Tax fraud accusations against Cyanotech Corp ($CYAN) Chairman Michael Arlen Davis were ratcheted up a notch by a whistleblower who unearthed more dodgy accounting and self-dealing between the Colonial Penn heir and charity investment company Rudolf Steiner Foundation.
The new accusations threaten to engulf RSF in a deeper Davis-created scandal, with the revelation that the social investment fund’s leadership were party to a 15-year-long tax scam underpinning a popular Mendocino vineyard known, ironically, for its vanity labels.
The tax fraud to control the Filigreen Farm vineyard snared long-time RSF chairman Mark Finser, who retired from that role this Summer. Son of former RSF chairman Seigfreid Finser, Finser was also chairman of New Resource Bank, a major lender to Cyanotech; that bank was unloaded to Amalgamated Bank late last year for $58.5m in stock.
Finser was replaced at RSF in July by Atlanta-based SunTrust VP Ron Alston, the head of RSF’s Audit Committee, in a nod at good governance to bolster the reputation of the social finance lender ahead of this gathering storm created by Davis.
Confronted by the whistleblower’s accusations swirling online, Davis on Friday, filed an SEC Form 13D to try to get ahead of the looming scandal over the Filigreen Farm scam as it snowballed across social media.
The whistleblower’s allegations, filed with the IRS and the SEC, support a parallel lawsuit against Davis by New Canaan-based investment fund Meridian OHC Partners, Cyanotech’s third-largest shareholder, after Davis and RSF, accusing those two entities of illegally gaining control of the company through the fraudulent use of public charities.
Davis, in Friday’s after-the-close 13D filing, tried to talk in circles around those accusations, but the upshot is the syndicate of seven non-profits that Davis controls or represent his money, hold 32.1% of Cyanotech, beyond the Section 4943 of IRS code threshold for a private foundation of 20%.
Davis claims they did not work in concert to own the shares, which would trigger the IRS violation — but how could they not? What kind of coincidence would lead seven non-profit entities controlled by the same people to invest in the same small-cap stock to ultimately appoint one, the man behind the funding of all seven, Davis, to be the small-cap company’s board chairman?
In total, the allegations against Davis, if confirmed by the IRS and SEC, could force the company chairman to pay some $80 million in back taxes, disgorge gains from the scams, and potentially relinquish control over Cyanotech.
Where that alleged fraud is recorded in the Meridian suit going back to 2011, what the whistleblower found was their relationship and dirty dealing goes all the way back to 2002 in Filigreen Farm.
At the core of the tax crimes detailed by the whistleblower, Davis has turned a large inheritance designated for charities into a funding mechanism to enrich himself and his friends.
The whistleblower is confident in the analysis after hiring financial and non-profit attorneys and forensic accountants that specialize in non-profits to validate his claims. He has published the analysis online and is urging the California Franchise Tax Board in Sacramento to press on with the state tax case against Davis.
“I cannot believe Davis is allowed near a public company board,” he told whistbl0wer. “I am an investor in the stock. Literally, an old retired guy with the time to do the work. Came across this situation by accident and this guy’s behavior really pissed me off.”
The fraud dates back to the terms of Davis’s huge inheritance from his father Leonard Davis, the owner of Colonial Penn Life Insurance and co-founder of AARP.
“Leonard died in early 2001 and left him a large charitable lead annuity trust requiring him to donate the money to qualified charities,” the whistleblower said, noting the trust has distributed at least $75 million already. “He set up a whole network of charities to capture the money for himself.”
To do so, Davis created a non-profit called Ginungagap Foundation. Under a different spelling, Ginnungagap, the seemingly nonsense name, refers to Norse mythology’s Eddaic text, the Gylfaginning. Ginnungagap is the primordial void — the “gaping abyss” or “yawning void” — since used to name a giant black hole on the sun.
In this case, Ginungagap, according to the whistleblower, could represent both the vastness of Leonard Davis’s estate, and the lengths to which Michael Arlen Davis was prepared to sidestep the terms of his inheritance for personal gain, harming employees and shareholders of Cyanotech and the executives of RSF in the process, never mind state and national tax coffers bereft of his fair contribution.
