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At the time, both Hamas and Hizballah were designated as “Foreign Terrorist Organizations” (“FTO”) in the “2001 Report on Foreign Terrorist Organizations released by the State Department’s Office of the Coordinator for Counterterrorism.”[327] This designation effectively criminalizes any person or organization which provides material support to the FTO. A flurry of main stream media stories appeared and Caribou Coffee was inundated with bad press and angry customers, including talk of a boycott by some Jewish groups.[328] Apparently, Arcapita had retained a Shariah advisory board and the head of the advisory board was Qaradawi. After weathering the storm for several months, Arcapita severed its relationship with Qaradawi stating that Qaradawi had resigned.[329]

Another ramification of this affair was an accusation that Arcapita was funneling charitable contributions, presumably from its Shariah charitable tax contributions or its purification of forbidden profits, to terrorist organizations with connections to Qaradawi. When the Jewish Community Relations Council of Minnesota and the Dakotas heard about the possible connection between Caribou and Qaradawi, they initiated an investigation and the Minneapolis-based company cooperated. According to local media, Caribou and its Bahrain-based majority shareholder even offered to allow the Jewish community organization to investigate all of the company’s charitable donations. According to the story, Arcapita hired the well-known law firm of Gibson, Dunn & Crutcher to certify that no charitable contributions were transferred to groups banned under U.S. law. According to news reports, that certification was made.[330]

In the first draft of the registration statement filed with the SEC pursuant to the 1933 Act in preparation for its initial public offering seeking to raise $90 million, the company lawyers settled on the following disclosures[331]:

[Under the “Risk Factors” rubric beginning:] Arcapita will continue to have substantial control over us after this offering, ….

. . .

Our compliance with Shariahh principles may make it difficult for us to obtain financing and may limit the products we sell.

Our majority shareholder operates its business and makes its investments in a manner consistent with the body of Islamic principles known as Shariahh. Consequently, we operate our business in a manner that is consistent with Shariahh principles and will continue to do so for so long as Arcapita is a significant shareholder. Shariahh principles regarding the lending and borrowing of money are complicated, requiring application of qualitative and quantitative standards. The negotiation and documentation of financing that is compliant with these principles are generally complex and time consuming. As such, if we have immediate liquidity needs, we may not be able to obtain financing that is compliant with Shariahh principles on a timely basis. A Shariahh-compliant company is prohibited from engaging in derivative hedging transactions such as interest rate swaps or futures, forward options or other instruments designed to hedge against changes in interest rates or the price of commodities we purchase. Also, a Shariahh-compliant company is prohibited from dealing in the areas of alcohol, gambling, pornography, pork and pork-related products.

We may be subject to adverse publicity resulting from alleged statements about Arcapita or complaints or questions from our customers arising from such adverse publicity.

During 2002, we were subject to adverse publicity due to attempts to connect Arcapita with inflammatory and controversial statements made by one of its former outside advisors, in his individual capacity, regarding a variety of subjects, including events in the Middle East. We may be subject to similar adverse publicity in the future. Even if unfounded, such adverse publicity could divert our management’s time and attention and adversely affect the way our customers perceive us, our net sales or results of operations, in the aggregate or at individual coffeehouses, or the market price for shares of our common stock.[332]

No other disclosures were made relating to SCF other than some basic disclosures of the company’s sale-lease back financing arrangements which were treated as capital leases as required by generally accepted accounting procedures (“GAAP”).[333] The SEC commented on the recitation of the 2002 affair in the registration statement requesting the following: “Please tell us, with a view to disclosure, more background about the statements, such as describe the statements made and identify who made them. Also revise the risk factor to clarify the risk.”[334]

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