MTY Denied and then Covered Up Whistleblower Allegations

Updated on March 6, 2021

Our attorney reported more than 100 whistleblower allegations to MTY in January 2020 according to this timeline. The report alleged FTC regulatory violations by Cold Stone Creamery—MTY’s largest concept—over a period of years. MTY’s attorney responded on February 13, 2020 stating the information inaccurately portrayed Cold Stone and Kahala. One day later, evidence of a well-orchestrated cover-up first emerged when the company announced the claims were reported by an “employee” and suggested they were “baseless”. MTY, CEO Eric Lefebvre and Audit Chairman, Gary O’Connor later stated the allegations had been researched and affirmed they were filed by an “active employee” and confirmed to be “baseless”.

This webpage outlines several specific allegations and the publicly identifiable elements of the cover-up. We’ve also included links to documents we feel substantiates these allegations and justify our belief that MTY and Cold Stone are engaged in a cover-up.

  1. MTY, its CEO, Eric Lefebvre and Audit Chairman, Gary O’Connor made false statements on behalf of the company following the whistleblower allegations.

Concern: The FTC and securities regulators require truthful statements. This includes oral statements that contradict the mandated FTC information (PDF pg. 89). In addition to claiming the allegations were baseless, MTY, Lefebvre and O’Connor falsely claimed the allegations were reported by an “active employee” and were “evaluated and dealt with in the past” (PDF pg. 2 and PDF pg. 2 & 6).

Cover-Up: Despite MTY, Lefebvre and O’Connor’s false statements to the contrary, the allegations were reported by this website, not an MTY employee. We believe MTY is attempting to stave off litigation by shareholders and regulatory agencies that claim the company failed to fulfill its obligation to monitor and remediate. By falsely claiming the whistleblower was “active employee”, MTY can cover-up the notion that an outsider was more effectively monitoring the company than management.

As demonstrated in the timeline, MTY had acknowledged receipt and review of the whistleblower allegations one day before calling them “baseless”. The allegations were accompanied by volumes of evidence to prove they had merit and were ongoing. Therefore, as demonstrated below, MTY, Lefebvre and O’Connor knew the allegations were neither “baseless” or “dealt with” when they made these false statements to investors.

Ongoing Concerns: Of the 100+ reported potential violations, only a small number have been remediated. We believed these matters were material at the time we reported them and are equally material today. Yet it appears MTY has not issued a retraction or impact statement on the subject.

  1. In an effort to cover-up Lefebvre’s false statements to investors, we believe Cold Stone submitted false data to the U.S. federal government.

Concern: The FTC and various securities regulations require truthful statements to investors. This article suggests the same may apply to U.S. disclosure documents. Following MTY’s announcement of the whistleblower allegations, Lefebvre responded to investor concerns about Cold Stone store closures by claiming the concept’s number of locations will always grow. Forbes questioned the truthfulness of the statement because Cold Stone hadn’t grown its U.S. locations since at least 2007 and had closed 500+ stores during the same period.

Cover-Up: According to Cold Stone’s 2018 federal disclosure data, the company had 328 international locations (PDF pg. 7) and 903 U.S. locations (PDF pg. 101) totaling 1,231 locations at year end. One month after Lefebvre’s false statement to investors, the company issued federal disclosures reporting its 2019 data of 341 international locations (PDF pg. 8) and 898 U.S. locations (PDF pg. 95) or 1,239 global locations by year end. Thus, if its federal disclosures are truthful, the concept gained eight global locations during 2019. As a result, Lefebvre’s statement to investors would be true as of 2019, thus perhaps mitigating any losses suffered by shareholders who relied on the statement.

However, reports submitted before Lefebvre’s statement casts doubt on the truthfulness of Cold Stone’s 2019 federal disclosure data. It appears that prior to Lefebvre’s statement, Cold Stone submitted other reports that reflected it lost total global locations. Such a loss would make Lefebvre’s statement false and perhaps exposed the company and its board to legal liability.

More specifically, on December 19, 2019, we imaged Cold Stone’s entrepreneur.com webpage, which included the company’s 2019 data. (Cold Stone’s fiscal year ends on November 30th (PDF pg. 8).) This data was presumably posted by Cold Stone.

