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Chipotle Investors Seek OK For Deal Over Illegal Hirings

Chipotle Mexican Grill Inc. investors urged a Colorado federal judge Thursday to sign off on a deal with company executives that would significantly enhance the company's internal oversight of its hiring policies in the wake of several federal investigations over the hiring of undocumented workers.

Plaintiffs in three consolidated derivative class actions brought on behalf of Chipotle urged U.S. District Judge William J. Martinez to issue final approval for a settlement that requires the company to adopt significant corporate governance changes designed to beef up internal oversight of its hiring practices, which have been the target of numerous federal probes in recent years.

“The proposed settlement results in significant benefits for Chipotle,” the motion said. “Plaintiff[s] respectfully submit that the settlement is fair, reasonable, and adequate and should be approved by the court.”

The investors' allegations stem from a 2010 federal immigration audit that showed some of Chipotle's Minnesota employees were illegal immigrants. The audit ultimately led to an investigation by U.S. Immigration and Customs Enforcement.

In late 2010, Chipotle fired 450 workers in Minnesota who were unable to provide valid work eligibility documents after the company learned of their undocumented status. The following year, ICE conducted similar audits of the company's Virginia and District of Columbia restaurants, and as a result Chipotle terminated an additional 50 employees in the the nation's capital.

Denver-based Chipotle told investors during a conference call in April 2011 that federal prosecutors from the criminal division of the U.S. Attorney's Office in Washington had joined ICE's investigation.

Additionally, the U.S. Securities and Exchange Commission also opened its own civil probe a year later into Chipotle's compliance with employee work authorization verification requirements and its related disclosures and statements. In 2012, prosecutors also advised the company that its investigation had widened to include a parallel criminal and civil investigation of Chipotle's compliance with federal securities laws.

In response to the numerous investigations, the investors launched several lawsuits beginning in July 2012 accusing Chipotle's executives of breaching their fiduciary duties to the company by failing to comply with employee work authorization requirements, according to court documents.

Later cases lodged derivative claims based on purportedly false and misleading statements about the demand for Chipotle’s products and the strength of its business that exposed the company to violations of the federal securities laws, according to court documents.

Among the reforms outlined in the settlement, Chipotle will furnish frequent reports to the company's audit committee, which is responsible for overseeing the company's compliance with hiring requirements.

The reports will be provided at least twice per year, once more than was previously required. The committee will also be granted greater leeway in determining how to address any hiring compliance issues detailed in the reports — a measure that beefs up the committee's oversight role, according to the settlement.

“The required reports as well as the expanded scope of the audit committee’s authority will place the committee and board in a substantially better position to assess the status of Chipotle’s hiring and employment compliance,” the motion said. “These reforms specifically address [the investors'] claims and are designed to prevent the type of harm alleged in the complaint.”

The investors noted that Chipotle has already made numerous improvements since the onset of the various investigations, including the addition of two independent directors to the board, an increase from six to 14 in the number of members on its compliance oversight team and improved employee training on the proper completion of employment verification documents, according to the settlement.

If approved, the agreement also calls for the investors' counsel to receive $525,000 in attorneys' fees.

Since Judge Martinez preliminarily approved the deal in April, none of the plaintiffs have objected to the settlement, the investors said.

The suit named eight individual Chipotle executives, including chairman and co-CEO Steven Ells, co-CEO Montgomery Moran and CFO John Hartung.

A representative for Chipotle said that the proposed settlement was mentioned in each of the company's last two quarterly filings with the SEC.

"The company has agreed to a proposed settlement of the consolidated cases the terms of which are subject to court approval," the filings said. "In the event the settlement is not approved, the company intends to continue to defend the cases vigorously, but it would not be possible at this time to reasonably estimate the outcome of or any potential liability from these cases."

Attorneys for the investors and for the executives were not immediately available for comment Friday.

The investors are represented by Gina M. Serra and Seth D. Rigrodsky of Rigrodsky & Long PA, Joseph E. Levi and Michael Rosner of Levi & Korsinsky LLP and Charles W. Lilley and Karen Cody-Hopkins of Charles Lilley & Associates PC.

The defendants are represented by Scott Leonard Evans of Messner & Reeves LLC and Andrew B. Clubok, Matthew Solum and Steven J. Menashi of Kirkland & Ellis LLP.

The lead case is Saleem Mohammed et al. v. M. Steven Ells et al., case number 1:12-cv-01831, in the U.S. District Court for the District of Colorado.