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Judge Says French Fry Machine Maker Dispensed Only Stock Fraud

After a long legal battle between shareholder groups over control of a french fry vending machine company, both sides lost when a Delaware state court judge decided the venture was a penny-stock fraud that should be dissolved.

After more than a decade of development, 128 million shares of stock sold and $40 million invested, Tasty Fries Inc. never installed one working french fry vending machine, Vice Chancellor Stephen Lamb said in a Delaware Chancery Court opinion.

However, he said, there were plenty of grandiose plans to cover the nation with machines that automatically cooked and dispensed fries, and there was plenty of work for lawyers as investor groups fought for the right to sell dealership territories for the hundreds of vending machines that Tasty Fries frequently claimed it was ready to install.

The vice chancellor noted that while he was writing this opinion, Tasty Fries claimed to have installed a vending machine in Bellevue Hospital in New York City but there was no confirmation that it ever worked.

There was never any real prospect of selling either fries or even french fry vending machines, because the venture was apparently a stock fraud for most of its life, the judge said.

Nevertheless, the selling of stock in the venture was lucrative and that eventually caused the insiders in Silver Leaf LLC, the parent of Tasty Fries, to split over the issue of who controlled the venture. The shareholders of the two companies told the Chancery Court that they were deadlocked and asked Vice Chancellor Lamb to divide up the company between them.

The judge said the two factions were evenly split, causing a deadlocked corporation, but he refused to order the selling off of Tasty Fries because there was nothing to sell — other than stock — which he said was Tasty Fries' principal product.

He refused to break the deadlock, appoint a receiver or allow anyone to sue anyone else in the name of the company because he found that the company "from the outset was formed as part of a scheme to deceive innocent investors."

The judge noted that the Securities and Exchange Commission is investigating possible stock fraud at both Tasty Fries and Silver Leaf.

"Both sides litigate this action as if there was no underlying problem, but there is an enormous underlying problem: all of the evidence indicates that Tasty Fries is simply a penny-stock fraud," Vice Chancellor Lamb said. "Without a legitimate vending machine business, the entire deal between Silver Leaf and Tasty Fries was predicated on raising money through stock issued in violation of state and federal securities law."

He denied all the other remedies the two sides sought because he found that they both came to the court with unclean hands.