PR fumble may be legal woe

Whole Foods CEO's online musings spur SEC informal inquiry

Joyzelle Davis, Rocky Mountain News

Published July 14, 2007 at midnight

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Whole Foods CEO John Mackey's anonymous online musings are turning into more than just a public relations nightmare.

The U.S. Securities and Exchange Commission opened an informal inquiry into Mackey's postings, The Wall Street Journal reported Friday, citing unnamed sources.

Whole Foods spokeswoman Kate Lowery said the company hasn't been contacted by the SEC and declined to comment further.

From 1999 to 2006, Mackey used an alias to post hundreds of comments that at times cheered his company and bashed rival Wild Oats. In February, Whole Foods offered to buy Boulder- based Wild Oats for $671 million.

Legal experts say it's unclear whether Mackey's anonymous postings on Yahoo! Finance message boards under the handle "rahodeb" violated securities law. Among the issues the SEC will likely examine are whether Mackey made material misstatements with the intention of inflating Whole Foods' stock or driving down Wild Oats'.

Also, any release of nonpublic information could violate a regulation that prohibits selective disclosure.

"I think the SEC is scratching their heads, wondering why anyone would possibly do this," said Scott Berdan, a partner at Kamlet Shepherd & -Reichert. "This is just befuddling, and they want to be sure there wasn't something more nefarious going on."

An area of particular scrutiny will be whether Mackey sold shares after making statements that might have caused a bump in Whole Foods stock, Berdan said.

Mackey owns 1.15 million shares of Whole Foods, worth about $46 million at Friday's closing price. In comparison, his recent stock sales are minimal: In December 2005, Mackey exercised 13,498 options and sold the underlying shares for a profit of $1.85 million.

In most other transactions, Mackey has used options but kept the shares rather than sell them.

Mackey, who founded the Austin, Texas-based natural-foods retailer in 1980, is known as an outspoken Libertarian. While the postings include riffs on topics such as his dislike of labor unions and aversion to restaurant chain the Olive Garden, several are likely to raise eyebrows at the SEC.

At the company's 2006 annual meeting, Mackey told shareholders the company would hit $12 billion in sales by 2010, doubling its sales in five years. Less than a week later, rahodeb proclaimed, "The upgraded prediction of $12 billion is most likely conservative. Won't surprise me if the number ends up close to $14 billion in five years."

Later that same month, rahodeb predicted "operating cash flow for 2006 will be up at least another 20 percent just as it is every year." Despite that upbeat prediction, operating cash flow in fiscal 2006 rose only 10.2 percent.

He also disparaged longtime rival Wild Oats, saying in January 2005, "Who would buy Wild Oats? Almost surely not at current prices. What would they gain? Oats locations are too small."

Mackey on Wednesday said the postings didn't reveal any proprietary information and "do not represent any official beliefs, policies or intentions by either Whole Foods Market or by me."

Mackey's online alter ego came to light in documents filed Tuesday by the Federal Trade Commission, which is seeking to block the Wild Oats acquisition on the grounds it would limit competition.

Depending on what's contained in them, Mackey's voluminous postings could be "anything from a peccadillo to something that leads to his ouster and worse legal problems," said David Gardner, co-founder of the Motley Fool and a shareholder in Whole Foods. "It's a great disappointment in someone I had always considered a great CEO."

Whole Foods lawyers, who are preparing to defend the merger at a court hearing this month, are likely distressed as well. Whole Foods plans to argue that the FTC is defining the grocery market too narrowly, and Wild Oats and Whole Foods are just a fraction of the increasingly competitive natural- and organic- foods market that's drawn strong interest from Wal-Mart and Safeway, among others.

Some Mackey posts said otherwise. In 2004, he declared, "Wal-Mart is going to dominate the low price side of the business and Whole Foods is going to dominate the quality/service/healthy side of the business."

"Here's Mackey saying that no one else can hold a candle to us," said Melissa Maxman, a partner at Baker Hostetler. "Now, his lawyers are going to have to explain this away."

