Thursday, December 16, 2010

A Question for Green Mountain Coffee Roasters

To CFO Francis G. Rathke:

While Green Mountain Coffee Roasters (NASDAQ: GMCR) is handling matters relating to the Securities and Exchange Commission inquiry, can you please clear up some confusion in two financial disclosures from the 10-K report below?

10-K report - page 33
Gross Profit
Fiscal 2010
Company gross profit for fiscal 2010 totaled $425.8 million, or 31.4% of net sales, as compared to $245.4 million, or 31.2% of net sales, in fiscal 2009. Gross margin increased over fiscal 2009 due to the additional manufacturing margin resulting from the acquisition of Timothy’s and Diedrich, and realized manufacturing efficiencies within SCBU. These increases in gross margin were offset by higher brewer sales returns and warranty expense. In fiscal 2010, the Company was able to recover approximately $6.0 million as reimbursement from its suppliers related to a quality issue associated with certain brewer models produced primarily in late calendar 2009. The quality issue did not represent a safety concern, and is believed to be tied to a component used in limited production primarily from late 2009. This recovery was reflected as a reduction to warranty expense and moderately offsets the higher brewer warranty expense and sales returns costs incurred during fiscal 2010. [Bold and italicized emphasis added.]
10-K report - page F-37
Product Warranties
The Company offers a one-year warranty on all Keurig® brewers it sells. Keurig provides for the estimated cost of product warranties, primarily using historical information and repair or replacement costs, at the time product revenue is recognized. During fiscal 2010, the Company experienced higher warranty returns associated with certain brewer models associated with a quality issue. The quality issue did not represent a safety concern, and is believed to be primarily tied to a component used in limited production primarily from late 2009 which came to the Company’s attention in the second quarter of fiscal 2010. The Company is continuing to replace any brewers exhibiting quality issues and has implemented hardware and software changes which it believes have corrected the issue, however, there can be no assurance that we will not experience some additional warranty expense related to this quality issue in future periods. The Company reached agreement with its suppliers and has recovered approximately $6.0 million as reimbursement related to this issue. This recovery was reflected in fiscal 2010 cost of sales as a reduction to warranty expense and substantially offsets the higher warranty expense and sales returns costs incurred in fiscal 2010. [Bold and italicized emphasis added.]
So I have a question.

How is it that the $6 million reimbursement "moderately offsets the higher brewer warranty expense and sales returns costs incurred during fiscal 2010" while that same reimbursement "substantially offsets the higher warranty expense and sales returns costs incurred in fiscal 2010"?

If you respond to my question, I will post your answer in my blog.

Respectfully,

Sam E. Antar

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 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. 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.

Monday, December 13, 2010

Green Mountain Coffee’s financial reporting doesn’t taste as good as its coffee

On Thursday, December 9, 2010 at 5:30 PM Eastern, Green Mountain Coffee Roasters (NASDAQ: GMCR) held its Q4 2010 conference call to review its "financial results for its fiscal 2010 fourth quarter and full year.” About an hour before the call, management issued “prepared remarks” which were made available to investors in an 8-K report filed with the Securities and Exchange Commission. The company also filed its annual 10-K report for fiscal year 2010, after receiving a two week extension.

No quick resolution to SEC inquiry

In its prepared remarks, management continued to express hopes for a quick resolution to the SEC inquiry:
We continue to cooperate fully, timely and voluntarily with the SEC in response to its inquiry as we would like to move the inquiry along as quickly as possible. We are fully responding to all information requests.
However, management expressed disappointment that:
Nevertheless, we do not control the timing of the process.
Just last week, I told Ilene, Phil’s Stock World editor and Seeking Alpha contributor, that Green Mountain was “concerned about the SEC inquiry and that the company is far from being out of the woods.” Now, Green Mountain concedes that it does not know when the SEC inquiry will end.

Inability to give narrow guidance with only 16 days left in quarter

Management seems unable to provide narrow guidance on earnings with only 16 days left in the current quarter ending on December 25, 2010. See below:
Non-GAAP earnings per share in the range of $0.14 to $0.18 per diluted share excluding any acquisition-related transaction expenses, amortization of identifiable intangibles related to the Company’s acquisitions, foreign exchange impact of hedging the Canadian dollar purchase price of the pending Van Houtte acquisition, and legal expenses related to the SEC inquiry or pending litigation. [Bold and italicized emphasis added.]
CNBC Senior Stocks Commentator Herb Greenberg wrote:
For the first quarter, the company guided to a range of 14 cents to 18 cents a share, which was below street estimates. And remember, it offered up that 4 cent spread even though it only two weeks left in that quarter. And the current quarter is the quarter that presumably included Christmas shipments. [Bold and italicized emphasis added.]
With 75 of 91 days in the fourth quarter completed, that management cannot estimate its earnings with greater precision is concerning.  But the main point is not whether or not Green Mountain will meet its earnings estimates. It’s the apparent inadequacy of internal controls.  Proper internal controls would insure that Green Mountain's future reports will be free of material misstatements. Its inability to provide narrow guidance to investors near the end of the quarter suggests those controls are not in place. The company itself admits as much.

"Material weakness" in internal controls

In its 2010 10-K report, Green Mountain disclosed that management cannot assure investors that its future financial reports can be free of material errors due to continuing “material weaknesses” in internal controls:
Management’s determination that material weaknesses exist in our internal controls over financial reporting could have a material adverse impact on the Company.
We are required to maintain internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. In Item 9A of this Annual Report, management reports that material weaknesses exist in the Company’s internal control over financial reporting principally related to the Company’s period-end financial reporting and consolidation process. Due to these material weaknesses, management has concluded that as of the end of the period covered by this Annual Report, the Company’s disclosure controls and procedures were not effective. Consequently, and pending the Company’s remediation of the matters that have caused the control deficiencies underlying the material weaknesses, our business and results of operations could be harmed, we may be unable to report properly or timely the results of our operations, and investors may lose faith in the reliability of our financial statements. Accordingly, the price of our securities may be adversely and materially impacted. [Bold and italicized emphasis added.]
Furthermore, Green Mountain disclosed that:
...the resolution of the SEC inquiry could require the filing of additional restatements of our prior financial statements, and/or our restated financial statements, or require that we take other actions not presently contemplated.  [Bold and italicized emphasis added.]
Thus, Green Mountain warned investors that it may not be able to properly report the results of its operations because of material weaknesses in its internal controls. In addition, Green Mountain surmised that “investors may lose faith in the reliability of our financial statements" and that the price of its securities "may be adversely and materially impacted.”  In addition, it noted that its restated financial reports from 2007 to 2010 could be restated again.

