CB Maryland Cease and Desist Order

Failure of any respondent to file an Answer, including a request for a hearing, shall result in entry of a final order directing Coffee Beanery to permanently cease and desist from violation of the Maryland Franchise Law.

ADMINISTRATIVE PROCEEDING BEFORE THE SECURITIES COMMISSIONER OF MARYLAND

IN THE MATTER OF:

THE COFFEE BEANERY, LTD.,

and

KEVIN SHAW,
Respondents.

Case No. 2005-0244

  • * * * * * * * * * * * * *

ORDER TO SHOW CAUSE

WHEREAS, the Securities Division of the Office of the Attorney General of Maryland (the
“Division”) initiated an investigation into the franchise-related activities of The Coffee Beanery, Ltd. and Kevin Shaw (collectively “Respondents”) under the authority granted under the Maryland Franchise Registration and Disclosure Law, MD. BUS. REG. CODE ANN. §14-210 et seq. (2004 Repl. Vol.) (the "Maryland Franchise Law"); and

WHEREAS, as a result of that investigation, the Maryland Securities Commissioner (the
"Commissioner") finds grounds to allege that Respondents violated the disclosure and antifraud provisions of the Maryland Franchise Law, in relation to the offer and sale of Coffee Beanery franchises in Maryland; and

NOW, THEREFORE, the Commissioner orders Respondents to show cause why a final order should not be entered ordering that the Respondents cease and desist from violating the disclosure and antifraud provisions of the Maryland Franchise Law.

I. JURISDICTION
1. The Commissioner has jurisdiction in this proceeding and over the Respondents pursuant to section 14-210 (a) of the Maryland Franchise Law.

II. STATEMENT OF FACTS
On information and belief, the Commissioner alleges the following:

A. Respondents
2. The Coffee Beanery, Ltd. (“Coffee Beanery”) is a Michigan corporation with a principal office address of 3429 Pierson Place, Flushing, Michigan 48433.

3. Coffee Beanery offers franchises for specialty retail coffee store, cafés, kiosks, coffee/espresso carts and coffee bars. Coffee Beanery franchisees sell fresh-brewed coffee, coffee beans, tea, spices, and related products such as mugs, coffee makers and food.

4. Kevin Shaw is Vice President of Real Estate for Coffee Beanery. Kevin Shaw is a former Vice President of Development for Coffee Beanery. At all relevant times, Kevin Shaw was involved in the offer and sale of Coffee Beanery franchises in Maryland.

B. Coffee Beanery Café Concept
5. Coffee Beanery initially registered with the Division to offer and sell franchises in
Maryland in January 1988. Coffee Beanery has consistently maintained an effective franchise registration in Maryland from that date to the present.

6. Beginning in or around 1997, Coffee Beanery began selling, for the first time, franchises for a new Coffee Beanery café concept (“Café Stores”).

7. Coffee Beanery Café Stores differ from traditional Coffee Beanery stores in several important respects. For example, Café Stores feature a menu of hot and cold specialty sandwiches, salads, soups and fresh baked goods. Traditional Coffee Beanery stores have a very limited food menu.

8. The layout of Café Stores are different from traditional Coffee Beanery stores and require additional space for food preparation and customer seating.

9. Café Stores are in different locations from traditional Coffee Beanery stores.
Traditional Coffee Beanery stores usually are located in malls. Café Stores usually are located in sites other than malls.

10. Café Stores require different equipment, fixtures, and staffing from traditional Coffee Beanery stores.

11. Café Stores have café-specific advertising.

12. Café Stores have experienced a higher percentage failure rate from traditional Coffee Beanery stores.

13. Coffee Beanery has had more experience with operating and franchising traditional
Coffee Beanery stores than it has had with Café Stores.

C. The Welshans’ Purchase of a Coffee Beanery Franchise
14. In Spring 2003, Deborah Williams and Richard Welshans (the “Welshans”) of
Annapolis, Maryland began to investigate the purchase of a Coffee Beanery franchise.

15. On or about May 28, 2003, the Welshans met with Kevin Shaw in Annapolis, Maryland to discuss their purchase of a Coffee Beanery franchise and a potential location for that store.

16. On or about June 2, 2003, after their meeting with Kevin Shaw, the Welshans received a copy of Coffee Beanery’s Uniform Franchise Offering Circular (“UFOC”). That UFOC contained an effective date of January 24, 2003.

17. On June 13, 2003, the Welshans attended a Coffee Beanery “discovery day” in Michigan to further investigate the Coffee Beanery franchise offering. At that discovery day, the Welshans received a tour of a Coffee Beanery Café Store operated by Coffee Beanery. Although the Welshans intended to purchase a traditional Coffee Beanery franchised store, several representatives of Coffee Beanery, including Kevin Shaw, encouraged them to purchase a Café Store, suggesting that Café Stores were potentially more lucrative, in part, because they were not “seasonal.”