Whole Foods

WFMI: Nasdaq

$40.50

+$1.50

Wild Oats

OATS: Nasdaq

$16.52

-3 cents

From Rahodeb's Web postings

Whole Foods CEO John Mackey this week acknowledged he posted anonymous remarks on a Yahoo! message board for a period stretching from 1999 to 2006 as "Rahodeb." The revelation came in documents filed by the FTC, which discovered Mackey's alias as part of an investigation into the merger. Other people who posted messages speculated about the true identity of rahodeb, who was a relentless booster of Whole Foods' prospects and often denigrated the prospects of rival Wild Oats.

• Jan. 13, 1999 - first post

There actually has been very little insider selling at Whole Foods the last several months. When the stock fell a couple of months ago down to $32 several executives exercised options at the low price because this minimizes their alternative minimum taxes. Exercising options, however, is not the same as selling them. Last executive to sell any stock at this company appears to be Richard Cundiff who did it last August - probably for personal reasons.

• May 19, 2000

I've shorted OATS in the past and made good money, but regretfully I missed the recent crash in their stock. Would I buy OATS at any price? Sure. I'm probably a buyer if they fall below $7 a share.

• Nov. 1, 2003

What I'm very doubtful about, however, is that OATS will ever be a very profitable or successful company on their own merits regardless of who owns and controls them. 1. They are simply too far behind Whole Foods and are getting further behind each quarter. 2. Too much bad real estate is going to act as an earnings drag for years to come. 3. Whole Foods is continuing to aggressively enter their profitable markets. I doubt they will discontinue this strategy either. When this happens good real estate becomes bad real estate for OATS. 4. TJs and Sunflower are going to aggressively compete with OATS (and Whole Foods too) on price. . . . What should OATS management do? They are doing it. They are trying to fix up OATS well enough to sell it for a profit. They aren't in it for the long-haul. They don't need to be if someone else will bite.

• Feb. 24, 2005

It does look grim for OATS at this time. However, they are not without hope. They are now a $1 billion company and they have a number of successful and profitable stores throughout the United States. At one time they had a number of dedicated and competent managers who believed in the OATS vision and their mission. The company may have made some bad acquisitions and expanded too rapidly in (Sunflower CEO Mike) Gilliland's ego quest to be the #1 natural/organic food chain, but they also did many things well. While much of that early goodwill and customer equity has been pissed away, some of it still remains. There is still some hope. However, I'm highly skeptical that the current management team will fulfill that hope.

• March 5, 2005

OATS has no long-term future as a business and this will be proven conclusively to the world over the next 5 years.

• Nov. 9, 2005

Oh yes, "the John Mackey identity theory". I've heard it a few times before on this Board. Believe it if you wish since it enhances the value of what I write.

• Feb. 10, 2006

Ron Burkle is simply a financial speculator who made his money merging companies together and then selling them off to a "greater fool".

• Final message, dated Aug. 12, 2006

This will be my final message on this bulletin board as I have lost my bet with hubris12000. Congratulations hubris! You win. I lose. I will honor the terms of our bet.

The learning from this bet is to never underestimate the manic/depressive nature of Mr. Market. Whole Foods had a very strong quarter with same store sales up 9.9% on top of a 15.2% increase last year - phenomenal results. In addition EPS were up 27% over last year and the company beat earnings estimates by 3 cents. However, Mr. Market hit the panic button and the stock has crashed, down almost 40% from its high of just a few months ago. Whole Foods itself has a very bright future and I will continue to hold my stock for a very long time - until the growth begins to significantly slow.

I've enjoyed my 8 years on this Board, but all things must come to an end. I wish everyone the very best. Hog152 - keep the faith. liberfar - good luck with your market timing game. hubris12000 - take your profits while you can, Whole Foods remains very strong and the stock will show continued strong growth over the long-term. Surgeon General and Boston Cowboy - you were both right about my true identity all along. Congratulations on your cleverness.

Take care everyone. Goodbye.

davisj@RockyMountainNews.com or 303-954-2514. The Associated Press and Rocky Mountain News finance editor David Milstead contributed to this report.

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