Looking for the Hole in the Doughnut

Krispy Kreme Doughnuts Inc. (Winston-Salem, N.C.) has been notified by the Securities and Exchange Commission that it is being formally investigated.

The company declined to specify the scope of the inquiry, and the SEC also had no comment.

In July, the SEC began in informal inquiry into certain Krispy Kreme franchise repurchases and of a profit warning issued by the company in May. A formal SEC investigation can be triggered after an informal inquiry finds possible securities law violations. In the formal phase, subpoenas can be used to gather testimony and records.

The company spent about $100 million to repurchase two franchises owned by corporate insiders earlier this year, and a shareholder lawsuit filed last month alleges the prices were inflated so much that they represented a violation of fiduciary responsibility by Krispy Kreme directors.