand its Nutrition business to protect against commodity price volatility in its legacy agricultural commodities trading business,” the suit states, noting that the strategic nutrition segment included plant-based proteins, natural flavors, and other specialty food and feed ingredients.
The suit asserts that ADM’s string of investments in animal feed and pet nutrition did not meet expectations, and the segment was under increased pressure, in part from weak demand for meat alternatives as well as downtime at a large soy processing facility.
ADM has been reshaping itself through acquisitions and investments to expand its higher profit margin human and animal food products and ingredients business, including its $3 billion purchase of the Swiss-German natural ingredient company Wild Flavors in 2014. Since then, the company has been investing and making acquisitions further downstream as the crop merchandising business has faced declining margins, CFO Dive previously reported.
In the wake of the turmoil at ADM earlier this week, analysts at the equity research arm of the financial firm Robert W. Baird lowered their rating on the stock to neutral and Jefferies analysts lowered the price target for ADM shares to $70, with an upside scenario of $88 and a downside scenario of $29. ADM shares ticked up 1.3% Friday to close at $52.05, though that’s still well below the $68.19 they closed at last Friday.
“While we understand that the Nutrition segment is currently the focus of the investigation, there is potential for the scope to widen to include other segments,” Jefferies analysts led by Dushyant Ailani wrote in a Monday report. “Per discussion with IR, given transfer pricing is at issue, we expect any restatements to be a headwind for the Nutrition segment and a tailwind for AS&O for example.”
Seth Goldstein, an analyst at Morningstar, said in an interview earlier this week that the company putting its CFO on leave signaled to him the matter was a “large” issue, which might lead to substantive restatement.
Still, the extent of the beating that ADM’s shares took in the wake of the announcements was more dramatic than Goldstein would have expected. He chalked it up to investors revising down their valuations and modeling it more as a commodity company, a sector that trades at lower multiples.
“It seemed that the market was rerating ADM as just another commodity trader rather than giving them credit for a growing nutrition business that would tend to see a higher multiple,” Goldstein said.
An ADM spokesperson declined to comment and attorneys for Raymond Chow did not respond to requests for comment.
