Shares of NASDAQ-listed BioAstin Hawaiian microalgae producer Cyanotech ($CYAN) were in focus after a whistleblower called for the resignation of Chairman Michael Arlen Davis.

Davis is accused in multiple SEC and IRS filings and lawsuits for cheating on his taxes using a web of non-profits to illegally control a 32% stake in the company, beyond the IRS limit of 20% for one non-profit foundation.

The whistleblower, a retired executive and long-time shareholder of the stock, has joined a chorus of disgruntled investors tired of Davis, beyond the legal questions over ownership of his stake.

Revolving-door management, the hiring of auditors and lawyers with conflicts of interests in favor of Davis and other poor governance shenanigans have compromised the company’s ability to produce microalgae to meet strong market demand for its products, they believe.

On social media, the whistleblower asked:

Why would Nasdaq: chairman Michael A. Davis fire the PUBLIC company’s legacy law firm and install his personal law firm instead? I’m not accusing Davis’ lawyer (whose name is on every Davis tax return) of illegal activity.

That frustration and anger at Davis is palpable from the comments by shareholders on the online fora. After the annual meeting in August, “Oldwise” wrote on Yahoo’s $CYAN forum:

Good news! The annual meeting votes are in, and it is great to see that shareholder disgust for Michael Davis and his lap dog toadies has not abated.

Davis led the pack with the most negative votes, David L. Vied, the Korn Ferry headhunter that votes to terminate executives so that he can earn a fee finding their replacement, came in with the second worst tally. Very interesting new development, Grant Thornton received more “withhold” votes than anyone on the board.

The way I read this is that the company’s auditor is being sent a message that it too can be held responsible for all the “shady” things happening inside this public company. Keep up the pressure honest shareholders – I believe I can hear the bell tolling. And, I cannot wait to see what this company will do when it is run for the benefit of its public shareholders and not to conform with Davis’ wingbat anti-growth religion.

The “anti-growth” comment refers to the Davis alliance with the Rudolf Steiner Foundation, a de-facto holder of a third of his stake via a Donor-Advised Fund structure.

The involvement of RSF Social Finance — a San Francisco based ethical investment group, which also owned a bank, since sold to Amalgamated, that was a major lender to Cyanotech, and a partnership between Davis and RSF in a vanity vineyard in California disclosed by the whistleblower — has muddied the waters around the management and the stock.

Investors who believe in the company’s actual business prospects want to see Davis gone.





Cyanotech farms microalgae in a 90-acre facility in Kona, Hawaii.

Incorporated in 1983, Cyanotech sells Hawaiian BioAstin natural astaxanthin, a dietary antioxidant and nutraceutical, and Hawaiian Spirulina Pacifica, a dietary supplement and source of antioxidant carotenoids.

Cyanotech today is valued at about $19 million, with shares trading at $3.29, near their low in the past year of $3.22 and 40% below a high of $5.77. The stock was trading close to $10 per share in 2015.

The whistleblower said he hoped to expose Davis’s actions and that he believed removing him from the Cyanotech board would return the focus of the company to its operating business.

“In a perfect world (I know it’s not) Davis would go, the company operations get cleaned up, and Cyanotech can grow nicely organically. Once Davis is on his way out, I know minority shareholders, myself included, would want to increase positions.”

“This is not about M&A, but about fairness before the law. That said, the sector is growing and without this jerk at the helm, the company’s future is bright.”

There are few public companies in the $30 billion vitamins and nutrition supplements market, but major transactions in the past five years support the thesis that Cyanotech is worth 3 to 5X sales versus 1X currently.

The last two big deals in the sector — in 2012 — highlighted the scope for future M&A.

Reckitt Benckiser (RB.L) bought Schiff Nutrition for $1.4 billion, besting Bayer’s $1.2 billion bid for the vitamins company, and Germany’s BASF (BASFn.DE) bought fish oils maker Pronova BioPharma (PRON.OL) for $845 million to boost its health supplements business.