Cold Stone reported 315 international locations and 893 U.S. locations for a total of 1,204 locations at the end of 2019. Cold Stone’s franchisetimes.com webpage corroborated the international total and also reflected a decline in global locations. Following MTY, Lefebvre and O’Connor’s statements to investors on February 24, 2020, however, Forbes published an article questioning the truthfulness of those statements.

Seemingly, in an attempt to cover-up Lefebvre’s false statement, Cold Stone published data within its federal disclosures that contradicted the losses reported on entrepreneur.com and franchisetimes.com. The new data increased the company’s international locations from 315 to 341 for 2019. This mysterious 26-store addition resulted in an global increase of eight locations compared to the prior year’s federal disclosure. It also represented a substantial trend reversal in international growth for Cold Stone considering its 2016, 2017 and 2018 disclosures totaled 349, 336 and 328, respectively.

This raises the question: Did Cold Stone knowingly increase its 2019 international locations data after Lefebvre’s false statement was exposed by Forbes to make it appear as if it was true? If not, what explains this miraculous increase that is just enough to cover-up his false statement—one month later?

Ongoing Concerns: Prior to Lefebvre’s false statement, Cold Stone had not grown its U.S. locations since at least 2007, despite excellent economies and industry growth. In its 13-year decline since 2007, 2020 would arguably be the least likely year one might expect to see a trend reversal—particularly in its international markets. Consider the odds: a global pandemic, its severe financial impact, many Cold Stone U.S. closures (e.g. here, here, here, etc.), Singapore franchisee folds, Cold Stone’s closest competitors lost double-digit and triple-digit locations (here and here), etc.

Despite this, just when Lefebvre needs a lifeline after being exposed for making false statements to investors, Cold Stone throws him one by reporting it grew by double digits in 2020. Investors should consider, to what extent Cold Stone might go to make Lefebvre’s false claims appear true—at least to the point that shareholder litigation is mitigated?

(We’ll post an update here after we’ve received Cold Stone’s 2021 FDD.)

  1. After years of false and misleading statements about its total global locations, Cold Stone finally admits it has fewer than 1,000 locations.

Concern: The FTC requires franchisors to publish accurate location totals within its FDD (PDF pg. 59) and its promotional materials (PDF pg. 89). Despite this, Cold Stone has repeatedly and substantially inflated its global locations in promoting its franchise investments. For example, the company repeatedly claims to operate approximately “1,500 locations” globally (here, here, etc.) and “more than 1,500” locations worldwide (here and here). As we reported to MTY, this is false.

Cover-Up: These concerns were a part of the whistleblower allegations that MTY, Lefebvre and O’Connor’s characterized as “baseless”. However, following our whistleblower complaint, Cold Stone adjusted its locations totals on some articles posted to its website used to promote franchise opportunities to claim “nearly 1,000 locations globally”, “nearly 1,000 locations around the world”, etc. Thus, the company lowered its claim on total locations by 500 locations or 33%.

Ongoing Concerns: Because MTY has allowed Cold Stone to publish some investor articles with false information and others without it, creates the strange scenario of Cold Stone claiming more than 1,000 U.S. and hundreds of international locations in 32 years on one hand (here), and fewer than 1,000 global locations also in 32 years on the other hand (here). Obviously, both cannot be true.

Also, as recently as February 10, 2021, MTY has allowed Cold Stone to continue claiming it “operates nearly 1,500 locations globally” in other publications and it’s left earlier false claims in place for potential investors to find and rely upon (e.g. here, here, etc.). As also reported to MTY, we believe Cold Stone’s false statements that its franchises are growing fast and rapidly are false, potentially misleading and may violate FTC regulations. These concerns remain unaddressed.

  1. Cold Stone makes false and misleading statements about its international locations and international markets.

Concerns: The FTC has jurisdiction over franchising in the U.S. and its territories (PDF pg. 6). However, all promotional materials (PDF pg. 89) and statements within the FDD must be truthful (PDF pg. 92). This article suggests the same may apply to U.S. disclosure documents. We alleged in our report to MTY that Cold Stone makes false and misleading statements about its international locations and markets. For example, Cold Stone often falsely claims it has more than 400 international locations (here, here, etc.). As explained below, we think the company also publishes false statements regarding its international locations within the company’s FDD’s.

