Information on wine futures?

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Evan L. Klein
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Information on wine futures?

#1 Post by Evan L. Klein » September 23rd, 2019, 7:55 pm

Can you purchase a futures contract on pre-existing rare wine, or is it only wine that hasn't been bottled yet? Is it normal to only put a % down on the contract and chip away at it over time? Or does the purchase have to paid outright upfront? Any insight would be helpful. Thanks, Evan

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Re: Information on wine futures?

#2 Post by JonathanG » September 23rd, 2019, 8:20 pm

I'm sure conceptually you could buy a futures contract on anything, but I do not think I have ever seen a wine futures contract on anything other than the most recent vintage. Outside of Bordeaux, I think it is uncommon for wineries to sell futures (Ridge does and some Italians). Most places want you to pay upfront, but I think Total Wine will let you pay only 50% upfront with the rest due on delivery.
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Re: Information on wine futures?

#3 Post by Evan L. Klein » September 23rd, 2019, 9:22 pm

Thanks, Jonathan. So would the futures contract come from the wineries themselves? Or could a broker/merchant do it on their behalf? I.e. if an alternative investment is selling wine futures to their investors/clients. Is that in the norm?

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Re: Information on wine futures?

#4 Post by Greg K » September 23rd, 2019, 11:08 pm

What do you by futures sold by an alternative investment? “Futures” in the financial context are not the same as “wine futures” as they are generally thought of in the wine industry.
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Re: Information on wine futures?

#5 Post by Evan L. Klein » September 24th, 2019, 5:03 am

Good to know. That's kind of what I'm trying to find out as I'm a bit confused as to how it works -- Essentially, I'm doing an investigative article on the investment side of the wine industry -- more specifically on how this one company turned their wine futures contracts into physical wine holdings for their clients. I'll give a little detail below from what I've got so far.

X company, which is/was an alternative investment company specializing in fine wine investment, had a bunch of clients who they sold wine futures contracts to. The contracts on paper were worth, say, $125,000. The client would only put $10,000 in, and the company would let them chip away at the remainder over time. But then, after a little time went by, they'd tell the client that their wine contract has gone up in value-- it's now worth $150,000 -- do they want to reinvest and roll it into the next one? The client would say yes, and then put in an additional X amount. Now they're in it for $30,000 instead of $10,000, etc. This would go on until they gave the company $100,000 but they've seen no returns back at any time -- but on paper they think they're getting rich.

Years later, they company gets warned/flagged by the SEC for $22 million of unreg securities (wine). So they introduce something called a "coupon." Which I'm not exactly sure what it meant, I'm trying to figure that out as well. But they told the client they needed to put in more money in order to get their full returns, and in exchange, they'd get this coupon which would save them a % on wine purchases in the future. The coupon amount was worth roughly what the remainder of their wine futures contract was worth, and they told the client it was to move their wine futures contract into a physical wine contract. So the client now owned cases of physical wine that was being held at the LCB.

I'd like to know your thoughts -- was this coupon what I think it was? A way to fulfill/axe their wine futures offerings in order to avoid further penalties/charges from authorities? Or are these coupons normal in the industry? Sort of a redemption offering, etc.

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Re: Information on wine futures?

#6 Post by Jeff_M. » September 24th, 2019, 6:29 am

Sounds like one hell of a scam
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Re: Information on wine futures?

#7 Post by Markus S » September 24th, 2019, 7:23 am

Jeff_M. wrote:
September 24th, 2019, 6:29 am
Sounds like one hell of a scam
Indeed...
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Re: Information on wine futures?

#8 Post by Evan L. Klein » September 24th, 2019, 7:32 am

That's what I'm gathering as well. I've been told some funds did offer some sort of redemption.

For the physical wine, I believe they pitched the physical wine as investing in a fleet of five growths. So the client would start by with investing in the first growth, then the company would tell the investor they should invest more to get the second growth because it'll increase the value as a portfolio, etc. And then the third growth, fourth, fifth, and so on. Until the client again had put in X amount for the five growths, and they'd get a set return each month over 3-7 years. I spoke to some clients who wanted to cash out after X amount of years, but the company would give a variety of reasons on why they shouldn't -- Brexit, currency exchange, the market crash, etc. Some investors got returns each month, I think up to 12%? While others haven't seen anything. When they finally convinced them to deliver their wine, it would always be at a huge loss- sometimes up to 50% or more.

