| [letterhead]
LUTIN & COMPANY
575 Madison Avenue
New York, New York 10022
Telephone (212) 605-0335
Facsimile (212) 605-0325
January 8, 2004
By email:
cutlers@sec.gov
Mr. Stephen M. Cutler
Division of Enforcement
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Farmer Bros. Co.
Dear Mr. Cutler:
The purpose of this letter is to ask the Securities and Exchange
Commission to investigate possible violations of securities laws by Farmer
Bros. Co. (the "Company") and, if appropriate, initiate timely actions to
protect the interests of the Company's public investors.
The Company's public shareholders had applied, themselves, for
injunctive relief to prevent management’s use of improperly acquired voting
stock to adopt a reorganization plan at an annual meeting now scheduled for
January 21, 2004. But the court decided that the Company's shareholders do
not have a private right of action to enforce the relevant sections 7(a) or
17(a) of the Investment Company Act of 1940 ("ICA"), and that only the SEC
can do so.
Under these circumstances, the Company’s shareholders must rely on the SEC
to protect their investment interests. The most immediate concern is a vote
in two weeks on a proposed reorganization plan that would effectively
deprive shareholders of their ability to monitor the Company’s management.
But the fundamental concern is that the Company has not been registered as
an investment company or otherwise operated in compliance with the ICA, and
that in the absence of enforcement actions the Company will continue to use
its assets for the benefit of management rather than for its public
shareholders, and will continue to refuse disclosures of information
required for investment decisions.
The SEC has been aware of some of the investor concerns about
the Company at least since August 2002, when the Company’s management
requested “no action” letters in relation to two shareholder proposals.
Based on that and subsequent public correspondence as well as recent Company
reports, it is believed that the Division of Investment Management is
familiar with the issues that concern the Company's shareholders, as
follows:
1. Company’s status as an investment company: Based on
publicly available Company reports, the Company appears to be an “investment
company” as defined by both sections 3(a)(1)(A) and 3(a)(1)(C) of the ICA.
A majority of the Company’s assets have been invested in securities for each
of the past ten years, steadily growing to more than $300 million and
constituting approximately 70% of total assets by the end of the most
recently reported quarter. Although investment income cannot be readily
determined in the absence of reporting required for investment companies,
analysis of the publicly available information suggests that a majority of
the Company’s net income has been derived from investments for at least the
past year. Finally, the amount of “investment securities” owned by the
Company since 2001 has been consistently greater than 40% of its total
assets, adjusted for exclusions of Government securities and cash according
to ICA section 3(a)(1)(C).
2. Company’s avoidance of compliance: Since issues of ICA
compliance were raised by shareholders in 2002, the Company’s management has
asserted that the Company is not an investment company but has failed to
respond to repeated requests for an explanation of any basis the Company may
have for exemption from registration requirements, ignored repeated
suggestions to apply for an exemption as permitted by ICA section 3(b)(2),
and refused to provide information about the Company’s investments in
response to shareholder demands, in spite of the Company’s recognition of
legal obligations to do so. When a shareholder submitted a proposal which
would have required ICA compliance, the Company’s management sought to
exclude the proposal from the proxy materials for voting at the annual
meeting in December 2002; and when the SEC required including the proposal,
management used its control of a majority vote to defeat it.
3. Violations of laws applicable to investment companies:
The Company’s attorney, a recognized authority on ICA compliance,
acknowledged in an August 26, 2002 letter to the SEC that the Company
“sponsors an employee stock option plan (an ‘ESOP’) to which it makes loans
and engages in other business which would be in violation of the affiliated
transaction prohibitions of Section 17 of the ICA.” Nevertheless, since the
date of that letter, the Company’s management has continued to authorize
ESOP transactions to acquire stock which would give them majority voting
control. During the fiscal year ending June 30, 2003, the Company loaned an
additional $24 million of corporate funds to the ESOP for its purchase of
77,850 shares of voting stock. On July 23, 2003, at the start of the
current fiscal year, the Company announced that its board had approved up to
$50 million of additional corporate loans to the ESOP affiliate for the
funding of more stock purchases, and on December 24, 2003, the Company
reported plans for the ESOP’s purchase of an additional 125,000 shares,
presumably using approximately $31 million of the recently approved
corporate loans in a transaction which is presumed to have closed prior to
the close of the quarter ending December 31, 2003.
In summary, assuming the conclusion of the transactions announced last
month, approximately $70 million of the Company’s funds has been used since
the ESOP affiliate was created in 2000 to acquire management control of
18.7% of the Company’s outstanding voting stock, and approximately $55
million of the that amount was funded after the Company acknowledged that
the transactions would violate laws applicable to investment companies.
4. Proposed reorganization: On October 24, 2003, the Company
filed a preliminary proxy statement which included a management proposal for
a reorganization plan according to which the existing corporation would be
merged into a new corporation that would significantly limit the rights of
public shareholders. The Company’s statement included the following
descriptions of proposed changes in governance provisions:
- “elimination of
shareholders’ ability to act by written consent”
- “establishment of a
classified board of directors”
- “elimination of the
ability of shareholders controlling at least ten percent (10%) of the
voting shares to call a special meeting of shareholders”
- “establishment of
advance notice procedures for shareholder nominations and other proposals”
- “requiring a vote of at
least eighty percent (80%) of the outstanding shares to amend the bylaws
by shareholder action instead of a majority of the outstanding shares”
- “the elimination of
cumulative voting”
- “the Board's ability to
designate and issue preferred stock [which], if issued and depending on
its terms, may make it more difficult for an unsolicited bidder to make a
takeover attempt”
- “Board may also consider
in the future certain defensive strategies allowed under the DGCL [new
state's law] which are designed to enhance the Board's ability to
negotiate with an unsolicited bidder [including] the adoption of a
shareholder rights plan and severance agreements for its management and
key employees”
5. Use of ESOP transactions to adopt reorganization plan:
The Company’s board of directors, and specifically the members controlling a
reported 39.6% of voting stock through direct holdings and as trustees, have
stated their support of the proposed reorganization plan. Unless a
significant number of non-management shareholders vote to restrict their own
rights, obtaining a required vote of more than 50% of outstanding shares to
adopt the reorganization plan will depend on the voting of stock acquired
during the past year for the ESOP affiliate.
In summary, if the SEC does not act to prevent management’s use
of the voting stock acquired by the ESOP affiliate, management will be able
to reorganize the Company in a form that greatly reduces the rights of the
Company’s non-management shareholders. This would certainly encourage the
Company’s management, and probably others who observe the example, to
continue ignoring the interests of public investors and the laws intended to
protect them.
Very
truly yours,
Gary
Lutin
|