Meridian's May 6, 2016 Letter

The beginning of the end for Michael A. Davis' antics at Cyanotech can be dated to Meridian's May 6, 2016 letter to the board of directors (full text here starting at page 27).  It begins with Meridian's explanation:
We were very surprised by the news on April 4, 2016 that Brent Bailey had been removed as the CEO. Given our surprise and our concern for the potential impact of this change, Meridian was eager to speak to Mr. Bailey. When we made contact and had an opportunity to ask questions, we found many of the answers quite disturbing...
Soon after, we began investigating aspects of the story that seemed particularly troubling. We are writing this letter to alert the board of directors of Cyanotech to the findings, to date, of our investigation, and to put its members on notice of the need for corrective action...Meridian believes the Chairman's practices are inconsistent with his role, as well as his fiduciary duties, and we believe that the Chairman's actions place the other directors, the Company and its stockholders' equity in jeopardy.
Meridian's letter then proceeds to detail the Federal securities violations and public company corporate governance practices that appear to have been violated by Chairman of Cyanotech's board of directors, Michael Arlen Davis, and by Cyanotech under Davis' direction.  These include:
  • Davis repeatedly "parking" securities with RSF
  • Davis and RSF constituting an undisclosed "group"
  • Davis failing to properly report his shareholdings on Schedule 13D
  • Davis systematically failing to report transactions as required by Federal law
  • Davis systematically making filings with misstatements and omissions
  • Davis replacing the company's Hawaiian corporate law firm with a San Francisco litigation law firm that would be loyal to him personally
  • Davis using his control of Cyanotech's board to pack it with unqualified people loyal to Davis personally
In its letter Meridian state that it:
Strongly recommends that Cyanotech's board engage counsel that is independent of its Chairman to review and discuss the contents of this letter...The issues described in this letter must be promptly addressed by Cyanotech's board. Failure to take prompt action could result in personal liability for the Company's directors. Among the topics to discuss with independent legal counsel are the limitations of a corporation's ability to indemnify directors for their actions and the exclusions within directors and officers (D&O) insurance policies for knowing breaches of director responsibilities.
Perhaps the most serious charge in Meridian's letter related to Davis' practice of "parking" shares with RSF:
Meridian believes both the Chairman and RSF have failed to properly disclose the close relationship and transactions that brought them together as a controlling stockholder group at Cyanotech. We believe this failure to provide required disclosure is potentially a violation of the federal securities laws inasmuch as it appears to be an undeclared "group." This type of securities law violation is sometimes referred to as "parking" - when one party causes shares to be held by another party in order to avoid required disclosures that would be problematic under various legal, regulatory or other ownership limitations. The most famous examples of parking involved Ivan Boesky and Michael Milken, each of whom served time in Federal prison for conspiring to tile false stock ownership
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