Could Green Mountain have made more transparent disclosures about the possible outcome of the SEC inquiry?

On Monday, September 20, 2010, the SEC notified Green Mountain Coffee Roasters that it was conducting an informal inquiry and requested it to voluntarily submit information concerning “revenue recognition practices and the Company’s relationship with one of its fulfillment vendors.”

Eight days later, on September 28, 2010, Green Mountain surprised investors by disclosing news of the SEC inquiry in an 8-K filing. In that same 8-K report, Green Mountain disclosed that it discovered an "immaterial accounting error" affecting financial reports issued from 2007 to 2010. The company claimed that the margin error was “immaterial” and said it would correct that error by making a cumulative adjustment to earnings “in the quarter ended September 25, 2010.”

After the stock market closed on Friday on November 19, 2010, Green Mountain disclosed three new overstatements totaling $3.2 million pre-tax income and one new understatement of $0.7 million in pre-tax income, making a total overstatement of $10.1 million in pre-tax income. This time, the company announced that it would restate its financial reports issued from 2007 to 2010 to correct its errors.

Green Mountain reassured investors that “none” of the financial statement errors involved any wrongdoing by the company, its management, or its employees:
The internal investigation is nearly complete, and the Company continues to cooperate fully with the SEC. None of the financial statement errors implicate misconduct with respect to the Company or its management or employees. In addition, none of the financial statement errors are related to the Company’s relationship with M.Block & Sons, the fulfillment vendor through which the Company makes a majority of the at-home orders for the Keurig business unit’s single-cup business sold to retailers. [Bold and italicized emphasis added.]
Green Mountain provided standard disclaimer language found at the bottom of the 8-K report:
Note Regarding Forward-Looking Statements
Except for historical information, the matters discussed in this current report on Form 8-K are “forward-looking statements” within the meaning of the applicable securities laws and regulations. Forward-looking statements, including statements regarding the Company’s intent to restate its prior financial statements, the estimated adjustments of the restated financials, the internal investigation by the audit committee of the Company’s board of directors and the expected timing of filing the restated financial reports, involve risks and uncertainties which may cause actual results to differ materially from those stated here. Factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the risk that additional information may arise from the final conclusion of the audit committee’s internal investigation, the risk that the process of preparing and auditing the financial statements or other subsequent events would require the Company to make additional adjustments, the time and effort required to complete the restatement of the financial reports and the impact of the inquiry initiated by the SEC and any related or additional governmental investigative or enforcement proceedings, as well as other risks described more fully in the Company’s filings with the SEC. Forward-looking statements reflect management’s analysis as of the date of this current report on Form 8-K. The Company does not undertake to revise these statements to reflect subsequent developments, other than in its regular, quarterly earnings releases.  [Bold and italicized emphasis added.]
However, investors apparently ignored the "forward-looking statements" disclaimer language and instead focused on the company's reassurance that there was no "misconduct." On the following Monday morning, at 8:21 AM Eastern on November 22, 2010 before the stock market opened, StreetInsider.com reported:
Janney Montgomery Scott reiterated their Buy rating and raised their fair value estimates on Green Mountain Coffee (Nasdaq: GMCR) from $40 to $50 following the restatement of financial results on Friday.
The firm said, "We believe the results of GMCR's internal investigation should sufficiently remove the key near-term overhang on the stock and expect the stock to be up meaningfully on this news." [Bold and italicized emphasis added.]
Barron’s reported that:
Cannacord Genuity Analyst Scot Van Winkle expects that the company's internal investigation will put the matter to rest, writing "we can be 99.99% confident that the SEC response will simply be inaction."
"In our view, the accounting issues are over.” [Bold and italicized emphasis added.]
The Wall Street Journal Market Beat blog reported that:
Bank of America Merrill Lynch analysts upgraded the stock to “Buy” from “underperform” Monday.
That day, Green Mountain shares climbed $5.52 to close at $35.78 per share, an 18.4% single day gain.

The mood of reassurance lasted briefly. On December 9, 2010, Green Mountain filed its 10-K report and added new and stronger language regarding the ongoing investigation by the SEC that wasn't present in its November 19th 8-K filing:
We face risks related to the ongoing SEC inquiry.
As previously disclosed, on September 20, 2010, the staff of the SEC’s Division of Enforcement informed the Company that it was conducting an inquiry into matters at the Company. The Company, at the direction of the audit committee of the Company’s board of directors, is cooperating fully with the SEC staff’s inquiry. At this point, we are unable to predict what, if any, consequences the SEC inquiry may have on us. However, the inquiry could result in considerable legal expenses, divert management’s attention from other business concerns and harm our business. If the SEC were to commence legal action, we could be required to pay significant penalties and/or other amounts and could become subject to injunctions, an administrative cease and desist order, and/or other equitable remedies. The filing of our restated financial statements to correct the discovered accounting errors will not resolve the SEC inquiry. Further, the resolution of the SEC inquiry could require the filing of additional restatements of our prior financial statements, and/or our restated financial statements, or require that we take other actions not presently contemplated. We can provide no assurances as to the outcome of the SEC inquiry. [Bold and italicized emphasis added.]
On December 10, 2010, the next trading day, Green Mountain shares dropped 9.65% in value.

