Bed, Bath & Beyond Shares Tank after Senior Executive’s Death | October 2022

October 5, 2022

McGraw Hill Higher Education

October 2022 | Volume 14, Issue 2

According to the article, the unexpected death of Bed, Bath & Beyond's former chief financial officer amid allegations of fraud against him raises further questions about the struggling retail chain and highlights its precarious finances.

Bed, Bath & Beyond's share price has plummeted. Over the past year, the retailer's stock has lost more than 70% of its value.

The company's chief financial officer, Gustavo Arnal, died recently after jumping from a luxury skyscraper in downtown Manhattan. The New York City medical examiner's office ruled his death a suicide.

The death of the 52-year-old executive comes as the once-popular retailer, whose sales have plunged since last year, struggles to turn itself around. Arnal is also named as a defendant in a securities lawsuit that accuses him, his employer and billionaire entrepreneur Ryan Cohen of a pump-and-dump scheme to inflate Bed, Bath & Beyond stock.

Recently, Bed Bath & Beyond appointed Laura Crossen interim CFO. On its website, the company called Arnal's death a "shocking loss."

"Gustavo will be remembered by all he worked with for his leadership, talent and stewardship of our Company. I am proud to have been his colleague, and he will be truly missed by all of us at Bed Bath & Beyond and everyone who had the pleasure of knowing him," Harriet Edelman, the company's chair, said in a statement.

Bed, Bath & Beyond shares have been on a roller coaster, soaring during the "meme stock" frenzy of 2020 before fading last year. The stock surged again in March when Cohen, the founder of online pet products company Chewy.com, revealed a nearly 10 percent stake in the company.

Cohen is credited with engineering a turnaround at GameStop, and his ownership was seen by some retail investors as a positive signal for Bed, Bath & Beyond. To kick-start the home goods company's recovery, he quickly helped usher Bed, Bath & Beyond's CEO and chief marketing officer out the door and appointed two new directors.

Cohen filed more paperwork with the Securities and Exchange Commission on August 16, restating his ownership of Bed, Bath & Beyond. That led the stock to surge once again. But that same day, Cohen immediately started selling his stake, prompting a sell-off that drove the company's stock to one-third its original price within a week.

That prompted some to call for an investigation by the SEC, and on August 23 a shareholder suit was filed in Washington, D.C., district court, alleging securities fraud.

The suit, which is seeking class-action status, claims that Cohen, Arnal, JPMorgan and others "engaged in a fraudulent scheme to artificially inflate the price of BBBY publicly traded stock" and "blatantly misrepresented the value and profitability of BBBY" to entice retail investors to buy shares.

According to the lawsuit, Cohen and Arnal cooked up a scheme whereby Cohen would hype the company's stock publicly while Arnal would limit stock sales by insiders, driving up its price. The complaint also claims that Cohen lied when he re-stated his ownership of the company and alleged that he had started selling his stock at that point.

Arnal also sold 55,000 shares of Bed, Bath & Beyond on August 16, although his disclosure states that the plan to sell started in April.

Cohen and Arnal "engaged in illegal insider trading and fraudulent SEC reporting," the suit claims. It also alleges that the two "took advantage of the inflated stock price and used fraudulent and misleading SEC filings to sell all their BBBY shares and options at artificially inflated prices to unsuspecting and innocent public investors and then retained control of the profit."

Bed, Bath & Beyond told investors in an August 31 securities filing that "The company is in the early stages of evaluating the complaint, but based on current knowledge the company believes the claims are without merit."

Even before the shareholder suit, Wall Street's view of Bed, Bath & Beyond had turned sour. Analysts at Wedbush downgraded the stock after Cohen's move to liquidate his stake, calling the price "disconnected" from the company's fundamentals.

"Bed, Bath & Beyond "finds itself in an unenviable position as it faces steep market share losses, an overabundance of inventory and dwindling cash reserves," they wrote. "Even if [Bed, Bath & Beyond] manages to make progress against some of its operational goals in the coming quarters, we see the current risk/reward as disproportionately skewed to the downside."

The retailer last week secured $500 million of new financing and outlined another turnaround plan that includes closing 150 stores, slashing one-fifth of staff and cutting down on store brands. It is still searching for a new CEO and chief marketing officer.

Discussion Questions

1. What is a “pump-and-dump” scheme, and why is it illegal?

According to www.investor.gov (published by the United States Securities and Exchange Commission):

“In a ‘pump and dump’ scheme, fraudsters typically spread false or misleading information to create a buying frenzy that will ‘pump’ up the price of a stock and then ‘dump’ shares of the stock by selling their own shares at the inflated price. Once the fraudsters dump their shares and stop hyping the stock, the stock price typically falls, and investors lose money.

False or misleading information about a company’s stock price may be spread through sources including social media, investment research websites, investment newsletters, online advertisements, email, Internet chat rooms, direct mail, newspapers, magazines, and radio. Microcap companies are particularly vulnerable to pump and dump schemes because there is often limited publicly available information about microcap companies.”

2. What is insider trading, and why is it illegal?

According to www.investopedia.com:

“The U.S. Securities and Exchange Commission (SEC) defines illegal insider trading as ‘The buying or selling of a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.’”

The reason that insider trading is illegal is primarily because if a person trades on “inside information” and profits from that trade, that is not fair to the public, since the public does not have access to that information. Public confidence in the stock market could be undermined if ordinary traders believe they do not have access to the same investment information that corporate “insiders” do.

3. Comment on the relative strength (or weakness) of the evidence included in the article in establishing a “pump-and-dump” scheme and insider trading.

This is an opinion question, so student responses may vary. In your author’s opinion “pump-and-dump” and insider trading cases hinge on the evidence introduced at trial. Remember, it is the prosecution’s burden to prove criminal cases beyond a reasonable doubt. The timing of insider stock sales is certainly relevant to such cases. Regarding the “pump and dump” allegation, it would make for an interesting classroom discussion for students to address the difference between merely touting the value of your company and its stock (which represents ownership of the company), which is entirely legal, and engaging in a “pump-and-dump” scheme, which is a criminal violation. Regarding the insider trading allegation, it would make for an interesting classroom discussion for students to address how they would personally act (or not act) if they had access to inside information not available to the public. In your author’s opinion, the temptation to trade stock based on access to inside information would be real.