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When a Pump-and-Dump Brews

“Stir it up, little darlin’, stir it up.” – Bob Marley

Musicians, just like celebrities and athletes, have been venturing in to the food and beverage industry. Sammy Hagar made millions with Cabo Wabo tequila, and even more when he sold his shares. Even his regular sideman and former-Van Halen bassist, Michael Anthony, has his hot sauce company. Seeing bags of Marley Coffee on supermarket shelves also makes perfect sense. Bob Marley’s continued influence on reggae and Jamaican culture should reach one of its largest exports — coffee. reverse merger

Unfortunately for Jammin’ Java Chairman Rohan Marley, his father’s and family’s name has been stirred up from its mellow mood in a $78 million pump-and-dump scheme, according to a release issued by the Securities and Exchange Commission.

The company, which uses Marley’s trademarks, is the defendant in a civil suit, though the current management was not involved. Still, anyone with their ear to the ground at Jammin Java during the time of former CEO Shane Whittle should have seen some warning signs of fraud.

The Crime

According to the news release, in the middle of 2011:

…Whittle orchestrated the scheme with three others who live abroad and operate entities offshore.  Whittle utilized a reverse merger to secretly gain control of millions of Jammin Java shares, and he spread the stock to the offshore entities controlled by Wayne Weaver of the UK and Canada, Michael Sun of India, and René Berlinger of Switzerland.  The shares were later dumped on the unsuspecting public after the stock price soared following fraudulent promotional campaigns.

The release continues with a laundry list of misconduct that certainly, in hindsight, read as an entrepreneurship how-not-to guide. This included distributing nominee stock to complex offshore accounts and creating the false appearance of legitimate third-party interest and investment in the company.

In short, those named are in violation of:

Moving in ‘Reverse’

A big part of the scheme involved Whittle’s reverse merger of the company, during which the complaint alleges he “secretly gained control of millions of shares” that had been issued to foreign nominees.

A reverse merger is a way for private companies to go public through a shorter and less expensive process, namely by doing so without raising capital. There are also ways to initiate a reverse takeover not to go public, as well.

When these maneuvers are well executed, they can usher in a new era for a company.

Warren Buffett’s Berkshire Hathaway, Ted Turner’s TBS and the NYSE are all products of some of the most famous reverse mergers to date.

Of course, there are some players who facilitate reverse takeovers in an effort to get rich quick.

“These reverse takeovers deserve immense scrutiny,” says Louis Gagnon, a finance professor at Queen’s University, in a Globe and Mail article. “It’s just a fact that many of these are not viable companies. It’s a great cause of concern in the marketplace.”

Though that article explored many Chinese deals that imploded post-RTO, the same can be said for any business that doesn’t have a good plan or CEO in place to oversee the transition and keep the company efficient and attractive.

Know Who’s Involved

The release details that British twin brothers Alexander and Thomas Hunter are also charged with “fraudulently promoting” the stock to investors by publishing false stock newsletters, which artificially sweetened the price. What’s worse is that they were charged in a prior, unrelated case by the SEC for a penny stock scheme.

Why would anyone do business with these people?  Furthermore, if you’re Whittle’s co-executives and you’re not in cahoots, it should be a huge sign that either:

a major mistake is being made

or

some shady deals are being brewed.

If it’s the former, how foolish does one have to be to align with people already on the SEC’s S-List?  Would you work with Bernie Madoff if he was released and came to you with a really great idea to make a huge score?

If it’s the latter and you’re privy to it, but not involved, it may be time to alert authorities or just get out.

The Aftermath

Marley Coffee immediately issued a responsive statement to the SEC’s charges. Their current CEO was brought in to remove Whittle in 2011 and clean up his mess. The company has pending litigation with him, also. Where Marley found this guy and how he rose to the ranks is a topic for another installment.  However, since the company is listed as a defendant, it plans to fight.

In the statement, CEO Brent Toevs details that “the Company itself did not profit from Mr. Whittle’s actions and did not have any knowledge of any improprieties associated with the 2010-2011 sale of securities…” and that:

“…[it] has fully complied over the past three years with the SEC’s investigation and has cooperated with all of the SEC’s requests for information and documentation.” Since the people named in the SEC’s charges were terminated or disassociated with, he feels to penalize the company is “unfounded,” and seems to want to fight it in court.

Regardless, Toevs detailed continued profits, sales and growth since he began sitting atop this hill of Jamaican coffee beans.

 

Brinen & Associates will follow this case and see if it simmers down or breaks new grounds.

Feel free to comment on this topic or contact us about your legal needs.

 

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