Monday, May 23, 2011

Are the Feds Going Insane?

Memo to White-Collar Criminals:

If the Feds come knocking, just tell them that you will conduct an “internal investigation” into your suspected wrongdoing. They may be gullible enough to believe whatever you report. At worst, you can throw them some crumbs and admit to some mistakes to avoid a wider investigation into your unlawful activities. I'm not kidding!

Sam E. Antar (Convicted Felon, Graduating Class of 1992)

Sarcasm aside, back in my criminal days at Crazy Eddie, we pulled that stunt on our auditors at Peat Marwick Main (now KPMG). They were dumb enough to believe the results of our internal investigation clearing us of wrongdoing. Now it seems that in certain instances, the Feds are drinking the same Kool-Aid as Crazy Eddie's former auditors. It's INSANE!

Yesterday, David S. Hilzenrath from the Washington Post reported:
As the U.S. government steps up investigations of companies suspected of paying bribes overseas, law enforcement officials are leaving much of the detective work to the very corporations under suspicion.
The probes are so costly and wide-ranging that the Justice Department and Securities and Exchange Commission often let the companies investigate themselves and then share the results.
The strategy is especially common in cases of foreign corruption but also extends to domestic investigations involving issues as varied as health-care fraud and shady accounting.
The corporations, sometimes at the request of the government, hire teams of lawyers and accountants to interview employees, gather electronic records and sift through documents. The government reviews the results and decides whether further legwork is warranted — and, ultimately, whether to pursue charges.
The private investigators help determine what evidence the government sees. They typically turn over only a small subset of the many documents they collect. Sometimes the lawyers who conduct the investigation are the same ones who represent the company in negotiations with the government over charges and penalties. [Emphasis added.]
Hilzenrath asked one insider about the government's reliance on internal investigations:
What prevents the internal investigators from airbrushing the facts or, say, omitting evidence that might implicate the chief executive?
“You mean other than integrity?” one former federal prosecutor replied. “Very little.” The former prosecutor, who now works on internal investigations, spoke on the condition of anonymity to avoid having his comments used against him in future cases. [Emphasis added.]
Further, Nathan Koppel reported in the Wall Street Journal Blog that:
In a recent proposal explaining how it plans to act on tips from corporate insiders and whistleblowers, the SEC said that it may “give the company an opportunity to investigate the matter and report back.”
“This has been the approach of the Enforcement staff in the past, and the Commission expects that it will continue in the future,” the agency said.
Are the people running the Justice Department and the Securities and Exchange Commission completely out of their minds? They should know better than to ever rely on anyone's “integrity” when conducting an investigation. White-collar criminals cloak themselves in a “wall of false integrity” to increase the comfort level of their victims and avoid action from law enforcement agencies and regulators. While the Justice Department and SEC are busy relying on the integrity of internal investigations by companies suspected of wrongdoing, they often ignore crucial information provided by whistleblowers.

For example, Bernie Madoff used his stature as the former Chairman of NASD to lure investors into a sense of false security and to avoid action by regulators. The Securities and Exchange Commission gave Bernie Madoff the benefit of any doubt and ignored warnings from whistleblower Harry Markopolos that Madoff was conducting a massive Ponzi scheme.

