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 III. Two Brief Case Studies:

Legal analysis is fact-specific. To crystallize just some of the issues raised in this memorandum, two brief case studies follow. While neither will be considered exhaustive, they will deal with the major issues raised by the public filings and other open source information available. As in most cases, the attorney for the business client engaging in SCF will have access to confidential, privileged, or non-public information which might change materially the analysis. But what is often the case, the most important material for assessing a prima facie case of civil or criminal liability is that which has been disclosed to the public. The relevant information kept from the public tends to be inculpatory rather than exculpatory.

A. Caribou Coffee
1.       Factual background

Caribou Coffee (“Caribou”) began as the dream of John and Kim Puckett, a young couple on a backpacking trip to Alaska. They wanted to change their life around and decided upon a new start-up venture: a coffee cafe chain envisioned as a competitor to the industry giant, Starbucks. In 1992, they opened up their first store in Minneapoliswith an initial investment of $50,000.[319] By December 2000, the upstart chain had raised $40 million through several private investment rounds and had opened 149 stores in a half-dozen markets, a distant second to Starbucks’ more than 3,000 stores. But poor management systems, board issues and a host of other problems prevented the company from exploiting the market and raising capital for further expansion. The company needed money badly; the investors were not going to invest further; and they were even threatening to exercise their put options to get their money back with interest.[320]

By the end of the year, the Pucketts had arranged for an exit strategy, agreeing to sell approximately 84% of Caribou Coffee to an Atlanta, Georgiabased company called Crescent Capital Investments, Inc. (“Crescent”), for a price tag of approximately $84 million.[321] Crescent was owned by a Bahrain-based investment bank called First Islamic Investment Bank, which was funded by mostly wealthy Arab investors from the GCC states.[322]

Over the next five years, with the added capital, Caribou grew substantially and by July 2005 was operating 337 coffeehouses. Notwithstanding the company’s continued operating losses, the time apparently was ripe for a public offering to raise an additional $90 million from the U.S.investing public. In July 2005, the company’s lawyers and accountants began the registration process under the 1933 Act for an initial public offering.[323]

One of the issues the lawyers for Caribou confronted was if and how to disclose the fact that its principal shareholder, Crescent and its parent First Islamic Investment Bank, which had changed their names to Arcapita Inc. and Arcapita Bank B.S.C.(c)[324], respectively, were Shariah observant and required that Caribou also operate its business according to Shariah. Ostensibly, this would have implications at the very least on what risks arose out of the prohibitions which precluded the company from incurring interest-based debt; limited the kinds of foods it could serve its customers; and forbade it to utilize traditional yet speculative hedging strategies to guard against the future price increases for its principal commodity, coffee.

But the problem with which the attorneys had to wrestle did not end there. Three years earlier in 2002, a public relations firestorm erupted forcing Caribou Coffee to respond publicly to accusations that it had aligned itself with a supporter of terrorism. [325] In July of 2002 an Internet-based campaign began accusing Caribou Coffee and its principal shareholder of being associating with and employing a Shariah authority named Yusuf Al-Qaradawi, who was well known for his statements in favor of Jihad, including suicide-homicide attacks against Israeli citizens by Palestinian terrorists and legal rulings supporting the Jihad carried out by Hamas and Hizballah against Israel.[326]

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