Item 3. Legal Proceedings
ITEM 3. LEGAL PROCEEDINGS.
A labor and employment lawsuit was filed by a former employee against FUSO, alleging it failed to provide proper meal and rest breaks, as well as other related violations. FUSO believes there is no merit to the case and vigorously defending against all the allegations. Therefore, the Company did not accrue any loss contingency for these matters on its consolidated financial statements as of December 31, 2020. The Court has entered orders dismissing the claim in 2021. See Note 19 - Subsequent Events, for additional information concerning this lawsuit.
On March 29, 2020, plaintiff Jesus Mendoza (“Mendoza”) filed a putative shareholder securities class action lawsuit (the Class Action Lawsuit”) in the United States District Court for the Central District of California against the Company and certain of its present and former officers (collectively, the “Class Action Defendants”) for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 styled Mendoza v. HF Foods Group Inc., et al., Civil Action No. 2:20-CV-2929-ODW-JPR (C.D. Cal.).
On April 30, 2020, plaintiff Walter Ponce-Sanchez (“Ponce-Sanchez”) filed a substantially similar putative shareholder securities class action lawsuit (the “Ponce-Sanchez Lawsuit”) in the United States District Court for the Central District of California against the same defendants named in the Class Action Lawsuit (collectively, the “Ponce-Sanchez Defendants” and with the Class Action Defendants, the “Defendants”) styled Ponce-Sanchez v. HF Foods Group Inc., et al. , Civil Action No. 2:20-CV-3967-ODW-JPR (C.D. Cal.). The Ponce-Sanchez Lawsuit has now been consolidated with the Class Action Lawsuit and both cases will proceed under the Class Action Lawsuit docket. The complaints both allege that the Defendants made
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materially false and or misleading statements that caused losses to investors. Additionally, the complaints both allege that the Defendants failed to disclose in public statements that the Company engaged in certain related party transactions, that insiders and related parties were enriching themselves by misusing shareholder funds, and that the Company masked the true number of free-floating shares. Neither complaint quantifies any alleged damages, but, in addition to attorneys’ fees and costs, they seek to recover damages on behalf of themselves and other persons who purchased or otherwise acquired Company stock during the putative class period from August 23, 2018 through March 23, 2020 at allegedly inflated prices and purportedly suffered financial harm as a result. On October 13, 2020, the Court appointed Yun F. Yee as lead plaintiff and approved Mr. Yee’s counsel as lead counsel in the consolidated Class Action Lawsuit. On October 28, 2020, the Court entered a scheduling order setting December 4, 2020 as the deadline for lead plaintiff to file the Consolidated Amended Complaint and setting a schedule for Defendants' anticipated motion to dismiss. Thereafter, an amended complaint was filed, which purports to expand the putative class period from August 23, 2018 to November 9, 2020. The Defendants filed their motion to dismiss the amended complaint on January 19, 2021, which is pending. The Class Action Lawsuit does not quantify any alleged damages. The Company intends to defend the consolidated Class Action Lawsuit vigorously.
On June 15, 2020, Mendoza filed a shareholder derivative lawsuit on behalf of the Company as a nominal defendant (the “Mendoza Derivative Lawsuit”) in the United States District Court for the Central District of California against certain of the Company’s present and former directors and officers (collectively, the “Mendoza Derivative Defendants”) styled Mendoza v. Zhou Min Ni, et al., Civil Action No. 2:20-CV-5300-ODW-JPR (C.D. Cal.). The complaint in the Mendoza Derivative Lawsuit is based largely on the same allegations as set forth in the Class Action Lawsuit discussed above and alleges violations of Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934, breach of fiduciary duties , unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. The Mendoza Derivative Lawsuit does not quantify any alleged damages, but, in addition to attorneys’ fees and costs, Mendoza seeks to recover damages on behalf of the Company for purported financial harm and to have the court order changes in the Company’s corporate governance. The Mendoza Derivative Defendants and the Company intend to defend the Mendoza Derivative Lawsuit vigorously. On July 8, 2020, the Court ordered that all proceedings in the Mendoza Derivative Lawsuit be stayed until such time as the Court has finally resolved the Defendants’ motion to dismiss the Class Action Lawsuit.
