"This is a public company being run like a private company," complains Gregory Bylinsky, managing director of New York-based hedge fund Lime Capital Management LLC, summing up the view of activists following the company.

Bylinsky, together with other hedge funds and other shareholders, has been pressing the Torrance, Calif.-based coffee distributor for over a year to put itself up for sale or go private.

Lately, they have opened a new front in their war, writing letters to the SEC's Division of Investment Management arguing that Farmer Brothers has become an unregistered investment company in violation of the Investment Company Act of 1940.

The company rebuts that allegation, saying it is still primarily in the business of roasting, packaging and distributing coffee. Even so, it revealed in December that the SEC staff has "concerns" that Farmer Brothers may be an unregistered investment company.

The characterization turns on Farmer Brothers' cash hoard. Investors estimate the company has roughly $200 million in cash and securities on hand — about a third of its roughly $600 million market cap.

If the SEC deems Farmer Brothers to be an investment company, that will effectively halt a plan to curb shareholders' rights.

Disgruntled shareholders led by Franklin Mutual Advisers LLC, a Short Hills, N.J., investment firm that holds 9.6%, are up in arms over a management proposal scheduled for Farmer Brothers' annual meeting later this month that would reincorporate the California company in Delaware and install a series of controversial anti-takeover measures.

If the SEC buys the argument that Farmer Brothers is operating as an unregistered investment company, the corporation would be prohibited from installing the anti-takeover provisions, says Gary Lutin, a spokesman for a dissident group of shareholders.

At the last annual meeting, 77% of the shares not held by insiders voted for a motion to convert Farmer Brothers into an investment company as a way to protect shareholders.

The company is proposing a package that includes a poison pill and staggered board. It would also bar shareholders from acting by written consent, calling special meetings or changing the board size.

Investors and academics keeping tabs on Farmer Brothers argue that these provisions are extreme and depress the company's stock value. The changes would effectively block dissidents from further efforts to press Farmer Brothers into a sale, Bylinsky says. (After pressure from investors, the company withdrew a proposal to require 80% approval to change its bylaws.)

Even without the changes, the hurdle for the dissidents is being raised. On Jan. 12 the company announced that its employee stock ownership plan had acquired a further 7.8% of the company, bringing its total stake to 18.7%, making it that much harder for other shareholders to get the votes they need. They will likely be voted against any major transaction, and chairman Roy F. Farmer controls about 40%.

Bylinsky and others contend that management is trying to lower the company's stock at the expense of outside shareholders to lessen the estate taxes anticipated on the death of the 86-year-old Farmer, who has been showing his age. Indeed, after rising last year to about $350 a share in July, Farmer Brothers stock has been in a long, slow slide since. On Jan. 30 it dipped another 3% to $315.

The company could earn more by investing the cash and securities in other businesses than it does with the company's current, highly conservative investments, Lutin says.

"No other coffee or food distribution company has this kind of cash on hand," Lutin explains. He notes that in 1980 Farmer was larger and more profitable than Houston-based rival Sysco Corp., a coffee and food distributor that has since surpassed Farmer Brothers in value.

Farmer Brothers spokesman James Lucas declined to comment. In proxy materials, the company says anti-takeover provisions benefit shareholders because they protect the company from hostile takeover. And Farmer Brothers said is moving to reincorporate because of "the predictability of Delaware corporate law."

A spokesman for the SEC's Division of Investment Management declines to comment.

Alan Hoffman, a securities lawyer with Proskauer Rose LLP in New York, says it is unlikely the agency will act on a request that comes from hedge fund managers and other shareholders. The SEC section responsible for these kinds of investigations is stretched thin and doesn't have the resources to conduct the detailed kind of review that would be entailed.

"Large public corporations have such complex structures that SEC staff would need to do a lot of fact-finding to come to a conclusion about whether the law has been violated," Hoffman says.

With an annual meeting set for Feb. 23, the agency is running against a tight deadline to bring formal charges against Farmer Brothers.

But Mark Braswell, a partner at Venable LLP in Washington, says that if the SEC feels investor harm is imminent and it thinks Farmer Brothers may have violated the investment act, it can simply reject the company's proxy statement for the reincorporation on the ground that the disclosures are inadequate.

Still, he concedes that it's rare for a company to be busted for operating as an unregistered investment firm. And the vast majority of complaints the agency receives are from sources whose interests aren't necessarily aligned with shareholders in general, he says, so such complaints are regarded with skepticism.

"Often complaints are made for no other purpose than to leverage an investor's animosity against an adversary by trying to position the government agency against the company," Braswell says.

Even if the SEC intervened, he says, Farmer Brothers would likely tie up the case for years in court, which would hurt investors even more in the long run, Hoffman explains.

But Bylinsky isn't discouraged. He says restructuring the company into two units, one that packages and distributes coffee and another that invests in securities, would uncover hidden value.

And Bylinsky's hoping he'll find allies in Washington. "The SEC lately has been trying to take a more shareholder-friendly view with a lot of its rules," he says.