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Re: Information on wine futures?

#9 Post by John Morris » September 24th, 2019, 7:43 am

Evan - I'm not sure how far you've delved into the different types of transaction. This article offers a good explanation of how futures ordinarily work:
https://www.winespectator.com/articles/ ... tures-3495

In conventional futures, the buyer has a legal claim to a particular case of wine. It's a purchase contract with delivery in the future. As the article explains, there are middlemen, but that doesn't change the basic nature. It's not fundamentally different from ordering a couch that you pay for now even though it won't be delivered for, say, six weeks.

By contrast, the scheme you've described sounds clearly like a security because the investor has no legal ownership in a particular underlying asset. The fact that you can nominally "take delivery" and roll over your investment doesn't change that. I assume you can't ask to redeem your investment in the form of particular wines. There's a basket of wines that they maintain, adding to and selling off over time. The fact that your investing in a pool with no claim to any specific case or bottle is what makes it a security.
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Re: Information on wine futures?

#10 Post by Evan L. Klein » September 24th, 2019, 8:32 am

John. thanks for the feedback. I'll check out the Spectator link now. There are a few different types of offerings I've been looking into, futures being one of them and I haven't dug too terribly deep into them.

As for it being a security, would that still be the case if the investor received a list of wines that he has invested in? Although the company technically owns the wine on behalf of the investor and stores it at a facility like the LCB, the investor is given a list of wines that's included within their purchase.

I know the company in question files under Reg D for exempt securities for their products (property,aquaculture, sporting goods, etc.) and I believe the wine is included.

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Re: Information on wine futures?

#11 Post by J. Rock » September 24th, 2019, 9:04 am

This sounds like something I'd see back when I did securities litigation (however, I never actually saw wine-based securities). What happens when an investor or potential investor wants to visit the company and kick the tires?
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Re: Information on wine futures?

#12 Post by Evan L. Klein » September 24th, 2019, 9:16 am

That's a good question. And especially complicated being that the investors are in the US but the company is headquartered in the BVI with its sales offices in Toronto and England. No US staff.

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Re: Information on wine futures?

#13 Post by John Morris » September 24th, 2019, 2:10 pm

Evan L. Klein wrote:
September 24th, 2019, 8:32 am
John. thanks for the feedback. I'll check out the Spectator link now. There are a few different types of offerings I've been looking into, futures being one of them and I haven't dug too terribly deep into them.

As for it being a security, would that still be the case if the investor received a list of wines that he has invested in? Although the company technically owns the wine on behalf of the investor and stores it at a facility like the LCB, the investor is given a list of wines that's included within their purchase.

I know the company in question files under Reg D for exempt securities for their products (property,aquaculture, sporting goods, etc.) and I believe the wine is included.
The list doesn't change the fact that it's a security because the investor has no claim on individual assets and he/she is passive (i.e., has no say in management or in what is bought or sold). Mutual funds and real estate investment trusts list their holdings in detail periodically, but they remain securities for the same reasons.
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Re: Information on wine futures?

#14 Post by Marcu$ Stanley » September 24th, 2019, 4:43 pm

A right to a physical commodity is not necessarily a security under SEC rules, and neither are commodity derivatives. However a certificate of profit participation for a company investing in physical commodities could easily be. There are commodity pools dealing in commodities and commodity derivatives that are regulated by the CFTC, not the SEC.

I have always wondered if the whole complex around the Liv-Ex wine pricing indexes and associated wine hedge funds and the like in London was designed to facilitate futures and derivatives of various sorts in wine, basically creating an industry around ways to bet directly on wine prices without taking physical ownership. That would be attractive because there are so many transaction costs for buying and selling wine, it's far from friction-free, but all the publicity around wine prices makes people want to do it as a pure investment. But I can think of all kinds of ways that such schemes could go very wrong.

As people are telling you, financial futures are not the same thing as orders for future delivery of a wine when released which are colloquially deemed "futures" in the hobby.
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Re: Information on wine futures?

#15 Post by Marcu$ Stanley » September 24th, 2019, 4:58 pm

Evan L. Klein wrote:
September 24th, 2019, 8:32 am


As for it being a security, would that still be the case if the investor received a list of wines that he has invested in? Although the company technically owns the wine on behalf of the investor and stores it at a facility like the LCB, the investor is given a list of wines that's included within their purchase.