Demand for Cyanotech’s BioAstin natural astaxanthin is high, but sales are limited by the company’s ability to produce the stuff, what between tropical storms and bad management decisions.

The whistleblower argues that a revolving door management-style under Davis’s leadership has distracted the business at hand, and may be masking Davis’s ulterior motives.

“I think Davis has been sandbagging production and has fired a succession of CEOs who tried to do the right thing. I think his goal has been to literally scare away investors, lock down the company, and start paying out cash dividends.

Besides the shareholders, the person most wronged in Davis’s opinion is former Cyanotech CEO Brent Bailey, fired without cause right before he was to vest in a large amount of stock five years into a seven-year deal.

“Davis fired him and clawed back his stock, this for the guy who was responsible for getting CYAN into Costco!”

After Davis pulled Bailey’s severance agreement, the former CEO brought Davis to arbitration and won; his severance was reinstated, Davis was shown to be acting unethically and illegally.

The noose around Davis is tightening.

“There is an open investigation at SEC, and 6,200 pages have been filed with IRS..”


Meridian & Section 4943 of IRS Code


Depending on you ask, the second or third-largest Cyanotech shareholder is Meridian OHC Partners, a New Canaan-based investment fund, which filed suit against Davis in 2016.

Section 4943 of the IRS code limits the amount of stock to 20% of a public company that be controlled by a private foundation.

When Davis’s purchases of Cyanotech shares approached and eventually exceeded 20%, he began “parking” shares with Rudolf Steiner Foundation via a Donor Advised Fund.

The parties agreed that RSF would hold the Cyanotech shares for the benefit of Ginungagap, the pass-through entity created and controlled by Davis, with two RSF executives on its board. The two “unrelated” companies are also connected via a partnership between the two companies in the Mendocino County vineyard.

For those questioning how tight Davis is coordinating with RSF, their vineyard deal, which is still in operation and goes back to 2002-2004, is via Davis non-profit Ginungagap — the mythical Nordic abyss — and an RSF company called Yggdrasil — the tree that connects the nine mythical Nordic worlds.

The arrangement turned RSF technically into the second-largest shareholder of Cyanotech, though clearly at Davis’s request and with his money. Ultimately, Davis is trying to paint seven non-profits as separate entities, but angry shareholders are not buying it, and neither is the judge.

Earlier this year, after a war of 13D filings, after Davis’s side called for the case to be dismissed. A US District Court judge in Nevada saw enough merit to allow it to proceed:

Meridian’s allegations exhibit a comprehensive plan by Davis to use RSF as an alter ego and use their combined interest in Cyanotech as a means of controlling it.

Meridian alleges that Davis has always invested in Cyanotech with a view to control it, as shown by his early placement on the Board, continued influence as its Chairman, and alleged involvement in cycling out CEOs.

Meridian further alleges that Davis used RSF to gain more influence, as shown by their close preexisting relationship, the unprecedented and never-repeated donation of $2.5 million dollars to RSF so that it could fund the purchase—that Davis allegedly negotiated—of a 9.7% interest in Cyanotech, and the subsequent transfers of stock to RSF through Davis’s charitable foundation.

And Meridian sufficiently alleges that Davis and RSF have been in cahoots since at least 2011 when RSF first invested because Davis was allegedly responsible for every share that RSF acquired.

These allegations are sufficient to plead plausible claims of noncompliance with Section 13(d.


Accordingly, the defendants’ motions to dismiss [ECF Nos. 78, 79] are DENIED.

Dated: March 15, 2018,
U.S. District Judge Jennifer A. Dorsey

Outside of RSF, the Cyanotech shares are controlled by Davis via five non-profit vehicles, including one belonging to his wife, film director Jyll Johnstone.

She’s also party to the tax fraud argument because of the non-profit movie making company Canobie Films they run together. Due to the stipulations in his father’s will, Davis isn’t supposed to be donating his charity dollars to organizations where he is principally benefiting. He’s supposed to be giving it away, not enjoying it and avoiding tax.