Like Madoff, sub-prime lender NovaStar Financial apparently used the "wall of false integrity" tactic to successfully avoid action from regulators, too. Last Sunday, Gretchen Morgenson and Joshua Rosner from the New York Times reported how the SEC repeatedly ignored warnings by short-seller Marc Cohodes about aggressive accounting tactics used by NovaStar to cook its books. The company hired Lanny Davis, former special counsel to President Clinton during the Monica Lewinski scandal to "run interference" with regulators:
So in February 2003, Mr. Cohodes started corresponding with the S.E.C. about NovaStar. He began “throwing things over the wall,” as he put it, to Amy Miller, a lawyer in the division of enforcement. 
[Snip]
Taking his pencil to NovaStar’s statements, Mr. Cohodes found a raft of red flags. “They made their numbers look however they wanted to,” he recalls. “Not even remotely realistic.”
One tactic gave the company lots of leeway in how it valued the loans held on its books. Another allowed it to record immediately all the income that a loan would generate over its life, even if that was decades. This accounting method ignored the possibility that some of the company’s loans might default. NovaStar assumed that losses on all of its loans would be nonexistent.
[Snip]
The company hired Lanny Davis, a well-connected lobbyist and public relations operative, to run interference. Mr. Davis was used to operating in a crucible; he had been special counsel to President Bill Clinton during the Monica Lewinsky scandal. [Emphasis added].
Ultimately, NovaStar's stock price collapsed and shareholders unnecessarily lost over a billion dollars because of SEC inaction:
At the end of 2009, NovaStar management concluded that the company’s financial reporting was “not effective.”
NovaStar had, in essence, confirmed what Mr. Cohodes had been telling the S.E.C. all along. The company’s financial reports just couldn’t be trusted. [Emphasis added}
The Feds listened to Lanny and ignored Cohodes.

Our government is making it easier for criminals to commit white-collar crime. The Obama Administration is permitting the Justice Department and SEC to rely on internal investigations by suspected wrongdoers. Republican Congressman Darrell Issa wants to gut the SEC to make it completely ineffective in policing the capital markets. Republican Presidential hopeful Michelle Bachmann wants to completely repeal Dodd-Frank, so white-collar criminals will never have to worry about potential whistleblowers. Small cap companies have been exempted from certain internal control provisions of Sarbanes-Oxley .The Supreme Court has narrowed the definition of honest services fraud. New York City has ten times more cops than the SEC has employees and twice as many cops than Special Agents employed by the FBI.

I should have been a criminal today, rather than in the 1980s. I could have avoided prosecution for my crimes. Maybe, it's time to end my retirement from white-collar crime?

Written by,

Sam E. Antar

Recommended reading

Reuters - Special Report: From Hannibal Lecter to Bernie Madoff by Matthew Goldstein

Dag Blog - "Crazy Eddie" Fraudster Sam Antar To Return To Crime - Thanks to Darrell Issa & Anti-Regulation Republicans by William K. Wolfrum

Gary Weiss - Novastar and Overstock in the News

Crowe Horwath - Putting the Freud in Fraud: Focus on the Human Element, Catching a Crook Isn't Only a Numbers Game By Jonathan T. Marks, CPA/CFF, CFE, CITP

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 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 Overstock.com securities long or short. My investigation of this company is a freebie for securities regulators to try to get me into heaven, though I doubt I will ever get there. My past sins are unforgivable.

Thursday, May 19, 2011

California Court Compels Overstock.com to Turn Over Contact Information of Former Employees to District Attorney Investigating Consumer Fraud

Yesterday, a California Superior Court Judge granted a motion filed by the Alameda District Attorney to compel Overstock.com (NASDAQ: OSTK) to turn over personal contact information of former employees with possible knowledge of alleged fraudulent pricing practices by the company. The District Attorney had complained to the Court that Overstock.com "refused" to provide them with the present or last known contact information of certain former employees who are viewed as "potential witnesses" in the investigation.