It would not necessarily be a security in that case. Gold funds that hold bullion can fall into a regulatory grey area like this. Gold ETFs are SEC-regulated but somebody owning a warehouse and buying gold for you and sticking it into the warehouse would not be.

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Re: Information on wine futures?

#16 Post by John Morris » September 25th, 2019, 6:46 am

Marcu$ Stanley wrote:
September 24th, 2019, 4:58 pm
Evan L. Klein wrote:
September 24th, 2019, 8:32 am


As for it being a security, would that still be the case if the investor received a list of wines that he has invested in? Although the company technically owns the wine on behalf of the investor and stores it at a facility like the LCB, the investor is given a list of wines that's included within their purchase.

It would not necessarily be a security in that case. Gold funds that hold bullion can fall into a regulatory grey area like this. Gold ETFs are SEC-regulated but somebody owning a warehouse and buying gold for you and sticking it into the warehouse would not be.
But in the case you describe, the investor owns a particular lot of gold, right?

By contrast, I gather that this wine creates a pool and then buys and sells wines for it, like a mutual fund. If the wine pool investor isn't given a claim to any particular wine, it is pretty clearly a security, I think. (It has been a loooong time since I took securities law, and it was my worst grade in law school.)

Evan - Do the fund sponsors give the investor any right to cash out in the form of wine? Do they have any choice of the wine they can receive? Or are they simply told that the value of the pool has increased, and they can receive a credit for that that they can apply to an investment in a new fund?
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Re: Information on wine futures?

#17 Post by Greg K » September 25th, 2019, 7:19 am

Marcu$ Stanley wrote:
September 24th, 2019, 4:58 pm
Evan L. Klein wrote:
September 24th, 2019, 8:32 am


As for it being a security, would that still be the case if the investor received a list of wines that he has invested in? Although the company technically owns the wine on behalf of the investor and stores it at a facility like the LCB, the investor is given a list of wines that's included within their purchase.

It would not necessarily be a security in that case. Gold funds that hold bullion can fall into a regulatory grey area like this. Gold ETFs are SEC-regulated but somebody owning a warehouse and buying gold for you and sticking it into the warehouse would not be.
That’s not the same thing, for several reasons. First, gold is fungible. Unless the wine “futures” we’re talking about allow physical delivery and relate to exactly the same bottle for all investors, they’re not comparable. Second, the ETFs certainly are securities because their return is based on a return linked to gold, not the holding or delivery of the gold itself. Finally, if the gold fund has a return linked to anything other than the literal gold being held for your account in the warehouse (excluding storage costs) upon your sale of that gold, it’s very hard to see how it’s not a security.
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Re: Information on wine futures?

#18 Post by Greg K » September 25th, 2019, 7:21 am

John Morris wrote:
September 25th, 2019, 6:46 am
Marcu$ Stanley wrote:
September 24th, 2019, 4:58 pm
Evan L. Klein wrote:
September 24th, 2019, 8:32 am


As for it being a security, would that still be the case if the investor received a list of wines that he has invested in? Although the company technically owns the wine on behalf of the investor and stores it at a facility like the LCB, the investor is given a list of wines that's included within their purchase.

It would not necessarily be a security in that case. Gold funds that hold bullion can fall into a regulatory grey area like this. Gold ETFs are SEC-regulated but somebody owning a warehouse and buying gold for you and sticking it into the warehouse would not be.
But in the case you describe, the investor owns a particular lot of gold, right?

By contrast, I gather that this wine creates a pool and then buys and sells wines for it, like a mutual fund. If the wine pool investor isn't given a claim to any particular wine, it is pretty clearly a security, I think. (It has been a loooong time since I took securities law, and it was my worst grade in law school.)

Evan - Do the fund sponsors give the investor any right to cash out in the form of wine? Do they have any choice of the wine they can receive? Or are they simply told that the value of the pool has increased, and they can receive a credit for that that they can apply to an investment in a new fund?
If the investor owns a particular lot of gold at a warehouse, he just owns gold at a warehouse. That’s like wine storage, not wine futures. Or like keeping your wine at your retailer after having paid for it.
EDIT: To be clear, I’m pretty sure we agree. Didn’t mean to suggest otherwise.
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Re: Information on wine futures?

#19 Post by Evan L. Klein » September 25th, 2019, 7:58 am

John -- As far as cashing out in a form of wine, from the investors I've spoken to they're always given the option of having their wine delivered. But it's always again at a massive loss. They don't have any say over the wine they invest in to my knowledge. The sponsor/investment company might have a list of what's available, etc.