“Think of Davis as a predator who corrupts people around him with his money,” the whistleblower said. “I think his father, Leonard, must have understood that by limiting his inheritance to charities only, because Davis’s brother, Alan, who appears to be entirely above board, seems to have had no restrictions imposed on his share.”
“Ginungagap is nothing but a shell pass-through entity. It has no charitable operations of its own, no W-2 employees. Complete fraud used as a blocking entity for massive private inurement.”
The board of Ginungagap is made up of two RSF executives, including former chairman Mark Finser, and Davis, its president.
Filigreen Farm LLC was created by Davis, who then donated the entity to Ginungagap Foundation, the non-profit he created and controls, which, in turn, is completely funded by Davis-family vehicle Skywords Family Foundation.
The whistleblower calculated that 97% of the charitable donations made by the Skywords Family Foundation from 2010 to 2015 were made to entities that financially benefit Davis, his family and friends — the ultimate IRS non-profit “no-no.” These include the winery, a documentary film company run by Davis and his wife and the RSF-related Marin Waldorf School, where Davis’s children were students.
Ginungagap’s IRS 990 filings from 2003 to 2015 show that 92% of reported expenses went to “Filigreen Farm Project Costs.”
The 87 acres of land under Filigreen Farm, in the fertile Anderson Valley, in Mendocino, California, are owned by the nonprofit Yggdrasil Land Foundation, an affiliate of Rudolf Steiner Foundation. From the same roots as Ginnungagap, Yggdrasil is an immense mythical tree that connects the nine worlds in Norse cosmology.
The symbolism could be their downfall — at least when it comes to determining who was the mastermind behind the scam: RSF’s Yggdrasil formed in 2000, back dated from 2001, and Davis’s Ginungagap was formed in 2003, in California, then moved to Delaware in 2005.
In 2004, Yggdrasil agreed to lease all 87 acres to Filigreen Farm LLC for $15,000 annually. For 30 years.
A local real estate appraiser for area vineyards contacted by the whistleblower laughed at that valuation, estimating the true market value — per acre — at $6,000 — per month.
The terms of the lease should be closer to $6.2 million per year, not $15,000.
Who benefits from this 99.8% rent discount are the families that enjoy the bucolic surroundings, run Filigreen Farm, and drink its wine.
According to Davis’s wife, film director Jyll Johnstone, on the website of their documentary film production shingle, Canobie Films:
“Our family is partners with two others in a modest, diverse Biodynamic farm in Mendocino County, California. The Anderson Valley, like much of Northern California, had once been home to a wide variety of fruit cultivation, but is no longer. Our partners are attempting a return to a more traditional and balanced farm ecosystem.”
All this talk of nature conservation aside, an elite London-based architect was commissioned to design a stunning and futuristic — even pharaonic — multi-million dollar wine tasting room for the “modest” farm…
RUDOLF STEINER FOUNDATION
RSF considers itself to be one of the first, last and most esteemed of the socially responsible investment organizations of the 1990s and is also known for supporting the Marin Waldorf schools, another area where Davis coincided with RSF, after educating his children there.
(Separately, the whistleblower analyzed Davis’s donations to the school and also found gaping anomalies — including the whopper that Davis’s supposed donation dwarfed the school’s annual budget, but seemed to have never actually been accounted for in its books.)
RSF Social Finance is their financial services firm for nonprofits, particularly those related to the teachings of Rudolf Steiner Foundation’s “new approach” to money.
“I think RSF’s behavior through this whole episode has been immoral,” the whistleblower said. “But they are a big public charity that does some good stuff, although not my cup of tea. I also think it’s contained to a few bad actors — Finser, Joel Solomon, and John Bloom [two other RSF top executives].”
“I would like to see those corrupt a-holes fired for their actions, but I would feel bad If the charity overall was impaired. At minimum, RSF needs to revamp their governance.”
Davis and RSF could be exposed to substantial excise taxes for Filigreen Farm due to violation of IRS rules against self-dealing, excess benefits transactions, and private inurement.
“No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.”
The whistleblower is represented by Barton LLP in New York.