Robbins Geller Defeats Defendants’ Motion to Dismiss in El Pollo Loco Securities Class Action
On August 4, 2017, the Honorable David O. Carter of the United States District Court for the Central District of California denied defendants’ motion to dismiss in Turocy v. El Pollo Loco Holdings, Inc., et al. El Pollo Loco is a “quick service restaurant plus” (“QSR+”) restaurant chain—a term adopted by El Pollo Loco to suggest that its restaurants have both “quick service” and “fast casual” elements. As of December 31, 2014, the company’s restaurant system had 415 restaurants, over 80% of which were located in California.
The case alleges that during the class period, defendants made false and misleading statements and/or failed to disclose adverse information about El Pollo Loco’s business and prospects, including that traffic at El Pollo Loco stores had declined substantially due to the removal of $5 value items from the restaurants’ menu boards. Given El Pollo Loco’s self-appointed niche as a QSR+ chain, plaintiffs allege that “menu pricing was a crucial component of El Pollo Loco’s QSR Plus positioning.” As a result of the menu change, comparable store sales were not growing at 3% – much less the 3% to 5% the defendants had led investors to believe they would grow in the second quarter of 2015. As a result of these false and misleading statements and/or omissions, El Pollo Loco securities traded at artificially inflated prices during the class period, with the company’s stock price reaching a high of $25.37 per share, allowing the company’s controlling shareholders, CEO and others to sell tens of millions of dollars’ worth of their personally held El Pollo Loco shares at artificially inflated prices.
In denying the motion to dismiss, the court found that “whether or not the [c]ompany maintained its self-appointed QSR+ status is material. The [c]ompany clearly believed that the QSR+ label was central to its identity, and promoted itself as a QSR+ brand at every available opportunity.” The court further held that plaintiffs “have sufficiently [pled] facts demonstrating the existence of false and misleading statements, and giving rise to a strong inference of scienter.”
Turocy v. El Pollo Loco Holdings, Inc., et al., Case No. 8:15-cv-01343-DOC-KES, Order Denying Motion to Dismiss (C.D. Cal. Aug. 4, 2017).