Green Mountain insiders miss big option gain
Options priced after Green Mountain stock jumps 41% in single day
SAN FRANCISCO (MarketWatch) —March 10 was options day for insiders at Green Mountain Coffee Roasters. Too bad it was the day the stock hit a record high and the options are presently worthless.
Their latest batch of stock options were priced Thursday as Green Mountain(GMCR 58.86, -2.85, -4.62%) shares ran up 41% on news the company had struck a deal for Starbucks (SBUX 36.56, -1.41, -3.71%) to make coffee for its Keurig single-cup coffee brewers. Read Starbucks, Green Mountain brew K-Cup deal.
According to filings Friday afternoon with the Securities and Exchange Commission, eight directors were each granted 2,300 stock options at Thursday’s closing price of $61.71 a share — a record high on a split-adjusted basis. The previous day the stock had closed at $43.64.exercised 9,375 options at $6.20 per share and simultaneously sold them at $55.54 per share. Stacey sold her stock at $11.90 per share higher than the previous day's closing price. Sometimes I wonder, is Michelle Stacy a shrewd insider, a psychic, or just plain lucky?
Timing of Michelle Stacy’s stock sales
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. On September 13, 2010, exercised 5,000 options at $6.20 per share and simultaneously sold those shares at $35.20 per share. Seven days later, on September 20, 2010, Green Mountain Coffee claimed that it was notified by the Securities and Exchange Commission (SEC) of an informal inquiry concerning its “revenue recognition practices and the Company’s relationship with one of its fulfillment vendors.” However, the company did not disclose news of the SEC inquiry to investors until seven days later.
On September 21, 2010, Michelle Stacy exercised 4,375 options at $6.20 per shares and simultaneously sold her shares at $37 per share. In addition, Stacy exercised another 625 options at $9.14 per share and simultaneously sold those shares at $37 per share. Seven days later, after the market closed on September 28, 2010, Green Mountain Coffee finally disclosed news of the SEC inquiry to investors. In addition, the company disclosed that it discovered an "immaterial accounting error" involving its K-Cup margin percentages which resulted in a $7.6 million cumulative overstatement of pre-tax income in financial reports issued from 2007 to June 26, 2010.
Maybe seven is a lucky number for Michelle Stacy? On September 13, she sold 5,000 shares seven days before Green Mountain Coffee claims it received notice of an SEC on September 20. On September 21, she sold another 5,000 shares seven days before Green Mountain Coffee disclosed news of the SEC inquiry to investors on September 28. That same day, Green Mountain Coffee reported that it overstated pre-tax income by $7.6 million dollars.
On September 29, 2010, the next trading day, Green Mountain Coffee stock dropped $5.95 per share to close at $31.06 per share as investors reacted to news of the SEC inquiry, a 16.1% drop in market value that day. By October 11, 2011, the market value of Green Mountain Coffee’s shares dropped to $26.87 per share, far below the price per share that Stacy sold her stock on August 13 ($30.95), September 13 ($35.20), and September 21, 2010 ($37.00).
In a blog post dated October 21, 2010, I expressed my concern about the possibility of illegal insider trading by Michelle Stacy based on the timing of her stock sales. Seven days later, on October 28, 2010, Stacy belatedly filed amended Form 4 reports and claimed she established a Rule 10b5-1 trading plan on August 13, 2010. A Rule 10b5-1 trading plan provides certain safe harbors which help executives defend against potential allegations of illegal insider-trading by removing their discretion to decide when their stock is bought or sold. She amended certain SEC Form 4 filings for her stock sales on September 13 and September 21 to reflect her 10b5-1 trading plan. However, her sale of 30,000 shares on August 13 was not pursuant to a 10b5-1 trading plan. According to Stacy's amended SEC filings, her 10b5-1 trading plan only covered future stock transactions.
Eventually, Green Mountain Coffee’s stock price recovered from its low point of $26.87 per share on October 11, 2010 to close at $34.63 per share on November 5, 2010. On that same day, Michelle Stacy exercised 10,000 options at $6.20 per share and simultaneously sold her shares at $35 per share.
On February 7, 2011, Michelle Stacy exercised 10,000 options at $6.20 per share and simultaneously sold her shares at $40.00 per share. In addition, she exercised another 5,561 options at $9.14 per share and simultaneously sold those shares at $40 per share.
Seven days later, on February 14, 2011, Green Mountain Coffee stock opened for trading at $42.14 per share. At 11:00 AM Reuters reported:
Green Mountain Coffee Roasters Inc's (GMCR.O) shares fell as much as 4 percent after Starbucks Corp (SBUX.O) said it plans to announce a new product for the single-cup coffee market, a move that could threaten Green Mountain's dominance in the fast-growing sector.The stock price of Green Mountain shares dropped to a low of $41.53 per share in intra-day trading.
