MTY Denied and then Covered Up Whistleblower Allegations
Updated on April 11, 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”, were previously “dealt with” and were “baseless”. As discussed below, those statements were false.
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.
- MTY, its CEO, Eric Lefebvre and Audit Chairman, Gary O’Connor made false statements to securities investors 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). Also, this article suggests that those who “falsify, conceal or cover up a material fact” or “make or use a document containing a materially false statement” under certain conditions, may face federal imprisonment. It appears this federal law was used to convict several high-profile individuals including Martha Stewart and Bernie Madoff (whose felony charges included false statements and false filings). 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.
- Lefebvre made false statements to investors claiming, Cold Stone would always grow.
Concern: The FTC and various securities regulations require truthful statements to investors. Following MTY’s announcement of the whistleblower allegations, Lefebvre responded to investor concerns about Cold Stone store closures by claiming Cold Stone’s 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: As demonstrated in this timeline, Lefebvre was repeatedly warned that Cold Stone wasn’t growing, most recently, just one month before his false statement to investors. In addition, MTY’s attorney acknowledged the company had received and reviewed our whistleblower allegations, which informed MTY that Cold Stone had not grown in over a decade. This was just one day before the company’s announcement of the allegations. Lefebvre was therefore aware that Cold Stone wasn’t growing at the time he made false statements to investors.
Following MTY’s announcement of whistleblower allegations, the company’s stock plummeted and investors expressed concerns about the pace of Cold Stone’s store closures. We believe Lefebvre’s false statement was intended to cover-up the fact that, as we reported to MTY, Cold Stone had been falsely telling potential investors for years that it was not just growing, but experiencing incredible growth. The reality was that the franchise network was shrinking fast.
Ongoing Concerns: As outlined in Section 3 below, we believe Cold Stone knowingly submitted false data to the U.S. federal government to cover up Lefebvre’s false statement to investors. In addition, Cold Stone continues to make false statements regarding the growth of its franchise network.
- We believe Cold Stone submitted false data in its 2020 U.S. federal disclosures to cover-up Lefebvre’s false statements to investors claiming Cold Stone would always grow.
Concern: The FTC and various securities regulations require truthful statements to investors. Also, this article suggests that those who “falsify, conceal or cover up a material fact” or “make or use a document containing a materially false statement” under certain conditions, may face federal imprisonment. It appears this federal law was used to convict several high-profile individuals including Martha Stewart and Bernie Madoff (whose felony charges included false statements and false filings).
Prior to Lefebvre’s statement to investors claiming Cold Stone will always open more stores than it closes, it appears Cold Stone submitted international locations data to two different sources indicating it closed more stores than it opened during 2019. However just one month after Lefebvre’s false statement, Cold Stone increased its previously reported totals in its 2020 U.S. federal disclosures. This made it appear that Cold Stone had opened more stores than it closed—just as Lefebvre had told investors.
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. One month after Lefebvre’s false statement to investors, the company issued federal disclosures reporting its 2019 data as 341 international locations (PDF pg. 8) and 898 U.S. locations (PDF pg. 95), or 1,239 global locations. Thus, if its federal disclosures are truthful, Cold Stone gained eight global locations during 2019. As a result, Lefebvre’s statement to investors would be true as of 2019, thus perhaps mitigating legal liability for losses suffered by shareholders who relied on his false statement.
However, reports submitted before Lefebvre’s statement casts doubt on the truthfulness of Cold Stone’s 2019 federal disclosure data. This appears to be a cover-up attempt aimed at disarming securities investors that suffered financial damages due to Lefebvre’s false statement.
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.) This data was presumably posted by Cold Stone.
Cold Stone reported data totaling 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 including Lefebvre’s growth statement, Forbes published an article questioning the truthfulness of the statements.
Seemingly, in an attempt to cover-up Lefebvre’s false statement, Cold Stone published data within its federal disclosures that contradicted the loss in locations reported to entrepreneur.com and franchisetimes.com. The new data increased the company’s international locations from 315 to 341 for 2019. This mysterious 26 additional stores resulted in a global increase of eight locations compared to the prior year’s federal disclosures.
This also represented a substantial trend reversal of the decline in international locations for Cold Stone considering its 2016, 2017 and 2018 disclosures totaled 349, 336 and 328, respectively. Miraculously, after many years of overall declines, Cold Stone supposedly grew it locations just in time to save Lefebvre, the CEO of its parent company, from appearing to have intentionally made false statements to investors to cover-up MTY’s leading brand’s impressive decline.
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 one month later that is just enough to cover-up Lefebvre’s false statement?
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 despite the pandemic. 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.)
- 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.
- 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 seems to imply that individuals within a company who are responsible for false statements may become the personal target of U.S. criminal investigations for certain untruthful disclosures. 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.
- 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.
- 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.
- 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: Also, MTY reported 152 store closures in the three-month period ending Q4, 2019—its most recent quarter prior to Covid’s effect on North America. In response to a question about store closures, Lefebvre said its “everywhere”, not just “one brand”.
MTY reported kickbacks in its federal disclosures for other brands in their respective 2020 FDD’s as well (e.g. Papa Murphy’s (PDF pg. 48), Taco Times (PDF pg. 59)). Thus, MTY’s store closure issue existed prior to Covid and is likely a result of the negative effects the company’s kickback scheme has on franchise profitability.