On November 17, 2010, District Attorneys from seven California counties sued Overstock.com (NASDAQ: OSTK) alleging that it engaged in fraudulent pricing practices after a two year investigation. The District Attorneys are seeking at least $15 million of restitution, fines, penalties, and cost reimbursements from Overstock.com. (Download a copy of the lawsuit). The lawsuit alleged that:
9. ...Overstock routinely and systematically made untrue and misleading comparative advertising claims about the prices of its products.
[Snip]
11. …Overstock used various misleading measures to inflate the comparative prices, and thus artificially increase the discounts it claimed to be offering consumers.
[Snip]
22. Often Overstock has not been determining or verifying the price other merchants charge for those identical products. Rather, Overstock has been using various misleading methods to make up its own “straw-man” prices which it claims other merchants are charging for those products, and then claiming that its own prices are significantly lower.
23. Overstock has advertised comparative prices which do not exist (i.e., simply making up the prices charged by other merchants). [Emphasis added.]
On April 1, 2011, the District Attorney of Alameda County filed a "motion to compel" Overstock.com to turn over the present or last known contact information for certain former employees with knowledge of alleged fraudulent pricing practices (Download a copy of motion here):
Specifically, the People will and do hereby move for an order compelling Overstock.com to further respond to Special Interrogatories 8 and 14 by providing current contact information for the former employees whose names Overstock disclosed in response to these Interrogatories.
The People met and conferred via email in good faith in an attempt to informally resolve this dispute and have offered to enter into a protective order as a means of satisfying Overstock.com’s asserted privacy objections. Nevertheless, Overstock.com has refused to provide the People with the information sought. [Emphasis added.]
In addition, the District Attorney's motion to compel stated:
Included in these interrogatories was a request for the name of each former employee, and their "present or last known address, telephone number, e-mail address, present or last known telephone number, and present or last known cell number.
[Snip]
...rather than provide current contact information, Overstock.com listed its corporate address and telephone number, even though the individuals in question were by definition former employees. [Emphasis added.]
Patrick Byrne intoxicated
Overstock.com did not want the Alameda County District Attorney to directly contact any ex-employees with possible knowledge of alleged wrongdoing. The company wanted the District Attorney to use it as a go-between to contact its former employees. This way, the company could know in advance, exactly who the District Attorney was going to question. It potentially gives the company an opportunity to get to specific witnesses before the District Attorney questions them and obstruct the investigation.

Apparently, Overstock.com was using the privacy issue as a ruse to hinder the District Attorney's investigation into alleged wronging by the company. The District Attorney had "offered to enter into a protective order as a means of satisfying Overstock.com’s... asserted privacy objections." However, the company still "refused" to turn over the information to the District Attorney.

After this blog broke the news of the District Attorney's efforts to compel an uncooperative Overstock.com to turn over contact information of its ex-employees, CEO Patrick Byrne accused them of not acting in good faith:
It is not our job to host DA’s on a no-limits fishing trip, especially when they have not acted in good faith in the past. [Emphasis added.]
On May 18, 2011, Judge Robert B. Freeman rejected Overstock.com's accusations and excuses. Judge Freeman granted the California District Attorney’s motion to compel Overstock.com to turn over the contact information of certain former employees (Download a copy of Court decision here):
IT IS HEREBY ORDERED THAT:
The Motion of Plaintiff The People of the State of California (“Plaintiff”) to Compel Further Responses to First Set of Interrogatories is ruled on as follows:
At issue are the responses of defendant Overstock.com, Inc. (“Defendant”) to Plaintiff’s Special Interrogatories (“SI”) 8 and 14 which seek identifying information regarding Defendant’s former employees who set “SET COMPARISON PRICES” and those who “worked as an OVERSTOCK BUYER” during the relevant time period. Defendant supplied Plaintiff with names, but refused to provide current contact information, asserting the privacy rights of these former employees.
The Motion is GRANTED. On balance, the importance to Plaintiff of obtaining contact information of Defendant’s former employees, all of whom may be fairly characterized as potential witnesses in this case, outweighs the privacy interests that these persons have in this information. [Emphasis added.]
Rick Koerber, under Federal indictment for fraud, with Patrick Byrne
Recently, best-selling author Gary Weiss asked if Overstock.com is trying to buy its way out of legal troubles in California:
My favorite corporate crime petri dish, Overstock.com, is currently fighting a savage legal battle with seven California district attorneys over one of its favorite causes: its God-given right to rip off customers.
So it was fascinating to learn that Overstock had decided to spend $7 million to splatter its name over a stadium in..... guess where? Salt Lake City, where it is located, and where most such naming takes place? (You know, community goodwill and the like.) Or would it be Alameda County, where it is being sued?
You guessed it. What a coinky-dink! Why, they wouldn't be wanting to influence the legal process by throwing their shareholders' scant money around, would they? Of course not, though I have to admit that doing stuff like this is one of the grimiest and oldest ploys in creation.
[Snip]
Gee, what's the matter? Whatever happened to pay for play? Aren't politicians or judges for sale in Oakland? Don't DAs take political contributions?
Mark Shurtleff, have you thought of relocating? [Emphasis added.]
Back in 2007, Patrick Byrne even paid off Utah State Attorney General Mark Shurtleff to write a letter defaming me by falsely claiming that I broke certain agreements with his office. I went to Utah at my own expense and took no fees to train Shurtleff’s staff on combating white collar crime. However, taped phone conversations with Chief Deputy Attorney General Kirk Torgensen and Deputy Attorney General Richard Hamp revealed that Shurtleff lied to defame and discredit me just days after receiving $5,000 from Overstock.com.

