teach law enforcement, professionals, businesses, and students about white-collar crime, I describe how fraudsters build "walls of false integrity" around themselves to increase the comfort level and ultimately gain the trust of their victims.
Green Mountain Coffee Roasters (NASDAQ: GMCR) likes to portray itself as a responsible corporate citizen. However, upon close examination, the company seems to have continuing problems following securities laws and Generally Accepted Accounting Principles. It also appears to have problems abiding by its own Code of Ethics governing how non-public information is discussed outside the company. Can Green Mountain Coffee be trusted by investors?
On May 5, 2011, CNBC Senior Stocks Commentator Herb Greenberg questioned the quality of earnings reported by Green Mountain Coffee Roasters for the thirteen-week period ended March 26, 2011, based on what appeared to be a reversal of sales returns reserves. Greenberg sought an explanation from the company, but they did not respond to him.
On May 9, 2011, I followed-up on Greenberg’s questions. Assuming that Green Mountain Coffee was consistent in its reporting of sales returns numbers as required under Generally Accepted Accounting Principles (GAAP), it appeared that the company made an adjustment and added $22 million to revenues by reversing an overstatement of its sales returns reserves in the latest thirteen-week period ended March 26, 2011.
On June 6, 2011, best-selling author and investigative journalist Roddy Boyd reported that Vice-President of Investor Relations Suzanne DuLong quietly reached out to a select handful of analysts and investors to explain that there was “no reversal” of sales returns reserves. However, DuLong admitted in an email that the company did not consistently report its sales returns reserves numbers from one period to the next, saying such reports were "...apples to oranges.” Further, she disclosed certain information about sales return reserves that were not included in the company’s recent 10-Q report.
That same day, I published the contents of a letter that I had written to the Securities and Exchange Commission (SEC) complaining about what I believe are violations of Regulation FD governing fair disclosure and violations of GAAP governing consistency in financial reporting by Green Mountain Coffee. I asked the SEC to require the company to file an 8-K report to provide investors with the same information it selectively disclosed to certain analysts and investors.
In response, Green Mountain Coffee published details about its sales returns reserves on its website, rather than file an 8-K report. The company admitted that its sales return reserve numbers were "misinterpreted" because of its inconsistent reporting.
In June 13, 2011, I followed up with another blog post showing how Green Mountain Coffee’s published reserve numbers do not add up. The company started the fiscal year with $14.056 million in combined sales return reserves and bad debt reserves. It claims to have added $5.262 million to sales returns reserves and $0.400 million to bad debt reserves. Therefore, the combined ending balance of both reserves should be $19.718 million. However, the company reported a combined sales return reserve and bad debt reserve totaling $20.565 in its latest 10-Q report, leaving an $847,000 unexplained discrepancy. Further, if you add Green Mountain Coffee’s first and second quarter income statement numbers, they don’t add up to the half-year totals.
Numbers are supposed to add up, but at this company they apparently don't. Even small discrepancies raise red flags that there may be deeper problems underneath the surface. Christopher Faille offered the following advice in his Forbes blog, "Never speculate that an accounting disparity will turn out to be harmless."
Legal advises Green Mountain Coffee not to comment
So far, Green Mountain Coffee has not, at least publicly, responded to my calculations showing a discrepancy in its reported numbers. Vice-President of Investor Relations Suzanne DuLong was interviewed by Andy Bromage from Seven Days. On June 15, 2011, Seven Days reported that:
Regarding Antar specifically, DuLong would only offer: “As a public company, we obviously pay close attention to what we say in the public press and what is said about us. At this point, I’ve been advised by legal that we choose not to comment.”
I guess it's "Mum's the word" for now on that issue.
Did Green Mountain Coffee violate its Code of Ethics?
Green Mountain Coffee's Code of Ethics expressly prohibits the dissemination of any information not disclosed in its financial reports filed with the SEC:
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 certain rules and regulations. These rules and regulations 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. [Emphasis added.]
However, Roddy Boyd's Financial Investigator blog provided a copy of an email sent by Suzanne DuLong to a certain independent analyst which contained non-public information that was not disclosed in the company’s recent 10-Q report. In addition, Boyd provided a copy of another email which contained a research note from Dougherty & Co. that included much of the same non-public information.
As I detailed above, DuLong admitted that comparing Green Mountain Coffee's financial reports from one period to the next period was like comparing "...apples to oranges.” Her remark appears to acknowledge that the company may have violated GAAP governing consistency in financial reporting.
Further, Green Mountain Coffee did not disclose the specific balance for its sales returns reserve in its 10-Q report for the period ended March 26, 2011. The company reported the combined balances of its sales returns reserve and allowance for doubtful accounts was $20.565 million in its Balance Sheet disclosure. However, DuLong's email stated that the separate balance for its sales returns reserve was $18 million:
Q2’11 ending reserve of $18 million.
In addition, DuLong's email stated that:
The sales return provision in Q2’11 was $12 million.
The "sales return provision" was not disclosed in its 10-Q report for the period ended March 26, 2011.
Therefore, it appears that DuLong may have violated the company's Code of Ethics by disseminating non-public information that was not included in its SEC filings.
Disclosure issues under Sarbanes-Oxley Act
If Suzanne DuLong disseminated non-public information under instructions from certain principal officers of the company, they also appear to have violated the Green Mountain Coffee's Code of Ethics. If that's the case, the company may be required to disclose such a departure from its Code of Ethics under Section 406 of the Sarbanes-Oxley Act:
Section 406(b) of the Sarbanes-Oxley Act directs us to require a company to make "immediate disclosure" on Form 8-K or via Internet dissemination of any change to, or waiver from, the company's code of ethics for its senior financial officers.
Note: Under Section 406, a senior financial officer is the "principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions."
In my opinion, the company violated Regulation FD since DuLong provided certain material non-public financial information to selected analysts and investors that were not disclosed in its SEC filings. According to the Securities and Exchange Commission:
Regulation FD is also designed to address another threat to the integrity of our markets: the potential for corporate management to treat material information as a commodity to be used to gain or maintain favor with particular analysts or investors.
Seven Days reported that Suzanne DuLong disagrees and claims that Green Mountain Coffee did not violate Regulation FD:
DuLong also suggested the company did not violate SEC Regulation FD because the financial information communicated to investors recently — as detailed on the Financial Investigator — was not “material” or significant.
However, the definition of materiality cited under Regulation FD is very broad and is based on investor perception:
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."
Green Mountain Coffee’s sales returns trends were closely followed by analysts, investors, and the financial press due to its higher than normal returns resulting from defective brewers. That’s why Herb Greenberg and others questioned the impact of sales returns on the company’s reported earnings for the thirteen-week period ended March 26, 2011. The provision for sales returns for the latest quarter, which was shared by DuLong with a certain independent analyst and others, provided key information about management estimates of future product returns. Further, that fact that DuLong said that the company's financial reports from one period to the next period were "apples to oranges" is very significant for investors to know.
I told Seven Days reporter Andy Bromage:
Send this message to the company. I will debate them in any forum, in any place, at any time. They can send 10 accountants — 10 against one, a convicted felon, over here.
My offer to debate Green Mountain Coffee management was published in his article and it still stands. It's more transparent for the company debate a critic in public than for it to engage in a whisper campaign that risks violating its Code of Ethics and Regulation FD. If the company provides the coffee, I'll provide the Danishes.
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 government entities, 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. My past sins are unforgivable.
I do not own any Green Mountain Coffee Roasters or Overstock.com securities long or short.