The language about the SEC inquiry in the December 9 10-K is more specific and more severe compared to the language in the November 19 8-K. Should Green Mountain have used the language it used in its December 9 10-K report in its earlier 8-K report? Would the stock have traded 18% higher if Green Mountain used the same disclosure? Did something change between the time Green Mountain released the 8-K report and the 10-K report? I previously warned that, "It is premature for Green Mountain to proclaim the absence of any wrongdoing while the SEC inquiry is still ongoing...."

Suspicious options trading before Green Mountain released its November 19, 2010 8-K report

On December 9, 2010, Herb Greenberg broke some disturbing news about call options trading on the afternoon before Green Mountain released its November 19, 2010 8-K report claiming it found no misconduct by the company. Appearing on CNBC's Fast Money, Greenberg asked "Who knew what when?" According to Herb:
If you look at the call activity in this company, the in-the-money call activity in this company, it was negligible, negligible, negligible in the days leading up to that November 19 announcement, when they said they... got their clean bill of health from their internal auditors. On the 19th, they pop, from 18,000 to 74,000... and much of the activity... was at the end of the day.



In addition, Greenberg noted that:
Jon Najarian of Options Monster, who helped analyze this data for me, said on Fast Money last night that it does suggest somebody may have been trading on material non-public information.
I believe the SEC will likely investigate whether any person working at or involved with Green Mountain leaked information in its 8-K filing to call option traders before it was released. The SEC might also ask whether the people responsible for Green Mountain’s financial disclosures also leaked information to call option traders.

Final comments

While I like the taste of Green Mountain’s Coffee, I don’t like the taste of its financial disclosures. Material weaknesses of internal controls create uncertainty about the reliability of future financial reports and the SEC inquiry creates uncertainty about its recently restated financial reports. Green Mountain still has not come clean about the timing of the discovery of its accounting errors. Now we have the possibility that material inside information was leaked to options traders.

To get to the bottom of Green Mountain's accounting problems and disclosure issues, the SEC might have to start issuing subpoenas and taking sworn testimony from witnesses. I wouldn't be surprised if the SEC investigates the option trades and starts a formal investigation of Green Mountain Coffee.

I can empathize with Green Mountain’s management team based on my own personal experience with the SEC in my Crazy Eddie days. It’s stressful to be investigated by SEC! Its investigators can cause many, many sleepless nights. Therefore, I recommend that Green Mountain’s management team stay away from the caffeine and stick to its own delicious brand of decaf coffee. Its lawyers, however, might need to start infusing the real caffeinated brew.

Written by:

Sam E. Antar with Ilene

Special note

On Thursday, December 16, 2010, The Committee on Continuing Legal Education of the New York State Bar Association is hosting an event called “Accounting for Lawyers.” I will be teaching a class on “Games Companies Play: How to Identify Financial Reporting Irregularities and Violations in Plain Sight.” Additional information here.

I would like to give special thanks to Overstock.com (NASDAQ: OSTK) CEO Patrick M. Byrne and other public companies written about in this blog for helping me develop my course materials. Without you, I would not be me.

Ilene's disclosure

Ilene is the editor of Phil’s Stock World, and fellow Seeking Alpha contributor. She does not own any Green Mountain Coffee Roasters securities, long or short. Her simulated Dark Horse Hedge portfolio is short Green Mountain’s common stock.

Sam's 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 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. 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.

Thursday, December 09, 2010

To Green Mountain Coffee Roasters: My Questions for Today's Earnings Call (updated)

Update: After publishing the blog post below, I sent another email to Kathleen Shaffer from Green Mountain's investor relations alerting her to my questions. According to my Active Meter, Site Meter, and Google Analytics software, Green Mountain read this blog post 12 times before Thursday's conference call with investors and ignored my requests to participate in the call and for it to answer certain questions about its accounting errors.

Green Mountain Coffee Roasters (NASDAQ: GMCR) is scheduled to hold a conference call with investors and analysts today at 5:30 PM ET to discuss the status of an informal SEC inquiry, its restatement of financial reports from 2007 to 2010 due to certain accounting errors, and its "financial results for its fiscal 2010 fourth quarter and full year."

In a previous blog post, I raised certain issues:
To truly exonerate itself after the discovery of certain material violations of Generally Accepted Accounting Principles (GAAP), Green Mountain Coffee Roasters (NASDAQ: GMCR) needs to come clean with investors and disclose exactly when it found certain accounting errors. In addition, Green Mountain needs to provide clearer and more transparent disclosures to investors about the Securities and Exchange Commission (SEC) inquiry and the discovery of those errors.

I sent the following email to Green Mountain's investor relations contact requesting that I participate with other investors and analysts in the conference call and that I be permitted to ask certain questions:
From: Sam E. Antar
Sent: Thursday, December 09, 2010 2:02 AM
To: 'Investor.Services@GMC...
Subject: Request Re Earnings Conference Call
Importance: High
Dear Kathleen Shaffer:
As you probably know, I have been closely covering events concerning Green Mountain Coffee in my blog. Please send me information on how I can dial in and listen to the live call via telephone, rather than listen to the live webcast. In the interest of transparency, I respectfully request that I be permitted to ask 2 or 3 questions during the Q & A.
Respectfully,
Sam E. Antar
I have not heard back from Green Mountain. Therefore, I am posting my questions here:

Question 1:
When did Green Mountain initially identify any weaknesses in internal controls and procedures which caused its recently disclosed accounting errors and led to its restatement of financial reports?

Question 2:
Please explain why the SEC Division of Corporation Finance was concerned about Green Mountain's "control and procedures" disclosures in its 2008 and 2009 10-K reports and why the company had to revise those disclosures?

Question 3:
Please explain why Green Mountain's margin error did not specifically meet any of the materiality criteria under SEC Staff Accounting Bulletin No. 99 and why the company initially considered its margin error to be an "immaterial accounting error."

If Green Mountain is truly interested in transparency, they will answer my questions.

Written by:

Sam E. Antar

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 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. 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 is a freebie for securities regulators to get me into heaven, though I doubt I will ever get there. My past sins are unforgivable.

