Fan Of Warren Buffett’s Fined For Cracker Barrel Purchases

If you are trying to be like Warren Buffett, then the first thing you need to do is pay attention to the investing rules.

Biglari Holdings have agreed to pay a civil penalty in the amount of $850,000. It’s needed to settle an alleged violation in reporting of shares that were purchased of Cracker Barrel Old Country Store during 2011, according to the Justice Department.

Sardar Biglari, who is the CEO of Biglari Holdings, currently owns about 18% of the gift shop and country style restaurant operator. He has been extremely critical of their performance, and he’s battled Cracker Barrel to try and institute changes in the leadership of the company.

It’s believed that because of Mr. Biglari’s influence and the fact that he is Cracker Barrel’s largest shareholder, they actually appointed a new CEO, brought in several new members of the board, and implemented sales boosting and cost-reduction efforts at all of its restaurants and stores. They are hoping to be able to reverse the downward trend that the business is seeing.

It’s unfortunate that Biglari (who is a longtime fan and follower of Berkshire Hathaway’s CEO and chairman Warren Buffett) hasn’t seemed to figure out the basic reporting process just yet.

There is a rule in place that says both companies and individuals must notify the Department of Justice, and wait for a certain period of time, in order to receive approval to make any purchase over $68.2 million. The only exception to this rule is if someone makes a passive acquisition used “solely for the purpose of investment.”

The Justice Department believes that Mr. Biglari always intended to become an active member of the company, so he was directly in violation of this rule between June 8 through September 22, 2011. There is a maximum civil penalty that costs $16,000 a day for this specific violation.

The slipup by Biglari happened to take place two months prior to the annual meeting that Cracker Barrel will hold – and at this meeting he actually plans to try and take a bigger seat on the board this year, because he in fact lost the vote last year. Cracker Barrel will continue to refuse his personal nomination to become a member of the board, and they are doing so because Biglari Holdings also has an ownership stake in Western Sizzlin and Steak N’ Shake restaurant chains. They claim that this is a conflict of interest.

During the annual meeting on November 15 of this year, there will be a vote among the investors to determine whether or not the board should uphold their plan to protect themselves against any hostile takeover attempts. Cracker Barrel put forth a poison pill provision in April which prevents any shareholder from taking more than a 20% ownership stake in the company.
The board attempted to institute a poison pill provision last year, and that was for no more than a 10% stake, but it didn’t pass. That’s why Mr. Biglari was capable of increasing his shares of the company.

“We’re disappointed [Mr. Biglari] has chosen to pursue a proxy fight, particularly considering the strong financial and operating results we’ve had recently… and the changes we’ve made to our board,” Chief Executive Sandy Cochran said in an interview.

Cracker Barrel has been struggling with declines in chronic guest traffic due to the recession. But, since Ms. Cochran has taken over this past year, there has been an improvement in both gift shop and restaurant guest traffic.

Cracker Barrel reported its fourth quarter earnings last week. Same-store sales rose 3.8%, and there was a 1.4% boost in traffic. The same-store sales in the retail section improved by 3.1%. The Cracker Barrel shares hit an all-time high right after reporting, but they have scaled back a bit since then.

Mr. Biglari purchased 26,528 extra shares two days prior to the release of the earnings report. At the time of this writing, Cracker Barrel stock traded at $67.12. This is a 64% price increase from this time last year.

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