Byline: EDWARD RUSSO The Register-Guard
WHEN BILL AND EFFIE HALL drive past the former Caffe Diva drive-through stand near Gateway Mall in Springfield, they wonder where their money went.
Four years ago, the elderly Eugene couple used $2,000 of their retirement savings to buy stock from the coffee retailer. They had read about the company's direct-to-investors stock offering in the newspaper and hoped their purchase would eventually pay off.
"You have Starbucks, and I have a relative who invested in that and made a bundle," Effie Hall said. "We thought we might get in on a company like that."
Instead of becoming the Starbucks of coffee drive-throughs, Caffe Diva violated Oregon securities law and eventually pulled a vanishing act, to the dismay of the Halls and hundreds of other Lane County investors. All told, Caffe Diva took in nearly $1 million by selling stock to the public.
Buying stock in established companies on the nation's major stock exchanges is risky enough, as the recent woes of Enron, WorldCom and other giants show. To sell stock in formal initial public offerings and get on major exchanges, companies go through reviews by investment banking firms and the U.S. Securities and Exchange Commission, which is supposed to protect the public.
But for investors in small, state-reviewed stock offerings, such as Caffe Diva's, the risks are far higher and the safeguards far weaker.
Caffe Diva, founded in Eugene, is one of 18 Oregon companies that since the mid-1980s have raised more than $25 million in start-up money by selling shares directly to investors in stock offerings given the green light by the Oregon Division of Finance and Corporate Securities.
The majority of these companies - including Caffe Diva - have failed, making their stock worthless, a Register-Guard investigation found.
The Caffe Diva case highlights how mom-and-pop investors put their faith in entrepreneurs who were big on dreams but often short on skills and, sometimes, ethics.
Four years after Caffe Diva raised money from investors, securities regulators in Oregon and other states fined the firm for fraud related to the company's sale of - and default on - $4.8 million in promissory notes, a type of corporate IOU. Most of the people who bought the promissory notes were elderly - those least able to afford to lose their savings.
Caffe Diva's case underscores weaknesses in the state system that is supposed to prevent questionable offerings from reaching the public.
State regulators rely heavily on entrepreneurs being honest and disclosing to investors key details about themselves and their companies.
In the absence of independent fact checking by regulators, entrepreneurs can embellish resumes or - as in the case of Caffe Diva - leave out disturbing facts investors might have found useful.
And while state regulators review each company's formal stock offering document, or prospectus, they don't screen other kinds of communication with investors. Caffe Diva, for example, made exaggerated claims in a letter it sent directly to investors.
Caffe Diva's history illustrates other drawbacks for investors, too.
Companies traded on the major stock exchanges must file independently audited financial reports with the U.S. Securities and Exchange Commission every three months.
However, Oregon requires most small direct-offering firms only to hold an annual shareholder meeting. If a company fails to do that or stops providing shareholders with financial reports, as Caffe Diva did in late 2000, investors can do little.
"The thing that tees me off is that (Caffe Diva) hasn't notified us that they have gone bankrupt or anything else," said Effie Hall, 77. "We don't even know if we should take a loss on our income taxes."
Caffe Diva has not declared bankruptcy. …