At this stage, the Company is unable to determine whether a future loss will be incurred due to the consolidated Class Action Lawsuit or the Mendoza Derivative Lawsuit, or estimate a range of loss, if any; accordingly, no amounts have been accrued in the Company’s financial statements as of December 31, 2020.
On August 21, 2020, plaintiff Jim Bishop ("Bishop") filed a putative shareholder derivative lawsuit (the “Bishop Lawsuit”) in the United States District Court for the District of Delaware against certain of the Company’s present and former directors and officers, as well as the Company (collectively, the “Bishop Defendants”) styled Jim Bishop v. Zhou Min Ni, et al. , Civil Action No. 1:20-cv-01103-RGA (D. Del.). The Bishop Lawsuit complaint alleges claims that are virtually the same as those alleged in the Mendoza Derivative Lawsuit. The Bishop Lawsuit does not quantify any alleged damages. But in addition to attorneys’ fees and costs, Bishop seeks to recover damages on behalf of the Company for purported financial harm and to have the Court order changes to the Company’s corporate governance.
The Bishop Defendants and the Company intend to defend vigorously the allegations in the Bishop Lawsuit, assuming it proceeds. On October 20, 2020, Bishop and the Bishop Defendants filed a Joint Stipulation to Stay Litigation with the Court. On November 19, 2020, the Bishop Lawsuit was transferred to the United Stated District Court for the Central District of California, as case number 2:20-CV-10657-ODW-JPR (C.D.Cal.). Motions to consolidate the Mendoza Derivative Lawsuit and the Bishop Lawsuit, and to designate a lead plaintiff and lead plaintiff’s counsel in the consolidated cases are pending in both cases . The Court further ordered that the Bishop Defendants do not need to respond to the complaint until the consolidation and appointment of lead plaintiff/lead plaintiff's counsel are resolved. The Bishop Defendants will seek to have the Bishop Lawsuit stayed until such time as the Court has finally resolved the Mendoza Defendants’ anticipated motion to dismiss the claims in the consolidated Class Action Lawsuit. This case remains in early procedural stage. At this stage, the Company is unable to determine whether a future loss will be incurred due to the Bishop Lawsuit or estimate a range of loss, if any; accordingly, no amounts have been accrued in the Company’s consolidated financial statements as of December 31, 2020.
The United States Securities and Exchange Commission (“SEC”) has initiated a formal, non-public investigation of the Company, and the SEC issued a subpoena for a variety of documents and other information. The subpoena relates to a range of matters including, but not limited to, the matters identified in the Class Action Lawsuit, the Mendoza Derivative Lawsuit, and the Bishop Lawsuit. The Company is cooperating with the SEC in its investigation.
Prior to receiving the document request from the SEC, the Company's board of directors appointed a special committee of independent directors to investigate the matters identified in the Class Action Lawsuit and the Mendoza Derivative Lawsuit.
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The SEC and independent committee investigations are ongoing.
On October 14, 2020, a labor and employment lawsuit was filed by a former employee against Happy FM Group, Inc., alleging it engaged in unlawful discrimination and wrongfully discharged the employee, as well as other related violations. We believe there is no merit to the case and are vigorously defending against all the allegations. Therefore, the Company did not accrue any loss contingency for these matters on its consolidated financial statements as of December 31, 2020.
On October 19, 2020, a purported class action labor and employment lawsuit was filed by a former employee against Happy FM Group, Inc., alleging it failed to provide minimum wages and overtime wages, proper meal and rest breaks, as well as other related violations. We believe there is no merit to the case and are vigorously defending against all the allegations. Therefore, the Company did not accrue any loss contingency for these matters on its consolidated financial statements as of December 31, 2020.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II.