A class action lawsuit was filed against Compass Diversified Holdings (CODI) by Levi & Korsinsky on May 9, 2025. The plaintiffs (shareholders) alleged that they bought CODI stock at artificially inflated prices between May 1, 2024, and May 7, 2025 (Class Period) and are now seeking compensation for their financial losses. Investors who bought Compass Diversified Holdings stock during that period can click here to learn about joining the lawsuit.
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Compass Diversified is a business acquisition company that invests in high-growth, middle-market businesses. CODI targets companies in the consumer, industrial technologies, and healthcare sectors with “positive and stable EBITDA of at least $10 million per annum” for acquisition. Compass now owns and fully consolidates the financials of several of the businesses it has acquired, including Honey Pot Company, Arnold Magnetic Technologies, Lugano, and Velocity Outdoors.
The company’s inadequate internal controls over its financial reporting are at the heart of the current complaint.
Compass Diversified’s Misleading Claims
According to the lawsuit, Compass, Lugano’s former CEO, and three of the Company’s current and/or former senior officers (the Defendants) repeatedly made false and misleading public statements throughout the Class Period. Particularly, they are accused of omitting truthful information about the efficacy of the Company’s internal controls over financial reporting from SEC filings and related material.
During the Class Period, the company consistently reiterated in its quarterly reports that all of the Trust’s Regular Trustees, as well as the CEO and CFO of the LLC, had concluded that the Trust’s and the LLC’s disclosure controls and procedures were effective.
Additionally, in certifications signed in accordance with federal law that accompanied a quarterly report filed with the SEC on July 31, 2024, CODI’s CEO and former CFO attested to the accuracy of the company’s financial reporting, as well as the disclosure of any material changes to the company’s internal controls over financial reporting and to the disclosure of all fraud.
Finally, in an annual report dated February 27, 2025, CODI noted that its management had evaluated the company’s internal controls over financial reporting and concluded that the controls were effective as of December 31, 2024.
However, subsequent events (discussed below) revealed that the defendants misled investors about the company’s inadequate reporting standards.
Plaintiffs’ Arguments
The plaintiffs maintain that the defendants deceived investors by lying and withholding critical information about the business practices during the Class Period. Importantly, the defendants are accused of misleading investors about inadequate financial reporting in the Lugano unit.
The information became clear after the market closed on May 7, 2025, when the company issued a press release announcing that it had “preliminarily identified irregularities in Lugano’s non-CODI financing, accounting, and inventory practices.” Moreover, CODI stated that the senior leadership, investigators, and the Audit Committee of CODI’s board had concluded that the previously published financial statements for 2024 require restatement and should no longer be relied upon. Accordingly, the company was delaying the filing of its quarterly report for the first quarter of 2025. Following the news, CODI stock plunged 62% the next day.
To conclude, the company misled investors about its inadequate financial reporting standards, which impacted its ability to submit timely reports to the SEC. Owing to these issues, CODI stock has declined 71.7% so far this year.
