Peapod Slapped with Class Action Suit

Online grocer Peapod, Inc. (Nasdaq: PPOD), which recently lost its CEO and $120 million (US$) in funding, was slammed with a class action lawsuit Monday over claims that misleading statements artificially inflated the company’s stock price.

The suit — filed in federal court in Chicago, Illinois by the New York law firms Abbey, Gardy & Squitieri and Faruqi & Faruqi — alleges that the Internet grocer violated federal securities regulations by issuing “a series of materially false and misleading statements in press releases and SEC filings concerning Peapod’s cash funding needs.”

Firm Admits Problems in SEC Filings

While the suit claims that Peapod made false and misleading statements during the “class period” of November 8, 1999 to March 16, 2000, Peapod admitted financial problems in a November 4, 1999 quarterly report filed with the SEC and made publicly available on EDGAR.

In that filing Peapod said, “The Company anticipates that existing cash and marketable securities may be insufficient to fund the Company’s operations and capital requirements for the next year and is currently evaluating financing opportunities.”

The filing also did not gloss over the company’s possible inability to secure additional funding. It said, “There can be no assurance that capital will be available to the Company on favorable terms, or at all.”

Plummeting Stock Prices

Peapod’s blue period began last week, when CEO Bill Malloy announced that he would leave the company for health reasons. The news of Malloy’s resignation led four investors to pull $120 million in promised funding off the table.

The company said in a statement last week that it has advised its financial advisors, Wasserstein Perrella & Co., to look for alternative financing or the possible sale of the company.

Peapod warned investors that there is no guarantee its resources will be sufficient to continue operations during this process. The company said that it only has approximately $3 million in cash on hand.

The uncertainty over Peapod’s future has led investors to drop Peapod like the proverbial hot potato. The stock has plummeted from about $9 per share to $3 per share in 10 days.

What’s more, several analysts downgraded the company from a buy rating to a neutral recommendation.

The Future

Peapod, which was a pioneer in the online grocery delivery business, is now fighting for survival. While the class action lawsuit will certainly be a nuisance, it is far from the firm’s most pressing problem, which is the combination of replacing its CEO and obtaining adequate financing to continue operations.

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