Later that day, at around 3:34 PM, Reuters citing an unnamed source reported:
Starbucks Corp (SBUX.O) and Green Mountain Coffee Roasters (GMCR.O) are in partnership negotiations, a source close to the talks told Reuters on Monday, sending Green Mountain shares surging.The Wall Street Journal reported:
Unusually fast movement – up or down 10% in less than five minutes – leads to a five-minute trading pause. This trading break is one of the fixes implemented after the Flash Crash last spring. In the case of Green Mountain, its shares shot to 47.88 from 41.81 – a 14% move in about five minutes.
Reuters reported in the afternoon that the two coffee companies are chatting about a possible partnership, which might have triggered a big enough stampede to get shorts covering positions in earnest.On that same day, Michelle Stacy exercised 10,000 options at $6.20 per share and simultaneously sold her shares at $45.13 per share.
On February 15, 2011, the Associated Press reported:
Shares of Green Mountain Coffee Roasters Inc. slumped in early trading after coffee chain giant Starbucks Corp. announced a single-cup coffee deal with a rival company.
Market speculation that coffee chain giant Starbucks Corp. would soon announce a partnership with Green Mountain had jacked up the single-serve brewer maker's shares -- the stock jumped $2.89, or 6.7 percent, to $46.35 Monday and have risen about 48 percent in the past three months.On February 15, 2010, the market value of Green Mountain Coffee stock eventually closed at $43.53 per share, a drop of $2.82 per share from the previous day's closing price of $46.35 per share. On the previous day, Michelle Stacy sold 10,000 Green Mountain Coffee shares at $45.13 share.
On Wednesday, March 9, 2011, Green Mountain Coffee shares closed at $43.64 per share. On Thursday, March 10, 2011, Green Mountain announced a “strategic relationship” with Starbucks. In reaction to the news, the market value of Green Mountain Coffee common stock rose $21.07 per share to close at $61.71 per share, or a 46% increase from the prior day’s closing price. That same day, Michelle Stacy exercised 9,375 options at $6.20 per share and simultaneously sold them at $55.54 per share, $11.90 per share higher than the previous day's closing price per share.
Class-action litigation alleges illegal insider trading
Is Michelle Stacy a shrewd insider, a psychic or just plain lucky? Perhaps the people who designed and administer her purported 10b5-1 trading plan are geniuses? Lawyers representing plaintiffs in a class-action lawsuit against Green Mountain Coffee don’t think so. They are alleging that Michelle Stacy and certain other insiders engaged in illegal insider trading.
According to amended class-action complaint (download here):
68. Moreover, although the September 28, 2010 Form 8-K indicates that, "[o]n September 20, 2010, the staff of the SEC's Division of Enforcement informed the Company that it was conducting an inquiry and made a request for a voluntary production of documents and information," the above-noted former employee has stated that by no later than the first week of May 2010, he/she was contacted by Company employees who asked if he/she had been had been the whistleblower in an SEC investigation of GMCR.
69. Accordingly, Company employees contacted the confidential witness concerning an SEC investigation five months prior to the issuance of the September 28, 2010 Form 8-K, which disclosed that the SEC informed the Company that it was conducting an inquiry and made a request for a voluntary production of documents and information on September 20, 2010.In other words, the amended class-action complaint alleges that Green Mountain Coffee knew that the SEC was poking around as early May 2010 or three months before Michelle Stacy claims she adopted a 10b5-1 trading plan. If a corporate executive already has nonpublic knowledge of certain adverse events such as undisclosed weaknesses in internal controls, accounting errors, or an SEC inquiry, a 10b5-1 plan cannot provide a safe harbor against illegal insider trading allegations.
The amended class-action complaint took issue with the timing of Michelle Stacy‘s stock sales and the timing of her 10b5-1 trading plan:
103. Prior to these sales, there had not been significant insider trading activity since June 2009. Not only did both division presidents sell the majority of their shares, but Stacy did so the day after the SEC's information request and one week before GMCR made the SEC inquiry public.
104. Even worse, in October 2010, Stacy amended her Form 4s for the August and September sales, claiming that she forgot to include in the original Form 4s that the sales were made pursuant to a Rule 10b5-1 trading plan adopted on August 13, 2010. Not only did the Company fail to inform the SEC of the plan on the day it was adopted, but it failed to disclose the plan when Stacy's Form 4 for the $928,500 sale was filed a mere four days after its adoption.Michelle Stacy did not amend her Form 4 for her August 13 exercise and simultaneous sale of 30,000 shares of stock. She adopted her 10b5-1 trading plan that same day to cover her future sales of stock. That error in the class-action amended complaint aside, Michelle Stacy has a lot of explaining to do. A significant amount of Green Mountain Coffee's accounting errors which caused it to restate its financial reports resulted from material weaknesses in internal controls over financial reporting in the Keurig division headed by her. What did she know about financial reporting problems on August 13, 2010? If she knew nothing, was she incompetent or dumb?
Sam E. Antar
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 his 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. I teach about white-collar crime for professional organizations, businesses, and colleges and universities.
Recently, I exposed GAAP violations by Overstock.com 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).
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.
I do not own any Green Mountain Coffee Roasters or Overstock.com securities long or short. My investigations of these companies are a freebie for securities regulators to get me into heaven, though I doubt I will ever get there. My past sins are unforgivable.