Coffee concern may face shareholder suit in oversight dispute. (Up Front).

A Jan. 3 letter sent to the board of Farmer Bros. Co. hints at legal action if the company does not respond to shareholder concerns about mismanagement.

"Investors need to know whether they can rely on a company's board of directors to serve the interests of shareholders," wrote Gary Lutin, a New York investment banker who has been advising a group of Farmer Bros. shareholders. "This question has become a serious issue in relation to recent management statement and conduct suggesting that your shareholders must resort to legal proceedings to enforce essential rights."

The letter reiterated several shareholder concerns, from the company not having enough independent directors to how the investment portfolio is managed. It requested a reply by Jan. 10.

"If the directors don't respond positively, shareholders would have to assume that they would have to take actions to enforce their rights," Lutin said.

John Simmons, treasurer of Farmer Bros., acknowledged that he had received the letter, but said he would not reply to Lutin because he is not a shareholder. He added the company is in search of an additional independent director.

Farmer Bros. long has been assailed by shareholders for being ran to benefit the founding family, consisting of 86-year-old Chairman and Chief Executive Roy F. Farmer and his son, Roy E. Farmer, the company's president.

A proposal from Franklin Mutual Advisers LLC, the largest institutional shareholder, to have Farmer Bros. register with the SEC as an investment company was voted down at the Dec. 26 shareholder meeting.

An investment company designation would require Farmer Bros. to report the results of its investment portfolio in more detail and appoint more independent directors. Such a registration would essentially split the company into two operations: an investment portfolio and a coffee company.

Farmer Bros. management, which controls 52 percent of the voting stock, had recommended against the investment company proposal. Farmer Bros. had $296 million, or 84 percent, of its corporate assets in investments as of Sept. 30.

In an interview last week, Simmons disputed Franklin's claims that Farmer Bros. is an unregistered mutual fund. "It just doesn't pass the smell test," he said. "We're not an investment company."

During the shareholders meeting, Simmons stressed that Farmer Bros. is "a coffee company" and maintained that "more than 50 public companies in California alone hold a higher percentage of their assets in cash and equivalents than Farmer Brothers -- and, like us, are not registered investment companies."

The list of companies, provided by Simmons to the Business Journal, includes several local companies including Ixia Inc., ValueClick Inc. and Stamps.com Inc.

David Winters, president and chief executive of Franklin Mutual Advisers, noted that the proposal received more than 70 percent of the nonmanagement vote at Farmer Bros. shareholder meeting. "So basically the shareholders agree with us," he said.

Winters would not comment on any further steps Franklin might take.

Former regulators said it could be years before the SEC closely examines the company. The agency, understaffed and under-funded, is focusing its attention on higher profile businesses.

There also are significant hurdles in proving that Farmer Bros. is an unregistered investment company. The 1940 Investment Company Act states that a company with at least 40 percent of its assets in marketable securities, less cash and government securities, is an investment company, and therefore must register with the SEC.

Since March, Farmer Bros. has moved more than $100 million in corporate funds into government securities, according to SEC filings, reducing its marketable securities holdings to 30 percent of total assets as of Sept. 30, down from 44 percent at the beginning of the year.

"The SEC would have to show pretty conclusive facts as to why (Farmer Bros.) is an investment company, and that takes time, which is something the SEC, at this juncture, does not have," said Barry Barbash, a partner at Shearman & Sterling and former head of the SEC's division of investment management.

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