18. While in Michigan for a discovery day, the Welshans expressed to Kevin Shaw their concern about the earning potential of a Café Store. In response, Kevin Shaw asked the Welshans if they would be able to manage with a combined income of $125,000. When they stated that they could manage with that income, Kevin Shaw responded that they should have no problem achieving that income level with a Café Store.

19. On or about June 17, 2003, Richard Welshans entered into a Franchise Agreement with Coffee Beanery for the operation of a Café Store in Annapolis, Maryland. Richard Welshan subsequently assigned the Franchise Agreement, with Coffee Beanery’s consent, to WW, LLC, a
Maryland limited liability company in which the Welshans were members.

20. The Welshans opened their Coffee Beanery Café Store in 2003. The Welshans encountered numerous problems with the layout of the store, the required cash register system, the advertising program, and certain required equipment.

21. The Welshan’s Coffee Beanery Café Store generated a loss each year it has operated.

D. The Coffee Beanery UFOC
22. The Coffee Beanery UFOC the Welshans received does not disclose when Coffee Beanery began selling franchises for Café Stores and, in several instances, does not differentiate disclosures for Café Stores from traditional Coffee Beanery stores.

23. In Item 1 of the Coffee Beanery UFOC the Welshans received, Coffee Beanery states as follows, under the heading “The Franchise Offered”:

We are in the business of: operating specialty retail stores, cafes, kiosks, coffee/espresso carts and coffee bars. For ease of reference, all of these will be referred to in this Offering Circular as “Stores” unless otherwise noted. Our Stores sell fresh-brewed coffee, coffee beans, tea, spices, related products such as mugs and coffee makes, and food items. We are also in the business of granting franchises for our stores and have offered franchises since 1985.

Since 1976, we have operated Stores of the type being franchised and continue to do so. These Stores are located in regional shopping malls, airports, strip centers, office buildings and cafes. Some of our Stores offer products only for off-premises consumption. …”

24. Item 20 of the Coffee Beanery UFOC the Welshans received discloses the number of Coffee Beanery franchises and company owned outlets opened, in operation, and closed, as of fiscal year 2002. That chart does not disclose how many of those outlets were Café Stores and how many were traditional Coffee Beanery stores.

25. Item 20 of the Coffee Beanery UFOC the Welshans received contains a list of the names, addresses, and telephone number of current and terminated franchisees, but that list does not distinguish which of those franchisees operated Café Stores.

26. Item 19 of the Coffee Beanery UFOC the Welshans received states, under the heading “Earnings Claim,” that “We do not make any representations or statements of actual, average, projected, or forecasted sales, profits, or earnings to franchisees with respect to our franchises under the Franchise Agreement. We do not furnish or authorize sales representatives to furnish you any oral or written information concerning the actual or potential sales, costs, income or profits of a Store or a Franchise. …”

27. Contrary to the statement in Item 19 of the Coffee Beanery UFOC, Kevin Shaw, a sales representative of Coffee Beanery, did furnish oral information concerning the potential income of a Café Store to the Welshans.

28. Coffee Beanery did not have a reasonable basis for Kevin Shaw’s representation that the Welshans could expect to earn a combined income of $125,000 from their operation of a Coffee Beanery Café Store.

COUNT ONE
AGAINST RESPONDENT COFFEE BEANERY ONLY
(Misrepresentation in connection with the offer or sale of franchises)

WHEREAS, section 14-229 of the Maryland Franchise Law prohibits any person, in connection with the offer or sale of a franchise, directly or indirectly, to employ a device, scheme or artifice to defraud; make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engage in any act, practice, or course of business which operates or would operate as a fraud or deceit on any person; and

WHEREAS, Coffee Beanery made material misrepresentations of fact and/or omissions of material fact about the Coffee Beanery franchise offering to prospective Maryland franchisees by failing to disclose when Coffee Beanery began selling franchises for Café Stores, failing to disclose the specific requirements for opening and operating franchises for Café Stores, and failing to separately identify the number of, and contact information for, franchisees who had opened, operated, and closed a Café Store; and

WHEREAS, Coffee Beanery made material misrepresentation of fact and/or omissions of material fact about the Coffee Beanery franchise offering in the form of unsubstantiated income projections, without disclosing the source and assumptions for those projections, and without having a reasonable basis for those projections;

NOW, THEREFORE, IT IS HEREBY ORDERED that Respondent Coffee Beanery show cause why Coffee Beanery should not be ordered to permanently cease and desist from the offer and sale of franchises in violation of the Maryland Franchise Law.

COUNT TWO
AGAINST RESPONDENTS COFFEE BEANERY AND KEVIN SHAW
(Earnings Representations)

WHEREAS, section 14-229 of the Maryland Franchise Law and COMAR 02.02.08.16(D) prohibit any person, in connection with the offer or sale of a franchise, directly or indirectly, to make oral or written statements concerning the potential earnings from operation of a franchise if the earnings claims have not been included in the franchisor’s UFOC; and WHEREAS, Kevin Shaw, an officer and representative of Coffee Beanery, told prospective Coffee Beanery franchisees that they could expect a specific income level from the operation of a Coffee Beanery Café Store franchise, but Coffee Beanery did not include an earnings claim in its UFOC and did not prepare that earnings claim in accordance with the requirements of the UFOC Guidelines;

NOW THEREFORE, IT IS HEREBY ORDERED, that Respondents show cause why a final order should not be issued against Coffee Beanery directing it to permanently cease and desist from the offer and sale of franchises in violation of the Maryland Franchise Law.