We have no reason to believe that MTY abandoned its kickbacks in 2020. We’ll update this section once we’ve received and reviewed Cold Stone’s 2021 FDD and add a section discussing observations from MTY’s 2020 consolidated financial statements.
- It appears that MTY has not issued a retraction or a material impact statement for its false statements to investors on February 24, 2020.
Concern: The Toronto Stock Exchange (TSX) requires immediate disclosure of information that “would reasonably be expected to result in a significant change in the market price or value” of stock (PDF pg. 4). The TSX also forbids misleading news releases that send “signals to the investment community which are not justified by an objective examination of the facts” (PDF pg. 7).
Cover-Up: MTY announced whistleblower allegations on February 14, 2020 and its stock plummeted. The allegations therefore meet the TSX definition of materiality. In addition, an objective examination of the information on this webpage demonstrates the allegations are true, despite MTY’s attempt to cover them up. MTY, Lefebvre and O’Connor’s false statements on February 24, 2020 claiming the allegations were reported by an MTY “active employee”, were previously “dealt with” and are “baseless” therefore meets the TSX definition of a “misleading news release”.
Thus, MTY owes investors a retraction of its earlier false statements and the issuance of a material impact notice.
The absence of a retraction and a material impact notice is the ultimate cover-up. MTY has done this for financial reasons. Specifically, to do so admits the allegations: (1) were not reported by an “active employee”; (2) were not previously “dealt with”; (3) were not “baseless”; and (4) that MTY, Lefebvre and O’Connor—MTY’s board of directors and senior management—subverted the TSX rules. They knowingly made false statements to investors to cover-up the allegations for their corporate and personal financial gain.
The risk of extensive shareholder litigation and MTY’s internal control weaknesses reported a year earlier may have been a factor. Also, management embarrassment may have may have played a role as the company should have caught, evaluated and dealt with these issues during the acquisition process. Once the allegations were reported, instead of disclosing, management likely decide the risk of a cover-up was far less than to cost of disclosure.
Ongoing Concerns: While a handful of the allegations have been addressed, 100+ remain at issue. Investors have not been warned as to the risk of these outstanding allegations.
- MTY’s highest order employee, CEO and board member Lefebvre, and its board of director, O’Connor, violated the company’s Code of Ethics by making false statements on February 24, 2020. Those statements resulted in a financial benefit to the company and its board members and was at the expense of other shareholders.
Concern: MTY’s Code of Ethics (COE) requires company employees and board members to “exercise honesty”, maintain “high standards of integrity” and to not “contravene laws and relevant regulations”. The goal of a COE is to ensure that the business is following laws and is “beneficial for all stakeholders”. Because noncompliance may result in legal penalties, management must “set a standard of ethical conduct” for its employees.
Cover-Up: As the CEO of MTY, Lefebvre is the highest-ranking employee. Because he and O’Connor sit on the company’s board of directors, they have the greatest interest to ensure COE compliance. In addition, each has an obligation to carry out his fiduciary obligation to operate in the beneficial interest of “all stakeholder”.
MTY’s chairman Stanley Ma owns 20% of the company’s outstanding shares and other board members have substantial holdings. Stanley Ma lost $40M in value alone in the ten-day period after the company’s announcement of the whistleblower allegations on February 14, 2020. MTY lost $200M in the same period. After MTY, Lefebvre and O’Connor’s February 24, 2020 false statements during the company’s earnings announcements, however, the stock soared. This reversed Stanley Ma and MTY’s slide despite that analysts were underwhelmed with MTY’s performance, and the market and MTY’s closest competitor were down.
Two weeks later, Forbes called the February 24, 2020 statements into question, and the stock again plummeted, resulting in Stanley Ma and MTY eventually losing $220M and $1.1B, respectively, between February 14, 2020 and March 18, 2020. Though some of the later losses can be attributed to Covid’s effect on the market, because MTY had lost hundreds of millions of dollars several weeks before Covid had a substantial impact on the market, the early poor performance is attributed to the whistleblower allegations.
While MTY, Lefebvre and O’Connor’s false statements financially benefitted Stanley Ma and MTY to the tune of hundreds of millions of dollars, their gains are at the expense of investors that loss substantially more on market swings due to the false statements. Because the statements have not been retracted and no material impact statement has been issued, that risk may be ongoing.
Lefebvre and O’Connor’s ethical practices do not align with their company’s own COE. Those practices safeguarded the interest of Stanley Ma and MTY at the expense of other investors. They put Stanley Ma and MTY’s financial interest over that of other stakeholders, which we believe violates the company’s own COE.
MTY’s board of directors has a fiduciary obligation to act in the best interest of its stakeholders. Despite this, MTY, Lefebvre and O’Connor may have intentionally undertaken actions that breached their fiduciary obligation. As a result, the company and its board members may be responsible for hundreds of millions of dollars in losses by shareholders.
Ongoing Concerns: The company has yet to disclose the truth in the form of a retraction and a material impact statement.
Also, MTY owns more than 70 brands. If MTY is not being truthful in its dealings related to Cold Stone, it’s possible the company is not being truthful in its dealings with other MTY franchises.
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.