Chairman Davis' Concealed Takeover of Cyanotech in 2010 and 2011

The MAD/RSF Investment Partnership

The history of the partnership between Michael Arlen Davis (MAD) and Rudolf Steiner Foundation (RSF) dates back to the early 2000s, when MAD became a large shareholder in Cyanotech and RSF took possession of the first parcel of what would become Filigreen Farm.

The partnership has operated under this structure ever since, with MAD operating as the "front man" at Cyanotech, and RSF playing the role of "front man" in control at Filigreen Farm (with Davis in fact controlling Filigreen Farm as well

The record shows that until 2010, the partnership focused most of its attention on Filigreen Farm, ultimately acquiring and combining 12 parcels with ownership split among various MAD and RSF entities.  In addition to his acquiring and owning several of the parcels, Davis has contributed at least $300,000 per year to the Filigreen project.  Other than as relates to MAD being a "disqualified person" in relation to RSF,  no one (outside the IRS) gives a whit how the MAD/RSF partnership works at Filigreen Farm, it is a private partnership that can be managed as furtively as the partners' consciences dictate.

The MAD/RSF investment group's activities at Cyanotech are an entirely different matter because Cyanotech is a public company subject to detailed and explicit disclosure requirements under the Securities Act of 1934.

This includes both mandated disclosure requirements for both the company and any shareholder acquiring more than 5% of outstanding shares.  MAD and RSF are both greater than 5% holders and MAD is chairman of the board of directors of Cyanotech, with this creating multiple levels of disclosure obligations for MAD.  The express purpose of the Securities Act of 1934, often referred to as the Exchange Act, is to protect investors by requiring disclosure of material information:
"The Exchange Act protects investors by making sure information is available, but also protects investors by prohibiting fraud and establishing severe penalties for those who defraud investors, as well as those who engage in some trading practices that take advantage of information most investors do not have (e.g. insider trading). When federal securities laws are violated by market participants, the SEC can bring a civil enforcement action and can also bring criminal actions for some violations. The Exchange Act also allows investors to sue market participants who have defrauded them."
Michael Arlen Davis' Concealed Takeover of Cyanotech in 2010-2011

Apparently satisfied with their progress around Filigreen Farm, the MAD/RSF partnership decidedly turned its attention to Cyanotech in 2010.  The partnership's initiatives advanced on two fronts, (1) MAD began positioning to take over as the company's chairman of the board, and (2) MAD began his program of "parking" shares with RSF in order to allow MAD to accumulate shares above the 20% ownership limitation created by Section 4943 of the Internal Revenue Code.

As can be seen in the table below, the cash value of MAD's financial support of the partnership increased by 8x in 2010 and 11x in 2011.  Note also, that MAD's giving returned back to the normal level in 2012 after the partnership's control objectives at Cyanotech had been achieved.

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A summary of the MAD/RSF partnership's actions during the key years of 2010-2011 include:

During 2010:
  • Chairman Gregg Robertson resigns from the board without explanation; 
  • MAD  becomes de-facto Chairman-in-waiting
  • MAD “gifts” $1.47 Million cash to RSF
  • MAD  "gifts” $.68 Million of Cyanotech stock to RSF
During 2011:
  • MAD  provides cash and directs RSF to acquire the VitaeLab 10% share block 
  • MAD “gifts” $2.786 Million cash to RSF
  • MAD “gifts” $.30 Million of Cyanotech stock to RSF
  • MAD becomes "Chairman for Life" at Cyanotech
Once ensconced as chairman of Cyanotech's board of directors, MAD took over that body completely, pushing off the board of directors anyone unwilling to serve his interests (see Ralph Carlton) and recruiting replacements with questionable credentials, but more importantly, willing to tow the MAD/RSF party line (see Nancy Katz).

The MAD/RSF partnership has periodically increased its holdings in Cyanotech since the 2010/2011 takeover of the company - usually via the near simultaneous process of (x) MAD "parking" shares with RSF as necessary to allow (y) Davis to accumulate more shares without exceeding the 20% ownership limitation created by Section 4943 of the Internal Revenue Code.

Likely Regulatory Violations and Liabilities

Outside of the MAD/RSF partnership, all of the above activity was kept secret.  No one knew that Cyanotech's two largest shareholders had been working as partners since the early 2000s to acquire and control valuable agricultural properties in the wine-country of Northern California and the sun-spoiled coast of the Big Island of Hawaii.  Among the many regulatory violations now seen to have been perpetrated are:
  • MAD and RSF systematically failing to properly comply with their reporting requirements under the Securities Exchange Act of 1934
  • MAD and RSF failing to disclose their close relationship and "group"
  • MAD's repeated "parking" of securities with RSF
  • MAD and RSF failing to disclose that RSF had become Cyanotech's second largest shareholder with Davis financing and directing the accumulation of each share held by RSF
  • MAD, as a director and then chairman of the board of Cyanotech, failing to disclose that he had financed RSF's purchase of the VitaeLab's 10% block
  • MAD, as a director and then chairman of the board of Cyanotech, using inside information obtained as a director, to target and then purchase the VitaeLab's 10% block for his own benefit, most-particularly, to increase his "group's" stake from around 20% to around 30% of the company
  • MAD and Cyanotech failing to disclose that the company was under the control of a "group" dedicated to promoting and pursuing the ideas of Rudolf Steiner
  • RSF, and perhaps MAD, via the "group's" large holdings in Cyanotech and MAD's status as a "disqualified person" exceeding the 20% ownership limitations created by Section 4943 of the Internal Revenue Code
  • MAD's long history of self-dealing in his directing "charitable" donations overwhelmingly to entities that he controls and from which he derives personal benefit
Of greatest importance to Cyanotech's shareholders is MAD's long track record of concealing first his intentions, and since 2011 his entrenched control of Cyanotech.

MAD filed his first Schedule 13G with the Securities and Exchange Commission in 2002 when he acquired a larger than 5% position in the company.  

When MAD joined Cyanotech's board of directors in 2003, his eligibility to use Schedule 13G ended as that short-form is reserved for passive investors and ineligible for anyone seeking to influence or in a position to influence the company.

The advantage of Schedule 13G is that it provides for much diminished disclosure requirements, the logic being that passive investors pose far less potential treat to the interests of other shareholders. Davis maintained his improper Schedule 13G passive filing status right through his appointment as chairman of the board of directors of Cyanotech, ending the fiction of his being a "passive" shareholder only when directly and repeatedly being challenged on the issue by Meridian.

It now seems that Davis used the lessened disclosure requirements under Schedule 13G to conceal his activities during the 2010/2011 period when the MAD/RSF partnership assumed its control position at Cyanotech.  As has been pointed out elsewhere, it is inconceivable that Davis went nearly 14 years (from 2003 to 2016) without being repeatedly informed that his filing on Schedule 13G was inappropriate.  It had to be purposeful, and the apparent purpose was to facilitate the concealment of Davis' intention, from 2003 forward, to work secretly with his partner, RSF, to consolidate and entrench MAD's control over the company via the secret "group" that they created in 2010 and have used to great effect since.

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