We believe Lefebvre’s assurances to investors of Cold Stone’s past and future growth along with MTY, Lefebvre and O’Connor’s blanket denial of the whistleblower allegations play a part in supporting this false narrative. In our view, their statements were intended to distract investors who were only beginning to discover the stunning decline of Cold Stone’s global franchise network since 2007. We also believe the collective statements of MTY, Lefebvre and O’Connor were intended to settle investors using the familiar corporate false narrative: Cold Stone, MTY’s sales leader, has been “growing for years”, that “growth shows no sign of stopping” and the whistleblower allegations and other claims to the contrary are “baseless”.

We believe this false narrative was supported, in part, by false international data. This includes Cold Stone’s continued false claims that it operates in more than 30 countries (here, here, etc.) or in 34 countries here.

Cover-Up: In addition, Cold Stone reported international locations of 336 (PDF pg. 7), 328 (PDF pg. 7) and 341 (PDF pg. 8) in its 2018, 2019 and 2020 FDD’s, respectively. This data proves the company’s international locations claims are false as neither value is greater than 400.

The company also reported U.S. locations of 923 (PDF pg. 97), 903 (PDF pg. 102) and 898 (PDF pg. 95) in the same respective FDD’s. Thus, if the company’s federal disclosures are truthful, its yearly global locations would equal the sum of the two or 1,259, 1,231 and 1,239 for the same respective FDD’s.

However, as discussed in Section 3 above, Cold Stone now admits it has fewer than 1,000 locations globally. Assuming for a minute that Cold Stone’s U.S. location data is accurate, in order for the company to have “nearly 1,000” global locations, the maximum international locations must be less than the difference between 1,000 and its U.S. totals, or 77, 97 and 102, for the same respective FDD’s. We therefore contend that Cold Stone’s international data is substantially inaccurate.

Cold Stone’s claim to more than 30 international markets is also vastly overstated. Cold Stone admitted in court proceedings that it operated in just 25 international markets in 2019. (This excludes Guam, which is a U.S. territory and Singapore, which folded in January 2020.) In addition, the company’s own website currently lists just 24 international markets, excluding Guam.

Ongoing Concerns: Based on its own contradictory statements and federal disclosures, it appears that Cold Stone is grossly overstating its international location data within its FDD and in its promotional publications including, on entreprenuer.com and on franchisetimes.com. By doing so, the company can hide its extraordinary global decline over the past 13 years and appear more stable and attractive to investors than its true data reveals.

  1. Cold Stone changed its presentation of financial performance data to substantially reduce the number of locations omitted in the calculation of its “average gross sales” and explained why each location’s data was omitted.

Concern: The FTC prevents franchisors from “cherry picking” their best data as a reflection of potential financial performance (PDF pg. 57). We informed MTY that Cold Stone calculated “average gross sales” in its 2018 and 2019 FDD’s after omitting 51 (PDF pg. 96) and 87 (PDF pg. 100) stores, respectively, claiming they were open fewer than 12 months.

In a healthy franchise system, one might anticipate that new locations would largely account for stores that were opened less than a year. However, Cold Stone curiously excluded 28 and 69 more stores than it opened as reported in its 2018 and 2019 FDD’s, respectively. By omitting 10% of its lowest-performing stores as it did in its 2019 FDD, for example, the company’s “average gross sales” appears considerably larger.

Cover-Up: After we reported this allegation to MTY, Cold Stone issued its 2020 FDD which excluded just six more stores than it opened (PDF pg. 93). In addition, the company characterize the omitted data.

Ongoing Concerns: We also reported to MTY that Cold Stone posted a portion of the “average gross sales” data to a 2018 and 2019 version of a franchise investment article titled “How Much Money Can I Make?” without the “specified information” required by the FTC (PDF pg. 55). Cold Stone has published a new version that also excluded specific information that would inform potential investors of the omitted data characteristics.