For example, I spoke to an investor last night who recently sold his wine holdings and they agreed to have the 4 cases delivered to his house. Being a client since 2008, he had invested around $62,000 for 4 cases of X wine. I think it had a Château Margaux, a Haut-Brion, a Mouton Rothschild and something else. The company agreed to "buy back the wine" for approx. $20k. subtract holding fees/insurance. While looking at WineSearcher, the current values of his wine holdings is around $60,000 as of today. But he paid $62,000 about ten years ago. i don't believe they use any third parties and they do everything in house.

As for the wine futures that they used to offer, the investors were simply told their contract had increased, and asked them if they wanted to roll it into a new contract without receiving the initial returns.

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Re: Information on wine futures?

#20 Post by Marcu$ Stanley » September 25th, 2019, 9:56 am

Greg K wrote:
September 25th, 2019, 7:19 am
Marcu$ Stanley wrote:
September 24th, 2019, 4:58 pm
Evan L. Klein wrote:
September 24th, 2019, 8:32 am


As for it being a security, would that still be the case if the investor received a list of wines that he has invested in? Although the company technically owns the wine on behalf of the investor and stores it at a facility like the LCB, the investor is given a list of wines that's included within their purchase.

It would not necessarily be a security in that case. Gold funds that hold bullion can fall into a regulatory grey area like this. Gold ETFs are SEC-regulated but somebody owning a warehouse and buying gold for you and sticking it into the warehouse would not be.
That’s not the same thing, for several reasons. First, gold is fungible. Unless the wine “futures” we’re talking about allow physical delivery and relate to exactly the same bottle for all investors, they’re not comparable. Second, the ETFs certainly are securities because their return is based on a return linked to gold, not the holding or delivery of the gold itself. Finally, if the gold fund has a return linked to anything other than the literal gold being held for your account in the warehouse (excluding storage costs) upon your sale of that gold, it’s very hard to see how it’s not a security.
The fungibility doesn't matter. An ownership share in a pool of commodities, fungible or not, is not generally a security. Neither is an ownership share of a pool purely made up of commodity derivatives. Many commodity ETFs are SEC-regulated because they use securities to track commodity indexes. But depending on how they are structured some commodity and currency ETFs might not be. The CFTC regulates commodity pools and their operators, sometimes sharing oversight with the SEC, sometimes not (https://www.investopedia.com/terms/c/commoditypool.asp).

Here is the definition of "security" from the Investment Company Act of 1940:
‘Security’’ means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subsciption, transferable share, investment contract, votingtrust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing

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Re: Information on wine futures?

#21 Post by Greg K » September 25th, 2019, 10:54 am

Marcu$ Stanley wrote:
September 25th, 2019, 9:56 am
Greg K wrote:
September 25th, 2019, 7:19 am
Marcu$ Stanley wrote:
September 24th, 2019, 4:58 pm


It would not necessarily be a security in that case. Gold funds that hold bullion can fall into a regulatory grey area like this. Gold ETFs are SEC-regulated but somebody owning a warehouse and buying gold for you and sticking it into the warehouse would not be.
That’s not the same thing, for several reasons. First, gold is fungible. Unless the wine “futures” we’re talking about allow physical delivery and relate to exactly the same bottle for all investors, they’re not comparable. Second, the ETFs certainly are securities because their return is based on a return linked to gold, not the holding or delivery of the gold itself. Finally, if the gold fund has a return linked to anything other than the literal gold being held for your account in the warehouse (excluding storage costs) upon your sale of that gold, it’s very hard to see how it’s not a security.
The fungibility doesn't matter. An ownership share in a pool of commodities, fungible or not, is not generally a security. Neither is an ownership share of a pool purely made up of commodity derivatives. Many commodity ETFs are SEC-regulated because they use securities to track commodity indexes. But depending on how they are structured some commodity and currency ETFs might not be. The CFTC regulates commodity pools and their operators, sometimes sharing oversight with the SEC, sometimes not (https://www.investopedia.com/terms/c/commoditypool.asp).