A San Francisco Chronicle blog complained:
To add insult to the injury of a terrible $7 million naming rights deal with e-commerce retailer Overstock.com that was reported at Zennie62.com, comes the revelation that the agreement was stuck while the Internet firm was and is embroiled in a lawsuit involving the State of California, and the County of Alameda, as well as six other California counties.

[Snip]
Did the Oakland Raiders say anything?  What about anyone with the City of Oakland or the County of Alameda. Did they even know that the County was involved against Overstock.com in this way? 
Ongoing SEC investigation

Overstock.com also has to contend with an ongoing investigation by the Securities and Exchange Commission (SEC) into securities law violations by the company. In 2009, this blog identified certain violations of Generally Accepted Accounting Principles (GAAP) by Overstock.com that allowed it to fabricate a Q4 2008 profit rather than a properly reported loss.

I sent emails to Overstock.com and the Securities and Exchange Commission alerting them about the company’s illegal accounting practices. I urged the company to restate its financial reports to correct its improper accounting practices. Instead of properly complying with GAAP, Overstock.com continued to materially overstate its income in Q1, Q2, and Q3 2009.

CEO Patrick Byrne personally attacked me on a stock market chat board, during various earnings calls, and in the press in an effort to discredit me. Byrne even hired internet stalker Judd Bagley to interfere with my divorce and pretext my children and relatives after I pointed out the company's accounting violations.

In September 2009, the SEC started investigating Overstock.com. In October 2009, the company fired Grant Thornton as its auditor after it finally agreed with my recommendation to restate its financial reports. In March 2010, Overstock.com finally admitted that it violated GAAP and restated its financial reports to correct its violations, as I recommended a year earlier.

Written by:

Sam E. Antar

Recommended reading: Gary Weiss - Novastar and Overstock in the News


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 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 Overstock.com securities long or short. My investigation of this company is a freebie for securities regulators to try to get me into heaven, though I doubt I will ever get there. My past sins are unforgivable.

Monday, May 09, 2011

Is Green Mountain Coffee Roasters Shuffling the Beans to Beat Earnings Expectations?

Note: Updated On June 6, 2011 here

On May 3, 2011, Green Mountain Coffee Roasters (NASDAQ: GMCR) beat analysts' earnings estimates by $0.10 per share for the thirteen-week period ended March 26, 2011. The next day, the stock price had risen to $11.91 per share to close at $75.98 per share, a staggering 18.5% increase over the previous day's closing stock price. CNBC Senior Stocks Commentator Herb Greenberg raised questions about the quality of Green Mountain Coffee's earnings because its provision for sales returns dropped $22 million in the thirteen-week period. He wanted to know if there was a certain adjustment to reserves ("a reversal") that helped Green Mountain Coffee beat analysts' earnings estimates. However, the company was not available to comment. It was too busy on a road show trying to sell more stock. Therefore, I will provide an analysis and some answers to questions below. (Video link to Herb Greenberg's comments.)



Provision for sales returns

During the thirteen-week period ended March 26, 2011, it was calculated that Green Mountain Coffee had a negative $22.259 million provision for sales returns. In its latest 10-Q report, Green Mountain Coffee disclosed that its provision for sales returns was $5.262 million for the twenty-six week period ending March 26, 2011, but the company did not disclose amounts for the thirteen-week period ended March 26, 2011. In its previous 10-Q report for the thirteen-week period ended December 25, 2010, Green Mountain Coffee disclosed that its provision for sales returns was $27.521 million. Therefore, the provision for sales returns for the thirteen-week period ended March 26, 2011 was a negative $22.259 million ($5.262 million minus $27.521 million). Note: The provision for sales returns can be found in the Statement of Cash Flows and see calculations below.