COUNT THREE
AGAINST RESPONDENT COFFEE BEANERY ONLY
(Untrue Statement in Application to the Securities Division)

WHEREAS, under section 14-231 of the Maryland Franchise Law, a person may not make or cause to be made an untrue statement of a material fact or omit to state a material fact in an application for registration, to amend a registration, or for renewal or in a notice o report filed with the Commissioner; and

WHEREAS, in numerous registration applications and amendments filed with the Commissioner, Coffee Beanery consistently has stated that it makes no representations to prospective franchisees about sales, profits or earnings from operating a Coffee Beanery franchise; and

WHEREAS, Coffee Beanery’s representation in its UFOC that it does not make oral or written representations about sales, profits or earnings that prospective franchisees could expect from operating a Coffee Beanery franchise is untrue, as Coffee Beanery has provided oral representations about the income a prospective Coffee Beanery franchisee could expect to earn from operating a Café Store franchise.

NOW THEREFORE, IT IS HEREBY ORDERED, that Coffee Beanery show cause why a final order should not be issued against Coffee Beanery directing it to permanently cease and desist from the offer and sale of franchises in violation of the Maryland Franchise Law.

COUNT FOUR
AGAINST RESPONDENTS COFFEE BEANERY AND KEVIN SHAW
(Violation of Disclosure Provisions)

WHEREAS, section 14-223 of the Maryland Franchise Law makes it unlawful for any person to offer or sell a franchise in Maryland without first giving a prospective franchisee a copy of the offering prospectus and a copy of each proposed agreement that relates to the sale of the franchise at the earlier of: (1) the first personal meeting of the franchisor and the prospective franchisee to discuss the possible sale of the franchise; or (2) 10 business days before the execution of a contract or payment of any consideration that relates to the franchise relationship. and

WHEREAS, under section 14-216 (a) and COMAR 02.02.08.04, the “offering prospectus” that a franchisor must give to a prospective franchisee is the UFOC that is registered by the Division;
and

WHEREAS, Respondents Coffee Beanery and Kevin Shaw offered and sold a franchise in Maryland without giving prospective franchisees a copy of the offering prospectus required under the Maryland Franchise Law at the earlier of the first personal meeting of the franchisor and the prospective franchisee to discuss the sale of the franchise or 10 business days before the execution of a contract or payment of any consideration that relates to the franchise relationship;

NOW, THEREFORE, IT IS HEREBY ORDERED that Respondents show cause why they should not be ordered to permanently cease and desist from the offer and sale of franchises in violation of the Maryland Franchise Law.

REQUIREMENT OF ANSWER AND
NOTICE OF OPPORTUNITY FOR HEARING

IT IS FURTHER ORDERED, pursuant to section 14-210 of the Maryland Franchise Law and COMAR 02.02.06.06, that Respondents shall file with the Commissioner a written Answer to this Order within fifteen days of service of the Order. The Answer shall admit or deny each factual allegation in the Order and shall set forth affirmative defenses, if any. A respondent without knowledge or information sufficient to form a belief as to the truth of an allegation shall so state. The Answer also shall indicate whether a respondent requests a hearing. A hearing will be scheduled in this matter if one is requested in writing. Failure by any respondent to file a written request for a hearing in this matter shall be deemed a waiver by that respondent of the right to such a hearing. Failure of any respondent to file an Answer, including a request for a hearing, shall result in entry of a final order directing Coffee Beanery to permanently cease and desist from violation of the Maryland Franchise Law.

SO ORDERED:

Dated: , 2006
MELANIE SENTER LUBIN
SECURITIES COMMISSIONER

CERTIFICATE OF SERVICE
I hereby certify that I have this day served the foregoing Order To Show Cause by causing a copy to be sent by United States Mail, certified delivery, return receipt requested, addressed to:

Kenneth Coxen
The Coffee Beanery, Ltd.
3429 Pierson Place
Flushing, Michigan 48433,

Kevin Shaw
The Coffee Beanery, Ltd.
3429 Pierson Place
Flushing, Michigan 48433, and

Paul R. Fransway, Esquire
Pear Sperling Eggan & Daniels, P.C.
Domino’s Farms
24 Frank Lloyd Wright Drive
Ann Arbor, Michigan 48105,

and by delivering a copy to Melanie Senter Lubin, Securities Commissioner, Maryland Division of Securities, 200 St. Paul Place Twenty-fifth Floor, Baltimore, Maryland 21202.

Dated: January , 2006

Dale E. Cantone
Assistant Attorney General
Maryland Division of Securities
200 St. Paul Place - 25th Floor
Baltimore, Maryland 21202-2020
(410) 576-6368


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