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"What do we got?" said Len Mayer, interim CEO of the Humboldt Creamery on Monday. "We have a 22-year-employee, the CEO, resigning immediately. We can't get hold of him, we can't contact him. And he says there's something wrong with the finances."

The last few days have been busy ones for Mayer and for the entire Humboldt Creamery today, following former CEO Rich Ghilarducci's mysterious and abrupt resignation on Friday. Ghilarducci sent his resignation via his lawyer, a San Francisco criminal defense attorney. With the resignation came a warning about the company's finances. The warning apparently stated that the company's financial statements are inaccurate, and it advised the company to suspend a capital campaign that has been underway since last month.

The Creamery's announcement concerning this turn of events was made Monday morning, and it sent an instant shock wave through the Humboldt County business community. The Creamery has been widely hailed, especially lately, as an unqualified bright spot in an otherwise bleak local economy, which has been ravaged not only by the national recession but the decline of key resource industries such as timber and fishing. The company, run by a cooperative of local dairy farmers, had over $130 million in revenue in 2008, according to financial statements.

But those very statements have now been called into question, and now no one knows how much faith to place in the company's books. Mayer said that no one at the Creamery, including the company's chief financial officer, had yet been able to pin down the maddeningly vague warnings in Ghilarducci's resignation letter.

"How could something be happening that we're not aware of?" Mayer said. "That's what we're trying to figure out."

Mayer wished to let the public know that the Creamery is taking the matter very seriously indeed. He said that the company would be holding meetings with stakeholders -- customers, vendors, investors -- over the coming weeks and days. He said that forensic accountants were being brought in to rake over the Creamery's books, and that a subcommittee of the Creamery's board of directors would be meeting daily in an attempt to handle the crisis. He pledged that the company would be completely open with the public and all interested parties throughout the review.

It also suspended its current efforts to raise $5 million through the sale of new preferred stock. Since the middle of last month, the company has held a series of meetings with local investors, seeking to raise capital in chunks of $10,000 and offering a 7.875 percent return on investment over the course of five years. The money was intended to buy new equipment, increase marketing efforts and fund the acquisition of another firm.

It is unknown how many people bought into the new stock offering. Patrick Cleary, CEO of Lost Coast Communications and a former investment banker, helped set up some of the meetings between the Creamery and local investors, which began last month; he said that a number of local people attended the presentations -- "more than a dozen, less than a hundred," he said Tuesday.

"They were looking for some financing for growth," Cleary said. "If they could get that, and provide a good return to local people, and keep the money in town, then it was a win-win-win." Cleary said that he was not paid anything for his services -- that he was merely helping out "a very important company" in the community.

Last Tuesday, three days before he resigned, Ghilarducci and Mayer presented the offering to the board of directors of the Headwaters Fund, the county-run investment fund for local economic development. (See "Spending Headwaters," Jan. 15, for background.) The company presented the outlines of the capital development campaign to the board in the hope that it might be persuaded to buy some of the stock. [Cleary, who is also a member of the Headwaters Board, recused himself from the discussion.]

Kathy Moxon, a member of the Headwaters Fund board and Director of Community Strategies for the Humboldt Area Foundation, said Tuesday that the board generally saw potential in the investment, but needed much more detail before it could make a decision.

"This was the kind of way that our board could do double duty by helping local businesses as well [as getting a return on investment]," Moxon said. "What we said at the time, though, was that we need to do due diligence."

But until the Creamery's investigation into the matter is complete, investors who did take the plunge must now be wondering how much of those record 2008 revenues are fact and how much fiction. If it does turn out that the company's true balance sheet leans toward the latter, there would likely be a securities fraud case in the making. And though everyone agrees that the Creamery, at base, is a solid business, a mountain of litigation is never helpful.

At least one person seems to be taking the legal possibilities seriously. Soon after the Headwaters Board presentation, Ghilarducci left on a business trip. His resignation letter, sent via his new attorneys, arrived back home before he did. He is being represented by the San Francisco firm of Keker & Van Nest, which maintains, among other specialties, a high-profile practice defending white-collar crime cases. Former clients include Enron principal Andrew Fastow, fallen tobacco trial lawyer Richard Scruggs and Hmong warlord Vang Pao.

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Hank Sims

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