Wednesday, December 08, 2010

Green Mountain Coffee Roasters, Slow Murky Drip

Below is an article written by Phil's Stock World and Seeking Alpha contributor Ilene with my assistance. She asked me about Herb Greenberg's article on Green Mountain Coffee Roasters.

Yesterday, CNBC Senior Stock Commentator Herb Greenberg wrote a brief article on Green Mountain Coffee (NASDAQ: GMCR), pointing out that the language in its press release on Monday, December 6, 2010, has changed and, it appears, the company may have backed off its previous commitment to release its 10-K report by the December 9, 2010 due date.

Green Mountain’s Monday press release contained new language not found in previous press releases:
In conjunction with this announcement, GMCR will publish management’s prepared remarks on its quarterly and annual results. These prepared remarks will be provided via a Current Report on Form 8-K and also posted under the events link in the Investor Relations section of the Company’s website at www.GMCR.com. [emphasis added.]
Herb writes:
Historically, Green Mountain has simply said that “management will review” results “and discuss future prospects” during a call that will last “about an hour."
Now it says that it will “publish management’s prepared remarks on its quarterly and annual results. These prepared remarks will be provided via a Current Report on Form 8-K. As a result of publishing prepared remarks in advance of the live call, the conference call will include only brief remarks by management followed by a question and answer session.”
Did I mention they said “prepared remarks?” The significance is this: the wording sounds very legal…
More significant, perhaps: Whither the 10-K? While the company mentions an 8-K, which is used to disseminate important information, there is no mention of the release of an annual 10-K.
Green Mountain’s 10-K report was due on November 24, 2010. On that same day, the company filed a Form 12b-25 with the SEC notifying it that Green Mountain will file its 10-K report 15 days late on December 9, 2010:
As described in the current report on Form 8-K dated November 19, 2010, the board of directors of Green Mountain Coffee Roasters, Inc. (the “Company”), based on the recommendation of the audit committee and in consultation with management, has concluded that, because of errors identified in the Company’s previously issued financial statements for the fiscal years ended September 29, 2007, September 27, 2008 and September 26, 2009 and the first three fiscal quarters of 2010, the Company will restate its previously issued financial statements, including the quarterly data for fiscal years 2009 and 2010 and its selected financial data for the relevant periods.
The restatement process has resulted in delays in obtaining and compiling the business and financial data necessary to complete the restatement and prepare the Company’s financial statements for the fiscal year ended September 25, 2010. However, the Company continues to expect to file its annual report on Form 10-K for the fiscal year ended September 25, 2010, including all restated financial statements, by no later than the fifteenth calendar day following the prescribed due date of November 24, 2010, or December 9, 2010. [emphasis added]
So Green Mountain which previously stated it was going to file the 10-K by December 9, 2010, may be backing out of that with some legalistic language that makes it unclear to the average reader.  Company press releases are usually checked and re-checked by attorneys before issuance, and changes in language are often done on purpose. The 8-K that it is preparing to file is not the same as the annual report, the 10-K, which is required.  Does this mean that the 10-K will be delayed again?

Is the company buying time with its press release rather than filing its 10-K?  The market doesn’t seem to care as the stock rallied 7% yesterday. Maybe, it’s because investors think that Green Mountains problems with an SEC inquiry are over.

For example, yesterday, Michael Baron from the Street.com reported that:
Green Mountain shares jumped following the announcement of the restatement as the market fears of problems related to M.Block & Sons, the fulfillment vendor for most of the at-home orders of Green Mountain’s Keurig business unit’s single-cup business, proved unfounded. [emphasis added.] 
On November 19, 2010, Green Mountain claimed that its internal investigation found no wrongdoing in connection with recent restatements:
The internal investigation is nearly complete, and the Company continues to cooperate fully with the SEC. None of the financial statement errors implicate misconduct with respect to the Company or its management or employees. In addition, none of the financial statement errors are related to the Company’s relationship with M.Block & Sons, the fulfillment vendor through which the Company makes a majority of the at-home orders for the Keurig business unit’s single-cup business sold to retailers. [emphasis added.]
However, last week, convicted felon turned independent whistleblower Sam Antar noted in his blog that:
It is premature for Green Mountain to proclaim the absence of any wrongdoing while the SEC inquiry is still ongoing and it admits that its own internal investigation is not fully completed. The SEC inquiry began on September 20 and has not been concluded. That statement will come back to haunt Green Mountain if the SEC decides to conduct a formal investigation.
In any case, I am naturally suspicious of self-proclaimed absences of wrongdoing without thorough outside independent examination. Back in the old days at Crazy Eddie, we conducted a similar internal inquiry with help from our auditors into certain allegations of wrongdoing involving a supplier and proclaimed ourselves clean… Management and auditors have little incentive to report their own foul-ups.
I asked Sam Antar about Green Mountain’s earnings call announcement and Herb Greenberg’s recent comments. Antar replied:
It appears that Green Mountain’s lawyers are being extra careful to choreograph and sanitize all information while the SEC inquiry continues. It sends the subtle signal that they are concerned about the SEC inquiry and that the company is far from being out of the woods.
My personal guess is that the SEC may start a formal investigation. With a formal investigation, the SEC can take testimony from witnesses such as Green Mountain’s officers and employees of M. Block & Sons and subpoena documents from them.
Whether or not Green Mountain files its 10-K report on December 9, the SEC inquiry will continue to leave uncertainty for investors.  As for the 10-K, we’ll see tomorrow.

Written by,

Ilene, with Sam E. Antar

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 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. 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 is a freebie for securities regulators to get me into heaven, though I doubt I will ever get there. My past sins are unforgivable.

Thursday, December 02, 2010

Green Mountain Coffee Roasters, Time to Spill the Beans?

To truly exonerate itself after the discovery of certain material violations of Generally Accepted Accounting Principles (GAAP), Green Mountain Coffee Roasters (NASDAQ: GMCR) needs to come clean with investors and disclose exactly when it found certain accounting errors. In addition, Green Mountain needs to provide clearer and more transparent disclosures to investors about the Securities and Exchange Commission (SEC) inquiry and the discovery of those errors.

