When someone decides to start a new company, it is natural that they should want people they already know and trust to invest in their new company. On the other hand, when those old relationships turn sour, it can lead to schemes to cheat other investors out of the true value of their shares of the company. This allegedly happened with one of the founders of a brewing company by the name of 5 Rabbit.
The brewery was founded in 2011 by Andres Araya and Isaac Showaki. Each founder had friends and family members help finance the company by becoming investors. In 2013, Showaki allegedly left the company following a dispute with Araya. The investors that Showaki brought to the company remained investors in the company and they are now the plaintiffs in the lawsuit against Araya and another investor.
Before Showaki left the company, Araya allegedly sold 11 shares of the company to “a friend and former colleague” who Araya met in Costa Rica, named Diego Foresi. The 11 shares were allegedly sold for a total of $250,000. The plaintiffs allege that they were never made aware of the sale of these shares. According to the allegations in the complaint that was filed, this sale of shares “was extremely important to (the) plan to artificially depress 5 Rabbit’s share value.”
The lawsuit further alleges that, when a company was hired by 5 Rabbit to determine the value of the brewery, 5 Rabbit “instructed the valuators to treat the investment as debt, not equity as it actually was.” The lawsuit claims that this alleged deception “significantly reduced 5 Rabbit’s fair market value and the implied value of its shares.” Clearly, this had a direct, negative impact on 5 Rabbit’s investors by giving the appearance that the shares they held in the company were worth less than what the investors initially paid for them.
A few months later, the lawsuit alleges that Araya, Randy Mosher, and other investors that Araya brought in as investors to 5 Rabbit (all of whom are named as defendants in the current lawsuit), set up a new company called Benjamin Thomas Inc. Allegedly, Araya, Mosher, and Araya’s other investors all transferred their shares of 5 Rabbit to the new company, making Benjamin Thomas Inc. the controlling shareholder of 5 Rabbit. Benjamin Thomas Inc. and 5 Rabbit then performed a short-form merger. The lawsuit alleges that the purpose of this merger was to force out Showaki’s investors at an artificially low price.
The investors who were allegedly forced out allegedly had their shares converted to cash at a rate of $3,019 per share. Since these investors had paid $5,000 per share, each of them received an alleged loss of about $2,000 for each share that they held.
Once this was completed, Foresi’s “debt” was allegedly converted to equity, and according to the lawsuit, “the fair market value of 5 Rabbit increased significantly, providing a substantial windfall for Foresi.” As a result, not only did the plaintiffs of the lawsuit allegedly lose a substantial amount of money, but Foresi was also allegedly enriched unjustly.
Mosher, one of the defendants in the lawsuit, said that he believes the suit has roots in the argument which led to Showaki leaving the company. “We think we’ve acted fairly in these dealings,” Mosher said in a statement. “We don’t think we’ve created any of the problems. They’ve all come from the other side.”
Super Lawyers named Illinois business trial attorneys Peter Lubin a Super Lawyer in the Categories of Class Action, Business Litigation, and Consumer Rights Litigation. Lubin Austermuehle’s Chicago business trial lawyers have over a quarter of a century of experience in litigating complex shareholder disputes for closely held family and other closely held businesses. We handle emergency business lawsuits involving injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist businesses and business owners who are victims of fraud. You can contact one of our business attorneys by calling our toll free number at 630-333-0333 or online here.