Why is a negative provision for sales returns an unusual occurrence

Under Generally Accepted Accounting Principles (GAAP), companies are required to set up reserves or allowances for product returns when customers have the right to return products back to the company. The provision for sales returns is supposed to reflect amounts that are added to the sales returns reserve for estimated future product returns. The accounting entry on the company's books increases the sales returns reserve and decreases revenues. Since revenues are decreased, earnings are decreased, too.

It is unusual for a company to have a negative provision for sales returns, since it is supposed to reflect amounts added, not subtracted from the sales returns reserve. A negative provision for sales returns increases earnings.

Reserves are depleted when the customer actually returns the product. However, the actual return of merchandise does not affect revenues or earnings, since the company previously reduced revenues when it made a provision for that sales return. The accounting entry on the company's books for the customer's return decreases the sales returns reserve and either increases liabilities (such as accounts payable) or decreases assets (such as accounts receivable).

Why a company could have a negative provision for sales returns

There are two reasons for a company to have a negative provision for sales returns. It may have overstated its sales returns reserve in the prior period and it is reversing the amount of the previous overstatement in the current period. Therefore, the company corrects that overstatement by increasing revenues and decreasing the sales returns reserve. The change of a previous estimate increases earnings in the current period, even though there is no improvement in operating performance.

The other reason for having a negative provision for sales returns has to do with illegal earnings management. For example, a company had an exceptionally good earnings report and beat analysts’ earnings estimates by $0.10 per share. It artificially increases its sales return reserve and thereby decreases its earnings by $0.05 per share. The company would still beat analysts’ earnings estimates by $0.05 per share instead of beating estimates by $0.10 per share. The company effectively created a "cookie jar" reserve, which is used to inflate future earnings.

Now, let’s say in the next quarter, the company's earnings fell below analysts' earnings expectations by $0.02 per share. Since the company overstated its reserve in the previous period, it then reduces the overstatement in the current period to beat analysts’ earnings estimates.

Another example of illegal earnings management is when a company understates its reserves in the current period to inflate earnings. Earnings management through the manipulation of reserves is a relatively easy fraud to commit because management could hide behind the excuse that it made good faith assumptions in computing its reserves.

Questions about earnings quality

Herb Greenberg wanted to know what caused Green Mountain Coffee to have a negative $22.259 million provision for sales returns in the thirteen-weeks ended March 26, 2011. Did the company make a reversal adjustment to its reserves? If the company made such an adjustment, did the increase in earnings help it beat analysts' earnings expectations for the thirteen-week period? He said, "This is all about earnings quality."

More red flags and some answers

I performed additional calculations below and found more red flags (Click on image to enlarge and see highlighted areas):


Note: In its fiscal year ended September 25, 2010 10-K report, Green Mountain Coffee reported separate balances for its sales returns allowance and allowance for doubtful accounts and provided a reconciliation of account balances (See page F-67). In its subsequent 10-Q reports, the company combined the balances of its sales returns allowance with allowances for doubtful accounts on its balance sheet and did not provide a reconciliation of account balances. Therefore, I traced the provision for sales returns in the Statement of Cash Flows (10-K report page F-8) to the reconciliation of reserve accounts (10-K report page F-67) to validate my assumptions and computations. In the above chart, I am assuming that Green Mountain Coffee is consistent in its presentation of provisions for sales returns in its subsequent 10-Q reports as required under GAAP and SEC rules.

As I detailed above, Green Mountain Coffee had a negative $22.259 million provision for sales returns for the thirteen-week period ended March 26, 2011. It’s usually a positive number. Deductions usually reflect the depletion of reserves and should be a negative number. However, in that same thirteen-week period it was a positive number and added $13.819 million to reserves, rather than reducing reserves. That is unusual, too. The fact that both numbers go opposite their normal direction is even more unusual.