Timing of certain disclosures

On Monday, September 20, 2010, the SEC notified Green Mountain Coffee Roasters that it was conducting an informal inquiry and requested it voluntarily submit information concerning “revenue recognition practices and the Company’s relationship with one of its fulfillment vendors.”

Eight days later, on September 28, 2010, Green Mountain surprised investors by disclosing news of the SEC inquiry in an 8-K filing with the SEC. In that same 8-K report, Green Mountain disclosed that it discovered an "immaterial accounting error" affecting financial reports issued from 2007 to 2010:
In connection with the preparation of its financial results for its fourth fiscal quarter, the Company’s management discovered an immaterial accounting error relating to the margin percentage it had been using to eliminate the inter-company markup in its K-Cup inventory balance residing at its Keurig business unit. Management discovered that the gross margin percentage used to eliminate the inter-company markup resulted in a lower margin applied to the Keurig ending inventory balance effectively overstating consolidated inventory and understating cost of sales. Management determined that the accounting error arose during fiscal 2007 and analyzed the quantitative impact from that point forward to June 26, 2010.
As of June 26, 2010, there is a cumulative $7.6 million overstatement of pre-tax income. Net of tax, the cumulative error resulted in a $4.4 million overstatement of net income or a $0.03 cumulative impact on earnings per share.
After evaluating the quantitative and qualitative aspects of the error in accordance with applicable accounting literature, including Staff Accounting Bulletins published by the SEC, the Company, with the participation of the audit committee of the Board of Directors, has determined that the correction in the margin calculation represents a correction of an error in accordance with Accounting Standards Codification 250 Accounting Changes and Error Corrections, that the correction was not material to the fiscal years and the respective quarters ended 2007, 2008 and 2009 and that the Company anticipates that the correction will not be material to fiscal year 2010 and the respective quarters of fiscal 2010. As a result, the Company anticipates the cumulative amount of the accounting correction will be made in the quarter ended September 25, 2010. [Bold and italicized emphasis added.]
Green Mountain did not disclose exactly when it discovered the margin error but only that the margin error was discovered “In connection with the preparation of its financial results for its fourth fiscal quarter…..” Green Mountain’s fiscal year ended on September 25, 2010. Usually companies prepare for their year-end audits up to two months in advance.

Two scenarios

If Green Mountain had discovered the margin error before it was notified about the SEC inquiry, on September 20, 2010, why didn’t the company disclose the margin error to investors earlier, instead of waiting until it filed its 8-K report September 28, 2010?

If Green Mountain discovered the margin error after it was notified about the SEC inquiry, on September 20, 2010, why was the company able to find an accounting error within eight days or by September 28, 2010, when it didn't find the error during the previous fiscal years (2007 to 2010)? This scenario is possible, but it would be very coincidental.

The unknown timing of Green Mountain’s discovery of its margin error raises the question: did the company disclose the error to investors when it was discovered or did the company wait?

Green Mountain’s Common Stock Purchase Agreement with Luigi Lavazza S.p.A.

In that same September 28, 2010 8-K report, Green Mountain disclosed that it closed its Common Stock Purchase Agreement with Luigi Lavazza S.p.A. See below:
On September 28, 2010, Green Mountain Coffee Roasters, Inc., a Delaware corporation (the “Company”), completed a sale of 8,566,649 shares (the “Shares”) of its common stock, par value $0.10 per share (“Common Stock”), to Luigi Lavazza S.p.A., an Italian corporation (“Lavazza”), for an aggregate purchase price of $250,000,000. The sale of the Shares was effected pursuant to the Common Stock Purchase Agreement, dated as of August 10, 2010 (the “SPA”), by and between the Company and Lavazza. The execution of the SPA was previously reported by the Company in its Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission (the “SEC”) on August 11, 2010, and the full text of the SPA was filed as Exhibit 10.1 thereto. 
In connection with the stock purchase agreement, Green Mountain provided certain warranties that the Company and its auditors have not identified and are not aware of:
(A) any significant deficiency or material weakness in the design or operation of internal control over financial reporting utilized by the Company; (B) any illegal act or fraud, that involves the Company’s management or other employees; or (C) any claim or allegation regarding any of the foregoing that would have a Material Adverse Effect. [Bold and italicized emphasis added.]
.07 A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
A material weakness in internal controls generally arises when accounting errors have a “reasonable possibility” of causing a company to restate its financial reports to correct those errors. A "significant deficiency" in internal controls arises when accounting errors are not material enough to cause a restatement of financial reports, but are instead corrected by making a cumulative adjustment to the latest period’s financial reports.

Initially, Green Mountain claimed that its margin error was “immaterial” and disclosed that it would correct that error by making a cumulative adjustment to its Q4 2010 financial reports, rather than restate its financial reports issued from 2007 to 2010. At the very least, that margin error appeared to result from a “significant deficiency” under auditing rules. It could be a breach of warranty under Green Mountain’s Common Stock Purchase Agreement with Luigi Lavazza, though Green Mountain never told investors that may have breached a key warranty under its agreement with Luigi Lavazza.

Green Mountain initially entered into its agreement to sell shares to Luigi Lavazza on August 10, 2010. On the following day, Green Mountain disclosed to investors that:
On August 10, 2010, Green Mountain Coffee Roasters, Inc., a Delaware corporation (“Green Mountain” or the “Company”), and Luigi Lavazza S.p.A., an Italian corporation (“Lavazza”), entered into a Common Stock Purchase Agreement (the “SPA”). Pursuant to the terms of the SPA, Lavazza has agreed to make a $250,000,000 investment (the “Investment”) in Green Mountain’s common stock, par value $0.10 per share (“Common Stock”), at a purchase price per share equal to the volume-weighted average price of the Common Stock for the 60 trading days before the closing of the Investment, less 7.5% (the “Shares”). [Bold and italicized emphasis added.]
Thus, Lavazza's "purchase price per share would be equal to the volume-weighted average price of the Common Stock for the 60 trading days before September 28, 2010, less 7.5% (the “Shares”).” If the share price were to have dropped prior to Sept. 28, it would be reflected in Lavazza's final purchase price.