Here is the definition of "security" from the Investment Company Act of 1940:
‘Security’’ means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subsciption, transferable share, investment contract, votingtrust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing
I had a much longer post written about this, but I'm just going to stick to one question. Could you explain to me your rationale for how an exchange traded fund (ETF) is not issuing securities if it only holds commodities or commodity derivatives/options/futures? I'm particularly curious in light of the Howey test. Please feel free to assume I'm fully familiar with securities regulation and CFTC regulation. Blackrock has an iShares gold ETF (which I believe does not use securities). Is your view that they're not an issuer of securities for 33 act purposes and those shares are not securities?
Because otherwise, I believe all you're saying is that owning commodities or a portion of a pool of commodities is not a security. Well, sure. But that's not different than agreeing to buy 25% of 5 different cases of wine with 4 friends. Which is clearly not the issue here. (Also, that the CFTC regulates commodity pools does not mean the securities they issue are not securities for 33 act purposes ......but I'm writing a longer post again. Never mind.)
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Re: Information on wine futures?

#22 Post by John Morris » September 25th, 2019, 11:59 am

Evan L. Klein wrote:
September 25th, 2019, 7:58 am
John -- As far as cashing out in a form of wine, from the investors I've spoken to they're always given the option of having their wine delivered. But it's always again at a massive loss. They don't have any say over the wine they invest in to my knowledge. The sponsor/investment company might have a list of what's available, etc.

For example, I spoke to an investor last night who recently sold his wine holdings and they agreed to have the 4 cases delivered to his house. Being a client since 2008, he had invested around $62,000 for 4 cases of X wine. I think it had a Château Margaux, a Haut-Brion, a Mouton Rothschild and something else. The company agreed to "buy back the wine" for approx. $20k. subtract holding fees/insurance. While looking at WineSearcher, the current values of his wine holdings is around $60,000 as of today. But he paid $62,000 about ten years ago. i don't believe they use any third parties and they do everything in house.

As for the wine futures that they used to offer, the investors were simply told their contract had increased, and asked them if they wanted to roll it into a new contract without receiving the initial returns.
Without seeing the language used for the investment, it's very difficult to know if this provision for a payout in wine means the trust isn't selling securities. It sounds like the SEC didn't buy that argument. If I had to guess, they wrote something that allowed them to get rid of investors by paying them off in wine at a ridiculous price (to keep them locked up) but that the investor doesn't really have a claim on any specific wine. How are the wines used to pay off investors chosen? I bet it's at the manager's discretion.
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Re: Information on wine futures?

#23 Post by Evan L. Klein » September 25th, 2019, 1:05 pm

I'm not too sure. But I think you guessed correct. And I think that's why they created the coupon and told investors it was just a token of appreciation. (If they paid their remaining futures balance and got out of the contract and contributed an additional investment, they'd get a coupon which got them a discount on future purchases, from my understanding).

What's interesting though is that they've had the same group of investors since inception. The account managers aren't allowed to source their own leads/clients. And what happened was that many of these investors said no when the company tried to get them to do the switch to physicals after the SEC incident. They already have 30k in the futures and didn't want to put any more in without seeing something back. But the company told them the investor owed the remaining balance due to the contract, etc. So a lot of these contracts are still sitting there stagnant even today. Probably millions on paper, either owed or due. Many of the investors have just treated it like a bad investment and cut their losses, but the company still calls them and pitches them on new products (property, acquaculture projects, sporting goods, etc.)

But how they went from futures into physicals with a coupon incentive I'm still trying to understand -- I'm not nearly as versed on securities law or investment vehicles as some of you guys on here.

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Re: Information on wine futures?

#24 Post by Nathan Smyth » October 4th, 2019, 4:54 pm

John Morris wrote:
September 24th, 2019, 7:43 am
In conventional futures, the buyer has a legal claim to a particular case of wine.
I don't know the Common Law case history up there in The Big City and the 2nd Circuit Court.

But down here in Hicksville and the 4th Circuit Court, you have no rights whatsoever to any wine which is not in your physical possession*.

The 4th Circuit has now delivered two decisions to that effect - the first involving a furniture retailer selling furniture on "futures", and the second involving a wine retailer selling wine on "futures" - and I suspect that it would take a party who had very deep pockets, and who was exceptionally well connected**, before you could get those two precedents overturned.

*Our legal system is so corrupt now that you shouldn't feel all that confident that you actually own anything even if it is in your physical possession.

**E.g. if they had access to Jeffrey Epstein's blackmail library...

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Re: Information on wine futures?

#25 Post by David Baum » October 4th, 2019, 5:28 pm

Or they could've just bought the bottles themselves. You can't fix stupid

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