The above data indicates that in the latest thirteen-week period ended March 26, 2011 Green Mountain Coffee apparently made an adjustment and reversed a significant amount of sales returns reserves from its previous reporting period. I'll make the presumption that the adjustment stemmed from an overstatement of reserves in the prior period and that it did not cause an understatement of reserves in the current period.

In any case, the reversal of the sales returns reserve made a significant contribution to Green Mountain Coffee's earnings during the latest period ended March 26, 2011. Since Green Mountain Coffee had a negative $22.259 million provision for sales returns, rather than a positive number, the adjustment of reserves probably added over $20 million in revenue to its latest quarter. However, I cannot determine its full impact on earnings.

When a reversal of a previous estimate of reserves in the current period helps a company beat analysts' earnings expectations it is considered material and should be disclosed. Green Mountain Coffee should show transparency to investors by responding to issues raised by Greenberg and explaining its accounting for reserves to clear up any concerns.

Now there are two SEC Divisions looking at Green Mountain Coffee's financial disclosures

On Monday, September 20, 2010, the SEC Enforcement Division notified Green Mountain Coffee Roasters that it was conducting an informal inquiry. It requested information concerning “revenue recognition practices and the Company’s relationship with one of its fulfillment vendors.” According to Green Mountain Coffee’s 10-Q report for the quarter ended March 27, 2011, the SEC Division of Corporation Financial recently started a  review of Green Mountain Coffee’s acquisition accounting:
On May 2, 2011, the Company received a comment letter from the staff of the SEC requesting the Company to provide further detail regarding certain of the pro forma adjustments made in its presentation of its unaudited pro forma condensed combined statement of operations that illustrated the effects of its acquisitions of Van Houtte, Diedrich and Timothy’s. The unaudited pro forma condensed combined statement of operations information was included in the Company’s amendment to its Current Report on Form 8-K filed on December 17, 2010. Specifically, the staff of the SEC requested further details regarding the adjustments related to acquisition-related expenses and stock compensation expense in Note G, losses on derivatives in Note H and merger-related expenses in Note K. The Company intends to provide the requested additional information to the staff of the SEC in a timely manner.
Hopefully, the Division of Corporation Finance will expand the scope of its review and examine Green Mountain Coffee's accounting for reserves.

Shortly after the conclusion of the review, the SEC’s comment letters and the company’s responses to them will be available on the SEC’s EDGAR site (listed as "upload" and "corresp" respectively) and should provide an interesting peak into underlying assumptions for Green Mountain Coffee's financial disclosures.

Written by:

Sam E. Antar

Important Note: Updated On June 6, 2011 here

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 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.

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.

Wednesday, May 04, 2011

Green Mountain Coffee Roasters: Do they know how to count the beans?

Updated at 5:35 PM and 12:42 AM (5/5), please see bottom of post for additional issues

Does anyone at Green Mountain Coffee Roasters (NASDAQ: GMCR) know math or accounting? Seriously, does anyone in their accounting department know how to count the beans?

On September 28, 2010, Green Mountain Coffee disclosed that the SEC started an informal inquiry into its accounting practices eight days earlier. On that same day, the company reported an accounting error involving its K-Cup margin percentages. On November 19, 2010, Green Mountain Coffee disclosed four new accounting errors. On that date, the company said it would restate its financial reports issued from 2007 to the quarter ended 2010 to correct its errors.