Based on the agreed upon terms, Luigi Lavazza paid $250 million to purchase 8,566,649 shares, or an average price per share of $29.18 which was computed as follows:
$31.55 gross volume-weighted average price of the Common Stock less 7.5% discount or $2.37 equals $29.18.
On September 28, 2010, Green Mountain closed its Common Stock Purchase Agreement with Luigi Lavazza. Later that same day, after the stock market closed, the company finally disclosed the SEC inquiry and the discovery of the margin error to investors.

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 in reaction to news of the SEC inquiry and accounting error. The stock continued to drop to $26.87 per share on October 11, 2010.

Green Mountain’s gross "volume-weighted average price" per share of stock in the sixty trading days prior to closing its Common Stock Purchase Agreement with Luigi Lavazza was about $31.55 per share. Apparently, if Green Mountain had waited to close the deal until after it disclosed news of the SEC inquiry and margin error, Luigi Lavazza would have paid less money per share to the company. This leads to the question: did Green Mountain purposely delay disclosure to investors of the SEC inquiry, the margin error, significant weaknesses in internal controls, and possible breaches of representations and warranties under its agreement with Luigi Lavazza?

Or did Green Mountain give early warning to Luigi Lavazza under the terms of their confidential agreement? (See Common Stock Purchase Agreement Section 7). In such case, did Luigi Lavazza not care about the probable negative impact on the stock price after the SEC inquiry and margin errors were disclosed to investors? And if so, why not?

More accounting errors discovered

On November 19, 2010, Green Mountain filed an 8-K report updating investors about the margin error it disclosed on September 28, 2010 and also disclosed additional accounting errors:
["Margin error"] A $7.6 million overstatement of pre-tax income, cumulative over the restated periods, due to the K-Cup inventory adjustment error previously reported in the Company’s Form 8-K filed on September 28, 2010. This error is the result of applying an incorrect standard cost to intercompany K-Cup inventory balances in consolidation. This error resulted in an overstatement of the consolidated inventory and an understatement of the cost of sales. Rather than correcting the cumulative amount of the error in the quarter ended September 25, 2010, as disclosed in the September 28, 2010 Form 8-K, the effect of this error will be recorded in the applicable restated periods.
A $1.4 million overstatement of pre-tax income, cumulative over the restated periods, due to the under-accrual of certain marketing and customer incentive program expenses. The Company also has corrected the classification of certain of these amounts as reductions to net sales instead of selling and operating expenses. These programs include, but are not limited to, brewer mark-down support and funds for promotional and marketing activities. Management has determined that miscommunication between the sales and accounting departments resulted in expenses for certain of these programs being recorded in the wrong fiscal periods.
A $1.0 million overstatement of pre-tax income, cumulative over the restated periods, due to changes in the timing and classification of the Company’s historical revenue recognition of royalties from third party licensed roasters. Because royalties were recognized upon shipment of K-Cups by roasters pursuant to the terms and conditions of the licensing agreements with these roasters, Keurig historically recognized these royalties at the time Keurig purchased the K-Cups from the licensed roasters and classified this royalty in net sales. Management has determined to recognize this royalty as a reduction to the carrying cost of the related inventory. The gross margin benefit of the royalty will then be realized upon the ultimate sale of the product to a third party customer. Due to the Company’s completed and, when consummated, pending acquisitions of third party licensed roasters, these purchases and the associated royalties have become less of a factor, since the post-acquisition royalties from these wholly-owned roasters are not included in the Company’s consolidated financial statements.
An $800,000 overstatement of pre-tax income, cumulative over the restated periods, due to applying an incorrect standard cost to intercompany brewer inventory balances in consolidation. This error was identified during the preparation of the fiscal year 2010 financial statements and resulted in an overstatement of the consolidated inventory and an understatement of the cost of sales.
A $700,000 understatement of pre-tax income for the Specialty Coffee business unit, due primarily to a failure to reverse an accrual related to certain customer incentive programs in the second fiscal quarter of 2010. The over-accrual was not identified and corrected until the fourth fiscal quarter of 2010.
In addition to the errors described above, the Company also will include in the restated financial statements certain other immaterial errors, including previously unrecorded immaterial adjustments identified in audits of prior years’ financial statements. [Bold and italicized emphasis added.]
Green Mountain also claimed that:
… these errors were discovered by management during the course of its preparation of the year-end financial statements and audit, as well as during the course of an internal investigation initiated by the audit committee of the Company’s board of directors in light of the previously disclosed inquiry by the staff of the Securities and Exchange Commission’s (“SEC”) Division of Enforcement. [Bold and italicized emphasis added.]
In its September 28, 2010 8-K report, Green Mountain claimed that the margin error was discovered “In connection with the preparation of its financial results for its fourth fiscal quarter.” Presumably, the additional errors listed in the November 19, 2010 8-K report were discovered during the internal investigation after the SEC notified the company of it informal inquiry.

We still don’t know exactly when Green Mountain discovered the margin error, whether it was before or after the company learned about the SEC inquiry on September 20, 2010. However, we now know that Green Mountain found several new accounting errors about sixty days after it was notified of the SEC inquiry. It also appears that Green Mountain is taking the position that its errors were "immaterial."

Materiality of accounting errors

Originally on September 28, 2010, Green Mountain disclosed that it overstated pre-tax income from 2007 to 2010 because of the margin error. The company claimed that the margin error was “immaterial” and said it would correct that error by making a cumulative adjustment to earnings “in the quarter ended September 25, 2010.”

