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Request for SEC Attention to Investor Interests

(January 8, 2004)

Copied below is a January 8, 2004 letter to the Director of the SEC Division of Enforcement requesting the regulatory agency's attention to issues concerning investors.

The SEC is asked to address the control of votes for an annual meeting currently to be held on January 21, 2004, as well as the broader questions about the company's need to comply with the Investment Company Act of 1940 ("ICA").  Reference is made to the recent court decision in a shareholder motion that investors do not have a private right of action to enforce the relevant securities laws, and that only the SEC can do so.

Letters were also sent to the SEC by shareholders, including the following:



575 Madison Avenue
New York, New York 10022
Telephone (212) 605-0335
Facsimile (212) 605-0325

                                                                        January 8, 2004



By email:


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.[1]


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.[2]


            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).[3]


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.[4]


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.[5]  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:[6]

  • “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”[7]
  • “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.[8]


            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


[1] The December 23, 2003 decision, not yet published, was issued by the United States District Court of the Central District of California in the action titled Leonard Rosenthal, Individually, and On Behalf of All Others Similarly Situated, v. Farmer Bros. Company, Guenther W. Berger, Lewis A. Coffman, Roy E. Farmer, Roy F. Farmer, Thomas A. Maloof, John M. Anglin, John H. Merrell and John Samore, Case Number CV03 8845 MMM.

[2] A history of shareholder efforts to address these concerns, and management responses to those efforts, can be found on a web site at:

[3] These calculations of the amounts of securities, investment securities and total assets include the Company’s loans to an affiliated Employee Stock Option Plan (“ESOP”), which are reported in the Company’s financial statements as deductions from shareholders equity rather than as assets.

[4] The proposal for managing the Company's funds in compliance with the ICA was supported by 77% of the votes not directly controlled by management, but was defeated by a total count of 1,163,944 against (146,841 shares more than were directly controlled by management) and 506,318 in favor, with 2,917 shares abstaining.

[5] The 125,000 shares were reportedly offered to the ESOP affiliate when the Company acquired 443,845 shares from other affiliates in a settlement of disputes among members of the chairman’s family.  According to the Company’s December 24, 2003 press release, a copy of which was filed in a Form 8-K report on December 29, 2003, the result of the transactions would be that “the ESOP will own 18.7% of the Company's shares outstanding, the Farmer family will hold 39.6% of the shares, leaving ownership of the remaining public shareholders at 41.7%.”  Neither the Company nor the affiliated sellers offered any of the shares to public investors.

[6] In a revised preliminary proxy statement filed on December 24, 2003, the Company added a statement that “[t]he Company might not be able to implement certain elements included in this proposal to reincorporate the Company in the State of Delaware if the Company were found to be an unregistered investment company.”  There was no indication, however, of which “elements” this statement addressed.

[7] The Company subsequently stated in its court response to the previously referenced shareholder litigation that it would withdraw the provision for 80% supermajority voting.

[8] It should be noted that the Company has recently announced plans to change the ESOP voting process from control by its trustees to some form of “pass-through” voting in which the ESOP beneficiaries, who are non-union Company employees, will be expected to present their voting instructions to Company directors who control their employment.



The Forum is open to all Farmer Bros. shareholders, whether institutional or individual, and to professionals concerned with their investment decisions.  Its purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their evaluations of alternatives.  As stated in the Forum's Conditions of Participation, participants are expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

There is no charge for participation.  Franklin Mutual Advisers, LLC, the manager of funds owning approximately 12.6% of Farmer Bros. shares, provided initial sponsorship for the Forum and arranged for it to be chaired by Gary Lutin.  Continuing support and guidance of the Forum is provided by an Advisory Panel of actively interested shareholders.

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