Thursday, October 21, 2010

Interesting Issues in Timing of Green Mountain Insider Stock Sales and Disclosure of SEC Inquiry

Interesting timing

On Monday, September 20, 2010, Green Mountain Coffee Roasters (NASDAQ: GMCR) was notified of a Securities and Exchange Commission informal inquiry and request for voluntary information concerning “revenue recognition practices and the Company’s relationship with one of its fulfillment vendors.”

On Tuesday, September 21, 2010, executive officer Michelle Stacy exercised 5,000 options and immediately sold her shares at $37 per share. Of the 5,000 shares bought and sold, options for 4,375 shares did not expire until November 3, 2018 and options for 625 shares did not expire until March 12, 2019. What was the urgency in exercising her options so soon?

After the stock market closed on September 28, 2010, Green Mountain finally disclosed the SEC inquiry to investors in an 8-K filing which included certain other material disclosures.

On September 29, 2010, Green Mountain stock dropped $5.95 per share to close at $31.06 per share, a 16.1% drop in market value that day.

According to the SEC:
Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.
Michelle Stacy will have to answer questions about the timing of her option exercise and simultaneous sale of stock after Green Mountain received notice of the SEC inquiry, but before the company disclosed it to investors. The SEC might want to find out if Stacy any prior knowledge of  the SEC inquiry when she sold her stock before it was disclosed to investors.

Will Stacy claim that even though she is among the five most highly-paid executive officers of the company and is President of its key Keurig business segment, that she did not know anything about the SEC inquiry and her sale of stock was a mere coincidence?

Green Mountain Coffee Roasters Code of Ethics

According to Green Mountain’s Code of Ethics:
As a publicly traded company, GMCR is required to adhere to federal laws and regulations prohibiting the disclosure of "insider information." The sending or posting of confidential information is against GMCR policy and is subject to laws and Securities and Exchange Commission (SEC) regulations with respect to insider information. These laws and rules make it illegal to use information - obtained as an employee – about the Company that is not generally available to the public for purposes of personal profit or to advise others in order that they may profit. GMCR submits periodic filings (10-Q's, 10-K's and 8-Ks) to the SEC that disclose Company information. Information not in these documents is confidential information and may not be discussed outside the Company by any GMCR employee. If you have questions about whether certain information may be disclosed, please check with our Chief Financial Officer or the VP of Human Resources and Organizational Development.
Note: Bold print and italics added by me.
Apparently, information not yet disclosed in Green Mountain's “10-Q's, 10-K's and 8-Ks” is considered "confidential information" and the company prohibits its employees from using such “confidential information” for personal profit. When Michelle Stacy sold her stock, news of the SEC inquiry was not yet disclosed to investors and such information could be considered confidential under Green Mountain's Code of Ethics.

If Michelle Stacy claims that she did not know about the SEC inquiry when she sold her shares, did Green Mountain Coffee have any procedures in place to alert executive officers of certain possible undisclosed material events, such as an SEC inquiry, before they sell their stock?

Should Green Mountain have disclosed the SEC inquiry a few days earlier?

If Green Mountain considered SEC inquiry material enough for disclosure it when it filed its 8-K report on September 28, why didn’t the company notify investors earlier? 8-K reports are required “to be filed or furnished within four business days after occurrence of the event.” Why didn’t the company disclose the inquiry on September 25 or “within four business days after occurrence" of that specific event?

SEC guidance on materiality

Green Mountain should have checked out the SEC's website for some guidance on materiality:
Information is material if "there is a substantial likelihood that a reasonable shareholder would consider it important" in making an investment decision.  To fulfill the materiality requirement, there must be a substantial likelihood that a fact "would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available."
As I detailed above, Green Mountain’s shares dropped $5.95 per share to close at $31.06 per share or a 16.1% drop in market value after the company disclosed the SEC inquiry to investors. Apparently, investors thought that news of the inquiry was material. The old adage taught in securities law classes “When in doubt, disclose.” seems to apply here.

Other insider stock sales and potential issues

In the weeks before Green Mountain was notified about the SEC inquiry, Michelle Stacy and Scott McCreary, President of Green Mountain's other key business segment, the Specialty Coffee Business Unit, simultaneously exercised and sold large amounts of shares.

On August 13, 2010, Michelle Stacy exercised 30,000 options at $6.20 per share and simultaneously sold those shares at $30.95 per share for gross proceeds of $928,500. On September 13, 2010 she exercised another 5,000 options at $6.20 per share and sold those shares at $35.40 for gross proceeds of $177,000.

On August 18, 2010, Scott McCreary, President of Green Mountain's other key business segment, the Specialty Coffee Business Unit, exercised 200,000 options and $1.47 per share and simultaneously sold his shares at $33.08 per share for gross proceeds of $6.616 million.

If the SEC does find malfeasance in Green Mountain's “revenue recognition practices and the Company’s relationship with one of its fulfillment vendors” the agency will investigate whether or not Stacy or McCreary knew anything about them before they sold any of their stock.

Closing comment

After Green Mountain disclosed the SEC inquiry to investors, several lawsuits seeking class action status were filed against the company and its officers alleging securities law violations. On one side, the company and its officers will have to contend with the SEC who has almost unlimited resources and on the other side they must contend with hungry class action lawyers with a profit motive who smell blood. Back in my criminal days, I hated them both equally.

Right now, there is an only an "informal inquiry" by the SEC and "request for voluntary information." If the informal SEC inquiry turns into a formal investigation and the regulator issues subpoenas compelling witnesses to testify and the production of documents, Green Mountain and its officers will have a lot more to worry about.

In any case, it looks like an early Christmas for lawyers representing the company and its officers as they prepare to rack up huge legal fees in defending their clients. Hopefully, a lesson learned by the Antar family, who ran Crazy Eddie back in my criminal days, does not apply here, "Your lawyers will defend you to your very last dollar."

Written by,

Sam E. Antar

Follow up Blog Post:

December 2, 2010 - Green Mountain Coffee Roasters, Time to Spill the Beans?

Recommended Reading:

WCAX.COM - Whistleblower alleges insider trading at GMCR

Seeking Alpha - Green Mountain Coffee: Beware the Valley Below

One More Cup of Coffee Addendum

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped my cousin Eddie Antar and other members of our family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes in cold-blood for fun and profit, and simply because I could.

If it weren't for the heroic efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals. Often, I refer cases to them as an independent whistleblower.

For example, I exposed GAAP violations by Overstock.com (NASDAQ: OSTK) which caused the company to restate its financial reports for the third time in three years. The SEC is now investigating Overstock.com and its CEO Patrick Byrne for securities law violations (Details here, here, and here).

In addition, the SEC is now investigating possible GAAP violations by Bidz.com (NASDAQ: BIDZ) after I alerted them about the company's inventory accounting practices.

I do not own any securities in any of the companies listed in this blog post, long or short.

I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time.

My investigation of Overstock.com, Bidz.com, and Green Mountain Roasted Coffee is a freebie for securities regulators to get me into heaven, though I doubt I will ever get there

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