On November 19, 2010, Green Mountain disclosed three new overstatements totaling $3.2 million pre-tax income and one new understatement of $0.7 million in pre-tax income, making a total overstatement of $10.1 million in pre-tax income. This time, the company announced that it would restate its financial reports issued from 2007 to 2010 to correct all of its errors:
On November 15, 2010, the board of directors of Green Mountain Coffee Roasters, Inc. (the “Company”), based on the recommendation of the audit committee and in consultation with management, concluded that, because of errors identified in the Company’s previously issued financial statements for the fiscal years ended September 29, 2007, September 27, 2008 and September 26, 2009 and the first three fiscal quarters of 2010, the Company will restate its previously issued financial statements, including the quarterly data for fiscal years 2009 and 2010 and its selected financial data for the relevant periods. Accordingly, investors should no longer rely upon the Company’s previously released financial statements for these periods and any earnings releases or other communications relating to these periods. [Bold and italicized emphasis added.]
Green Mountain did not identify any specific accounting error as "material." However, under SEC Staff Accounting Bulletin No. 99, accounting errors are material when they cause the "financial statements taken as a whole" to be "materially misstated" or "materially misleading." Such errors must be corrected by restating financial reports, instead of using a cumulative adjustment to the latest quarter's report to correct those errors.

How Green Mountain tried to spin the materiality issue

In its November 19, 2010 8-K report, Green Mountain tried to minimize to seriousness of its accounting errors by using carefully crafted language claiming that:
The effects on certain reported periods are quantitatively significant, and the impact of the individual errors will be disclosed in more detail in the Company’s restated financial statements.

The adjustments necessary to correct the errors will have no effect on reported cash flow from operations, and are not expected to have a material impact on the balance sheet.
Such errors can still be cause "financial statements taken as a whole" to be "materially misstated" or "materially misleading." SAB No. 99 directly addresses that issue:
If the misstatement of an individual amount causes the financial statements as a whole to be materially misstated, that effect cannot be eliminated by other misstatements whose effect may be to diminish the impact of the misstatement on other financial statement items. To take an obvious example, if a registrant's revenues are a material financial statement item and if they are materially overstated, the financial statements taken as a whole will be materially misleading even if the effect on earnings is completely offset by an equivalent overstatement of expenses.

Even though a misstatement of an individual amount may not cause the financial statements taken as a whole to be materially misstated, it may nonetheless, when aggregated with other misstatements, render the financial statements taken as a whole to be materially misleading. [Bold and italicized emphasis added.] 
For example, Company A and Company B are both competitors and each company has $100 of revenue, $100 of expenses, and zero profits. Both companies make only cash sales to customers and pay all of their expenses in cash. Each company started and ended the year with $100 in cash because they had zero profits.

Company A wants to make it appear that it has more market share (revenues) than company B and it inflates revenues and expenses by $100 each to report $200 of revenues, $200 of expenses, and but still zero profits. At the end of the year both companies report zero profits, zero cash flows from operations, and $100 cash on their balance sheets.

Company A's inflation of revenues and expenses did not change its reported profits, cash flow from operations, or balance sheet. However, Company A materially overstated both its revenues and expenses. Therefore, Company A's financial statements "taken as a whole" were "materially misleading."

Green Mountain said that "The effects on certain reported periods are quantitatively significant, and the impact of the individual errors will be disclosed in more detail in the Company’s restated financial statements." However, Green Mountain made no specific mention that its "financial statements taken as a whole" were "materially misstated" or "materially misleading."

Green Mountain should explain its decision to consider the margin error as an "immaterial accounting error"

When Green Mountain issues its restated financial reports, it should provide a thorough analysis and explain to investors why, originally on September 28, 2010, it considered the margin error “immaterial” and initially decided to use a cumulative adjustment to Q4 2010’s financial report to correct that error instead of restating its financial reports.

When the SEC Division of Corporation Finance conducts periodic reviews of public company financial reports and finds accounting errors, it requires the companies to provide a detailed materiality analysis using criteria under SAB No. 99. The analysis is later made publicly available in company filings after the review is completed. At the very least, Green Mountain should provide this analysis to investors when it files its 2010 annual 10-K report.

According to SAB No. 99:
Among the considerations that may well render material a quantitatively small misstatement of a financial statement item are –  
  • whether the misstatement arises from an item capable of precise measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent in the estimate 
  • whether the misstatement masks a change in earnings or other trends   
  • whether the misstatement hides a failure to meet analysts' consensus expectations for the enterprise   
  • whether the misstatement changes a loss into income or vice versa  
  • whether the misstatement concerns a segment or other portion of the registrant's business that has been identified as playing a significant role in the registrant's operations or profitability  
  • whether the misstatement affects the registrant's compliance with regulatory requirements
  • whether the misstatement affects the registrant's compliance with loan covenants or other contractual requirements   
  • whether the misstatement has the effect of increasing management's compensation – for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation 
  • whether the misstatement involves concealment of an unlawful transaction. 
This is not an exhaustive list of the circumstances that may affect the materiality of a quantitatively small misstatement. Among other factors, the demonstrated volatility of the price of a registrant's securities in response to certain types of disclosures may provide guidance as to whether investors regard quantitatively small misstatements as material. Consideration of potential market reaction to disclosure of a misstatement is by itself "too blunt an instrument to be depended on" in considering whether a fact is material. When, however, management or the independent auditor expects (based, for example, on a pattern of market performance) that a known misstatement may result in a significant positive or negative market reaction, that expected reaction should be taken into account when considering whether a misstatement is material.
If Green Mountain's margin error fell under any of the criteria listed above, it should have been considered a material accounting error under SAB No. 99, rather than an "immaterial accounting error" as originally claimed by the company.

Insider sales of stock

In a previous blog post, I detailed how on September 21, 2010, a day after Green Mountain was notified of the SEC inquiry, but seven days before the SEC inquiry was disclosed to investors, executive officer Michelle Stacy exercised 5,000 options and immediately sold her shares at $37 per share. At that time, Michelle Stacy's Form 4 disclosure did not reflect that she sold her shares pursuant to a Rule 10b5-1 trading plan. 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.

