Krispy Kreme faces criminal investigation

CHARLOTTE, N.C. — Shares of Krispy Kreme Doughnuts Inc. dropped nearly 7 percent Thursday after the company said it is cooperating with an investigation by federal prosecutors who want to interview current and former executives.

The Winston-Salem-based doughnut chain said it believes the probe by the U.S. attorney for the Southern District of New York is related to matters already under formal investigation by the Securities and Exchange Commission.

While Thursday’s news involved no new accusations against the company, investors continued their yearlong flight from once-hot Krispy Kreme shares.

The company’s stock fell 39 cents, or 6.8 percent, to close at $5.36 in Thursday trading on the New York Stock Exchange, below its previous 52-week low of $5.50. Less than two years ago, the stock was trading at nearly $50.

Carl Sibilski, an analyst at Chicago-based Morningstar, said the news of yet another investigation was the last thing investors want to hear about Krispy Kreme.

“It doesn’t appear to me the New York investigation is focusing on anything we don’t already know about,” he said, “but it heightens concerns and raises its visibility if more entities are investigating the company.”

Krispy Kreme is under formal SEC investigation of its franchise buybacks and earnings outlooks and is facing shareholder lawsuits. The SEC investigation was announced in October.

Allegations included in the lawsuits and being looked into by the SEC include that Krispy Kreme improperly recorded payments to former franchise owners in Michigan and northern California as compensation, rather than as a purchase price in buying back their franchises.

Shareholders have also alleged that executives intentionally padded sales figures to hide the fact that doughnut sales began declining in early 2003.

“From my perspective, another investigation gives more credibility to these allegations,” Sibilski said.

Krispy Kreme did not elaborate on a short news release it issued to disclose the new investigation.

“We will cooperate fully,” company spokeswoman Amy Hughes said.

Megan Gaffney, a spokeswoman for the U.S. attorney’s office in New York, said she could not provide details on the investigation.