Rather than cash profit, the film company’s payback is notoriety at dozens of international film festivals, with charity-paid-for entry forms, attendance fees, hotel rooms, publicity junkets, plus, obviously, the cost of producing all those the movies, which the rare Hollywood distribution deal could one day even lead to money into his pocket.

That’s bad, and the farm deal is even more dodgy.

Of course, Davis argues it’s a non-profit donating to a non-profit, but the fact the Davis’s live adjacent to the property, along with the other partner on the deal, and they’re just helping out RSF to be good neighbors, also doesn’t wash. They directly benefit, personally.

With such honest folks, the whistleblower wasn’t surprised to find one of these matching Nordic-named “unrelated parties” undercharging rent to the other by an estimated $6.2 million — so, undeclared goodwill of $6,185,000:

A 30-year lease for 87 acres in Mendocino for $15,000 per annum — so shocking, it could even be illegal.


 “Davis is crooked, and we want him out.”


News of the local partnership between Davis and RSF in a tax-dodging California winery lit a new fire under Davis, forcing the latest 13 D, as the Meridian case lingers, with both hanging over Davis’s future at the helm and the stock.

The whistleblower, who has dedicated the past year of retirement hours better spent on a golf course, to expose Davis via a website detailing his corruption, was sanguine about the future of the company and hopeful the pressure will force Davis’s hand.

“Cyanotech could be a great company; it’s product is great, company management, when allowed to do their job, performed very well. The scope for an eventually buyout at a high valuation is also real.”

But Davis is in the way.

“Davis’ attitude seems to be this public company became his private property with his original financing,” the whistleblower said.“He was formally added to the board in early 2003 and been directly influencing the company for his personal benefit ever since.”

His control over Cyanotech deepened in 2010, when he fired the first of several CEOs and began increasing his position in the stock. By 2011, from the Meridian suit, Davis via RSF owned a third of the company.

The self-styled mild-mannered documentary film producer gained his initial stake in Cyanotech through a convertible bond and private stock private placement that he renegotiated to near loanshark levels.

In 2000, Davis started with a $1.25 million convertible-stock placement at 6%, with a strike price at $1.50, plus an almost equal amount of warrants at $1.80 available (when the stock was already trading above $2.)

By May, 2002, Cyanotech was fumbling, including at risk of losing its NASDAQ-listing.

The note repayment was delayed six months. In exchange, Davis’s strike price fell to $1.00, the interest rate went to 10%, plus Davis got 30% more warrants at $1.10.

In October, 2002, the loan was replaced with a new $1.25 million convertible-stock placement, directly at 10% interest, plus a whopping 750,000 warrants at a strike price of $0.65 per share, compared to stock trading above $2.

The screenshot is the disclosure in Cyanotech’s 2003 SEC 10K about the original Davis investment in 2002.

The amount of profit in the convertible shares at point of pricing covered the cash stock he bought in the deal.

“Shareholders are sick of this guy,” the whistleblower said. “Davis and his partners are mad with power at this company, and minority shareholders feel abused.”

“We’re calling for the SEC and the IRS to step-it-up, and bring this man to heel.”

“Davis is crooked, and we want him out.”

Barton LLP in New York represents the whistleblower in the SEC filing.


2 Thoughts on “Whistleblower Calls For Removal of Cyanotech ($CYAN) Chairman Michael Arlen Davis; Promising Future of BioAstin Microalgae Vitamin Biz Curtailed By Tax Cheat”

  • I take the vitamin, but don’t own the stock.

    CPA for 20+ years, this Davis sounds like a real POS.

    Company looks ok, I hope they throw this guy out with the dirty algae water!

  • The update here is to apologize for the dead links. The whistleblower — an old guy who had time to do the work — has stepped away from his vigilantism, shutting his Twitter and his website. We’re told it was his ulcer, plus his wife, plus the stress of waging this war alone, especially after the whistlebl0wer Twitter account that provided him air cover was suspended for too much truth. His case is still pending, his lawyer is active and for anyone needing to contact him, we can forward along the message.

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