The U.S. Securities and Exchange Commission has subpoenaed Chipotle Mexican Grill in an investigation of the fast-casual chain’s immigration compliance, adding another layer to ongoing probes.
In filings late Friday, Denver-based Chipotle said it received a subpoena from the SEC on May 17 requesting information regarding the chain’s compliance with employee work authorization requirements, public statements and other disclosures, and related information. The company said it will cooperate fully with the SEC investigation.
The move follows Chipotle’s disclosure last year that Immigration and Customs Enforcement, or ICE, as well as the U.S. Attorney for the District of Columbia, are looking into the company’s compliance with immigration laws.
Attorney Marcus Williams of Davis Wright Tremaine in Portland, Ore., said that while it’s unusual for the SEC to get involved in immigration matters, the concern is likely whether Chipotle has adequately disclosed risks associated with the ICE and U.S. Attorney’s Office probes to investors.
“Once multiple agencies start getting involved, other agencies that have jurisdiction over a company will start asking questions, and, from the SEC’s perspective, those questions will be focused on the protection of investors in the company’s securities,” he said.
Williams said he did not know of another case where the SEC had taken this kind of action, but he noted that the agency often conducts informal inquiries, for which no public announcement is required. “As a result, it’s quite possible that the SEC has reviewed similar events and circumstances with other companies and that those investigations have remained confidential,” he noted.
Analyst Stephen Anderson of Miller Tabak & Co. LLC, wrote in a report Monday that the SEC investigation was likely to have “minimal headline risk” for Chipotle, unless it is found that the chain performed inadequate screening procedures in additional markets.
“We think Chipotle is likely to accrue modest one-time charges on the SG&A line in 2Q12 (and possibly 3Q12) from incremental legal fees on the company’s GAAP earnings, and we cannot rule out the possibility of a small fine or out-of-court settlement,” Anderson wrote.
If Chipotle were found out of compliance in other markets, however, he wrote, “it would result in not only increased legal fees, but also a more significant rise in labor costs (e.g. recruiting and training replacement workers).”
The ICE and U.S. Attorney’s office investigations are looking into hiring practices at Chipotle locations in Minnesota, Washington, D.C., and Virginia. Company officials have spoken about the ongoing investigation in earnings reports and calls to analysts over the past year.
The company has also attempted to strengthen hiring procedures for verifying employment, including using the electronic E-Verify system, which, Anderson suggested, might clear Chipotle of wrongdoing for this type of offense in the future. However, he added, “We acknowledge E-Verify is not a perfect system and thus still may leave the company open to operating risk."
He pointed to an incident involving Pei Wei, a brand owned by P.F. Chang’s China Bistro Inc., which used the E-Verify system. Last year eight Pei Wei locations were closed following the arrest of workers on identity theft charges.
Though the company lost about $1.3 million in operating profit from the closed locations, management was cleared of any wrongdoing and there were no additional legal or other fees.
In its first quarter ended March 31, Chipotle had a total of 1,262 locations in the U.S., Canada and Europe.