About five weeks after that blog post, on October 28, 2010, Stacy belatedly filed an amended Form 4 report and disclosed that:
This Form 4 has been amended to note that these sales were affected pursuant to a Rule 10b5-1 trading plan adopted by Ms. Stacy on 08/13/2010. 
In addition, Michelle Stacy filed another amended Form 4 report to reflect that her September 13, 2010 option exercise and sale of stock was also "affected pursuant to a Rule 10b5-1 trading plan." That option exercise and sale took place just seven days before Green Mountain was notified by the SEC on an inquiry.

At the very least, Michelle Stacy’s filing of amended Form 4 reports displays a continuous pattern of problematic financial reporting by Green Mountain and its officers and which increases investor uncertainty about the integrity of the company’s SEC filings.

Many responsible companies voluntarily disclose their insider's 10b5-1 trading plans as they are adopted, even though such disclosure is not required under existing SEC rules. The existence of 10b5-1 trading plans are only required to be disclosed on Form 4 as insiders purchase or sell their stock pursuant to such plans. However, voluntary disclosure at the inception of a 10b5-1 trading plan by insiders increases corporate transparency.

On August 13, 2010, Michelle Stacy exercised 30,000 options and immediately sold her shares at $30.95 per share. Not till October 28 did Stacy file amended Form 4 reports to reflect that her September 13th and 21st option exercises and sales of stock were carried out pursuant to a Rule 10b5-1 trading plan. Stacy claimed that she adopted a 10b5-1 trading plan on August 13. On August 13th, Stacy exercised options and sold stock, but she still does not claim that those transactions were made pursuant to 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. If it turns out that Michelle Stacy had non-public knowledge of any of those issues affecting Green Mountain before adopting her 10b5-1 trading plan, she could be charged by the SEC with alleged insider trading violations. Several lawsuits seeking class action status have already alleged securities law violations by Green Mountain and its officers.

Usually 10b5-1 trading plans call for the purchase or sale of stock by insiders at regular intervals.  Michelle Stacy’s plan doesn't appear particularly regular. On Monday, September 13, 2010, she exercised options and sold 5,000 shares of Green Mountain stock. Eight days later on Tuesday, September 21, 2010 (and a day after Green Mountain received notification of the SEC inquiry) she exercised options and sold another 5,000 shares of Green Mountain stock. Forty-five days later, on November 5, 2010, Michelle Stacy exercised options and sold 10,000 shares of Green Mountain stock. In the interest of transparency, Michelle Stacy should explain how the timing of option exercises and sales were determined under her 10b5-1 plan.

PricewaterhouseCoopers

PricewaterhouseCoopers is Green Mountain’s current auditor and it is now evident that it missed a growing list of accounting errors covering fiscal years 2007 to 2010. Likewise, until 2009 PricewaterhouseCoopers was Overstock.com’s (NASDAQ: OSTK) auditors, too. Every single initial financial report issued by Overstock.com from 1999 to 2009 had to be restated at least once and as many as three times due to accounting errors. Therefore, PricewaterhouseCoopers missed accounting errors by Overstock.com in each and every audit it performed of the company.

In 2009, I identified certain violations of Generally Accepted Accounting Principles (GAAP) which ultimately caused Overstock.com to restate its financial reports for the third time in three years, after the SEC intervened and forced to company to correct its accounting errors. During the ongoing SEC investigation, PricewaterhouseCoopers defended Overstock.com’s improper accounting treatment of cost recoveries from vendors and as it turns out, they were wrong.

Prematurely proclaiming the absence of wrongdoing 

In its November 19, 2010 8-K report, Green Mountain claimed that none of the financial statement errors implicate misconduct with respect to the Company or its management or employees:
The internal investigation is nearly complete, and the Company continues to cooperate fully with the SEC. None of the financial statement errors implicate misconduct with respect to the Company or its management or employees. In addition, none of the financial statement errors are related to the Company’s relationship with M.Block & Sons, the fulfillment vendor through which the Company makes a majority of the at-home orders for the Keurig business unit’s single-cup business sold to retailers. [Bold and italicized emphasis added.]
It is premature for Green Mountain to proclaim the absence of any wrongdoing while the SEC inquiry is still ongoing and it admits that its own internal investigation is not fully completed. The SEC inquiry began on September 20 and has not been concluded. That statement will come back to haunt Green Mountain if the SEC decides to conduct a formal investigation.

In any case, I am naturally suspicious of self-proclaimed absences of wrongdoing without thorough outside independent examination. Back in the old days at Crazy Eddie, we conducted a similar internal inquiry with help from our auditors into certain allegations of wrongdoing involving a supplier and proclaimed ourselves clean. The auditors falsely claimed to both our audit committee and the SEC that they thoroughly checked out those allegations and found no wrongdoing. Management and auditors have little incentive to report their own foul-ups.

Final comment

Every financial report issued by Green Mountain and certified by PricewaterhouseCoopers from 2007 to 2010 had to be restated because of accounting errors. In addition, Green Mountain CEO Lawrence J. Blanford and CFO Frances G. Rathke signed Sarbanes-Oxley certifications covering those reports. So far no one has been held accountable by Green Mountain for its financial misstatements – not its auditors, CFO, or CEO.

While I personally like the smell of Green Mountain's coffee, I don't like the smell of its financial disclosures. A little more enthusiasm in cleaning up its financial reporting (like it devotes to cleaning up the environment) and a little more transparency would go a long way.

Written by,

Sam E. Antar (with research assistance from Ilene)

Recommended reading about issues with 10b5-1 trading plans

February 1, 2009: Stanford University Graduate School of Business - Sec Rule 10b5-1 and Insiders' Strategic Trade by Alan D. Jagolinzer

July 2009: Stanford University Graduate School of Business - Research Underpins SEC Scrutiny of Scheduled Insider Trades by Bill Snyder

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 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. 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 those companies is a freebie for securities regulators to get me into heaven, though I doubt I will ever get there. My past sins are unforgivable.