Risk Factor Gone Viral

The Internet was recently ablaze with rumors that the Chipotle chain of fast-but-fresh Mexican food had announced an imminent avocado shortage that would lead it to stop selling guacamole.  An inability to obtain guacamole would be quite upsetting to me personally (first world problems), but it ultimately turned out that such fears were overblown.

The source of the rumor was, of all things, a risk factor buried in Chipotle’s 10-K, which stated, in part:

Increasing weather volatility or other long-term changes in global weather patterns, including any changes associated with global climate change, could have a significant impact on the price or availability of some of our ingredients. Any increase in the prices of the ingredients most critical to our menu, such as chicken, beef, cheese, avocados, beans, rice, tomatoes and pork, would adversely affect our operating results. Alternatively, in the event of cost increases with respect to one or more of our raw ingredients, we may choose to temporarily suspend serving menu items, such as guacamole or one or more of our salsas, rather than paying the increased cost for the ingredients.

chipotleAfter the rumor spread, Chipotle’s PR representative downplayed the possibility laid out in the risk factor, saying “We don’t foresee that happening now…The sky isn’t falling.” This of course begs the question why the statement was there in the first place.

Ultimately, this episode demonstrates a big problem with securities disclosure:  there is no real disincentive to just throwing into your filing whatever obscure risk that can be dreamed up by a junior attorney or found in a competitor’s filing.  If you challenge the necessity of including the risk, the response you get is that including it can only protect the company.  The SEC does note in Item 503 of

Regulation S-K that you should only list the “most significant” risks and should not list risks that could apply to any issuer or any offering.  However, if you are over-inclusive, the only likely consequence would be the SEC asking you to remove the disclosure during a comment process.  Shareholder suits aren’t lost because the risk factor section of company filings included obscure risks.