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Item 3. Legal Proceedings

2023-01-31 compared with 2021-03-16 · 49 added, 63 removed, 3 unchanged (97% of the section changed)

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.

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.

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.

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.

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.

From time to time, we are a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business.

When we become aware of a claim or potential claim, we assess the likelihood of any loss or exposure.

In accordance with authoritative guidance, we record loss contingencies in our financial statements only for matters in which losses are probable and can be reasonably estimated.

Where a range of loss can be reasonably estimated with no best estimate in the range, we record the minimum estimated liability.

If the loss is not probable or the amount of the loss cannot be reasonably estimated, we disclose the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved is material.

We continuously assess the potential liability related to our pending litigation and revise its estimates when additional information becomes available.

Adverse outcomes in some or all of these matters may result in significant monetary damages or injunctive relief against us that could adversely affect our ability to conduct our business.

There also exists the possibility of a material adverse effect on our financial statements for the period in which the effect of an unfavorable outcome becomes probable and reasonably estimable.

As previously disclosed, in March 2020, an analyst report suggested certain improprieties in the Company’s operations.

These allegations became the subject of two putative stockholder class actions filed on or after March 29, 2020 in the United States District Court for the Central District of California generally alleging the Company and certain of its current and former directors and officers violated the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making allegedly false and misleading statements (the “Class Actions”).

After the second putative stockholder class action was filed, the Class Actions were consolidated.

On January 19, 2021, the Company and the director and officer defendants filed a Motion to Dismiss the consolidated Class Actions.

On August 25, 2021, the Court granted the Motion to Dismiss with leave to amend the complaint.

The Plaintiff elected not to amend his complaint, and the Court entered Judgment in favor of the Company and the director and officer defendants on September 20, 2021.

The Court’s decision was not appealed, and the Class Actions are now closed.

The Company was likewise named a nominal defendant and certain of the Company's current and former directors and officers were named as defendants in a shareholder derivative lawsuit filed on June 15, 2020, in the United States District Court for the Central District of California.

The complaint made similar allegations as the Class Actions and alleged 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.

A second virtually identical shareholder derivative lawsuit was filed on

August 21, 2020 in the United States District Court for the District of Delaware.

On November 19, 2020, the District Court for the District of Delaware transferred the second-filed derivative lawsuit to the District Court for the Central District of California.

The shareholder derivative lawsuits were stayed pending the deadline to file a notice of appeal in the Class Actions.

On November 5, 2021, the first of the two shareholder derivative lawsuits was dismissed voluntarily without prejudice by the plaintiff.

On November 23, 2021, the second shareholder derivative lawsuit was dismissed by the Court on the basis of the parties’ stipulation of voluntary dismissal without prejudice.

In response to the allegations in the March 2020 analyst report, the Company's Board of Directors appointed a Special Committee of Independent Directors (the “Special Investigation Committee”) to conduct an internal independent investigation with the assistance of counsel.

On May 20, 2022, the Board of Directors of HF Group received a letter from a purported stockholder, James Bishop (the “Bishop Demand”).

The Bishop Demand alleges that certain current and former officers and directors of HF Group engaged in misconduct and breached their fiduciary duties, and demands that HF Group investigate the allegations and, if warranted, assert claims against those current or former officers and directors.

Many of the allegations contained in the Bishop Demand were the subject of a shareholder derivative action that Bishop filed in August 2020, captioned Bishop v.

Zhou Min Ni, et al., No.

2:20-cv-10657 (C.D.

Cal.) (the “Bishop Derivative Action”).

On November 24, 2021, after the United States District Court for the Central District of California dismissed with prejudice a related securities class action, captioned Mendoza v.

HF Foods Group Inc.

2:20-cv-02929 (C.D.

Cal.), the Bishop Derivative Action was voluntarily dismissed without prejudice.

On June 30, 2022, the Board of Directors of HF Group resolved to form a special committee (the “Special Litigation Committee”) comprised of independent directors and advised by counsel to analyze and evaluate the allegations in the Bishop Demand in order to determine whether the Company should assert any claims against the current or former officers and directors.

On August 19, 2022, James Bishop filed a verified stockholder derivative complaint in the Court of Chancery of the State of Delaware (the “Delaware Action”), which asserts similar allegations to those set forth in the Bishop Demand.

On September 21, 2022, Bishop and the Company filed a stipulation to stay the Delaware Action for 90 days, which the court granted on September 22, 2022.

On December 20, 2022, Bishop and the Company filed a stipulation to extend the stay of the Delaware Action for an additional 60 days, which the court granted on December 21, 2022.

The Special Litigation Committee is in the process of analyzing and evaluating the claims alleged in the Bishop Demand and Delaware Action, and has not determined whether any claims should be asserted or the probability of recovery for such claims.

In addition, the SEC initiated a formal, non-public investigation of the Company, and the SEC informally requested, and later issued a subpoena for, documents and other information.

The subpoena relates to but is not necessarily limited to the matters identified in the Class Actions.

The Special Investigation Committee and the Company are cooperating with the SEC.

While the SEC investigation is ongoing, the Special Investigation Committee has made certain factual findings based on evidence adduced during its investigation, and made recommendations to management regarding improvements to Company operations and structure, including but not limited to its dealings with related parties.

The Company is working to implement those improvements.

Refer to the Independent Investigation Update in Part II, Item 7 " Independent Investigation Update" to the consolidated financial statements of this Annual Report on Form 10-K.

We have also instituted structural changes including the retirement of the former Co-Chief Executive Officer and Chairman of the Board.

We now have an independent Chairman of the Board and, as of January 31, 2023, three other independent directors on the Board.

Our senior executive team now includes a General Counsel and Chief Compliance Officer, a Chief Operations Officer who was hired in May 2022, and a new Chief Financial Officer who joined the Company in August 2022.

We also hired a Vice President and Head of Internal Audit in April 2022 who reports directly to the Chief Financial Officer and to the Audit Committee Chair, and in November 2022, we hired a Vice President of Compliance and Associate General Counsel, who reports directly to the General Counsel and Chief Compliance Officer.

MINE SAFETY DISCLOSURES.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 3. Legal Proceedings