Before the restatement of accounting errors, Green Mountain Coffee issued a 10-Q report for the quarter ended December 26, 2009 and disclosed the following financial results for Timothy’s:
For the thirteen-weeks ended December 26, 2009, Timothy’s contributed approximately $7,141,000 in revenue and $902,000 of income before taxes.
After the restatement of financial reports, Green Mountain Coffee issued a 10-Q report for the quarter ended December 25, 2010 and disclosed the following revised financial results for Timothy’s in 2009:
For the thirteen weeks ended December 26, 2009, the Timothy’s acquisition resulted in an additional $4.1 million of revenue and $0.0 million of income before income taxes.
[Emphasis added.]
Yesterday, Green Mountain Coffee issued its 10-Q report for the quarter ended March 26, 2011 and reported the following financial results for Timothy's from the previous fiscal year:
For the thirteen weeks ended March 27, 2010, the Timothy’s operations contributed an additional $13.0 million of revenue and $3.8 million of income before taxes. [Emphasis added.]
Maybe they need a calculator?
Therefore, for the twenty six weeks ended March 27, 2010, Timothy's operations should have contributed an additional $3.8 million of income before taxes ($0.0 million of income before income taxes for thirteen weeks ended December 26, 2009 plus $3.8 million of income before taxes for the thirteen weeks ended March 27, 2010). Right?

In that same 10-Q report for the quarter ended March 26, 2011, Green Mountain Coffee reported the following financial results for Timothy's for the previous twenty-six weeks ended March 27, 2010:
...Timothy’s operations contributed in an additional $17.2 million of revenue and $2.8 million of income before income taxes. [Emphasis added.]
Green Mountain Coffee's numbers for Timothy's don't add up. Timothy's Income for before taxes for the twenty-six weeks ended March 27, 2010 should be $3.8 million, not $2.8 million if you add up the numbers for each thirteen-week period. Did Green Mountain Coffee make a mathematical error or did the company find a new error in the quarter ended December 26, 2009 that was not found in its previous restatement of financial reports?

Green Mountain Coffee revises its reconciliation of its GAAP net income and non-GAAP net income to comply with Regulation G

At least Green Mountain Coffee corrected its presentation of net income to non-GAAP net income to comply with SEC Regulation G, as I recommended in a February 13, 2011 blog post.

In its 10-Q report for the quarter ended December 25, 2010, Green Mountain presented the following reconciliation of its GAAP net income and non-GAAP net income:


In my February 2011 blog post, I pointed out that:
According to Regulation G, Green Mountain's non-GAAP net income is required to be reconciled to its most directly comparable GAAP measure, which in this case is GAAP net income. Accordingly, Green Mountain showed how its non-GAAP net income did not include acquisition-related expenses, SEC inquiry expenses, and amortization of identifiable intangibles. However, according to SEC Regulation G Compliance & Disclosure Interpretations, Green Mountain cannot provide side-by-side reconciliations of GAAP and non-GAAP numbers in such a way that it presents a full non-GAAP income statement. See below:
Question 102.10
Question: Is it appropriate to present a full non-GAAP income statement for purposes of reconciling non-GAAP measures to the most directly comparable GAAP measures?
Answer: Generally, no. Presenting a full non-GAAP income statement may attach undue prominence to the non-GAAP information. [Jan. 11, 2010].
In addition, I alerted the SEC about Green Mountain Coffee's violation of Regulation G.

In its 10-Q report for the quarter ended March 26, 2011, Green Mountain Coffee revised its reconciliation of GAAP net income and non-GAAP net income and no longer presented a full non-GAAP income statement. See below:


I've just started reviewing Green Mountain Coffee's latest 10-Q report and found even more troubling disclosures which I hope to detail soon.

Updated concerns

One issue that I am curious about is Green Mountain Coffee's costs related to the SEC inquiry and defending class-action lawsuits against the company. In the quarter ended December 26, 2010, it spent $5.989 million (pre-tax) in legal fees and other expenses and in the latest quarter ended March 26, 2011, it spent only $0.405 million (pre-tax). Under accrual basis accounting, expenses are recognized when incurred, not when paid. Below are my questions:

Question 1: Did Green Mountain Coffee pay sizable retainers to lawyers, accountants, and other experts in the quarter ended December 26, 2010 and expense the full amount in that quarter, rather than record them as a prepaid expense (asset) and expense those costs, as incurred, against income in future accounting periods?

Question 2: Did Green Mountain Coffee offset those costs with possible reimbursements from its D & O insurance carriers (assuming it has coverage)?

Question 3: If Green Mountain has insurance coverage, but did not accrue any possible insurance reimbursements, why didn't it disclose a gain contingency?

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 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.