We also alleged that some of the company’s financial performance statements were misleading (e.g. a “high likelihood of success”, like a “winning lottery ticket”, “a sound investment”, “high profit margin”, etc.). Supportively, the company also falsely claims its franchises are growing fast or rapidly, and that “franchisee satisfaction is at an all-time high”. However, Cold Stone reported 271 franchisees ceased to do business with the company during the three-year span reported in their 2018, 2019 and 2020 FDDs (PDF pg. 106, PDF pg. 110 and PDF pg. 104, respectively). We therefore believe the company’s financial performance and related statements are potentially misleading and may violate FTC regulations.

  1. Cold Stone omitted the FTC mandated “Table No. 5” from its 2018 and 2019 federal disclosures.

Concern: The FTC requires franchisors to publish prospective growth data in “Table No. 5” (PDF pg. 116). The data is intended to give “prospective franchisees insight into anticipated growth within the system”. Cold Stone omitted this table from its 2018 (PDF pg. 106) and 2019 (PDF pg. 110) FDD’s. However, Cold Stone included the same table in the same FDD’s for its licensee, Rocky Mountain Chocolate Factory (PDF pg. 411 and PDF pg. 434, respectively), and in earlier FDD’s (PDF pg. 152), therefore, Cold Stone was aware of the requirement.

By omitting the table, Cold Stone prevents prospective franchisees from verifying that the company’s claims that investors are clamoring to purchase their franchises are not true.

Cover-Up: Two months after we reported the whistleblower allegations to MTY, despite MTY, Lefebvre and O’Connor’s denials, the 2020 FDD was issued with Table No. 5 included (PDF pg. 103). The table disclosed just nine projected franchises in 2020. (This was prior to COVID-19.)

Thus while projecting only nine new franchises, Cold Stone described demand for its franchises as, among the “hottest tickets”, “so many investors are trying to cash in”, a “can’t-miss“ investment in “high demand”, etc.

Ongoing Concerns: As demonstrated above, Cold Stone continues to falsely claim there is exceptional demand for its franchise opportunities.

  1. Cold Stone falsely claims that its franchise opportunities are low-risk, high-reward and that its franchises enjoy a low closure rate.

Concern: The FTC requires franchisors to publish accurate financial performance information within its FDD (PDF pg. 59) and its promotional materials (PDF pg. 89), even when those communications are “by implication” (PDF pg. 14). Cold Stone promotes its franchise investments as “low-risk, high-reward” investment opportunities and claims to have “so few” store closings. As we reported to MTY, this is false.

Cover-Up: MTY, Lefebvre and O’Connor have denied these allegations. However, Cold Stone purportedly had 1,444 global locations at the end of 2007. Because Cold Stone recently admitted that it has fewer than 1,000 locations, the company is also admitting that it closed at least 445 stores in 12 years, or 31% of its stores. This proves Cold Stone does not have a low closure rate. It also supports other reports, including a federal government study that implies Cold Stone is among the highest risk franchise investments in the U.S.

In Section 5 above, we discussed that Cold Stone disclosed a total of 271 franchisees ceased to do business with the company in a three-year period according to their 2018, 2019 and 2020 FDD’s. MTY also disclosed that it has engaged in a kickback scheme for at least the same period. Kickbacks are “commercial bribes” that cause operators to pay “artificially high” prices and are therefore harmful to the profitability of franchise owners. MTY generated a total of $63.3 million from kickbacks as disclosed in Cold Stone’s 2018, 2019 and 2020 FDD’s (see PDF pg. 62, PDF pg. 66 and PDF pg. 59, respectively).

MTY’s kickback scheme likely contributed to Cold Stone’s high closure rate, the recent departure of 271 franchisees and the high risk it poses to investors.

Ongoing Concerns: We have no reason to believe that MTY abandoned its kickback scheme in 2020. We’ll update this section once we’ve received and reviewed Cold Stone’s 2021 FDD.

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These are not minor—accidental data anomalies that occurred over a year or so, these are major anomalies over the span of more than a decade. When brought to the attention of MTY, their top executives and board of director denied all and covered up.