Monday, May 21, 2012

Are they really that stupid at Green Mountain Coffee Roasters?

There is a saying among white-collar criminals, “When you are caught in the act of doing something wrong, play stupid. Tell them that you made an inadvertent error. Never admit to any deliberate wrongdoing. Being stupid is not a crime in America.” The board of directors and executives running Green Mountain Coffee Roasters (NASDAQ: GMCR) appear to want the Securities and Exchange Commission who is investigating the company, the Judge presiding over class action lawsuits alleging securities fraud, and investors to believe they are incredibly incompetent or grossly negligent, rather than admit to any deliberate wrongdoing. There can be either one of two answers for the continuing mishaps plaguing Green Mountain Coffee. Either they are dumb or they engaged in deliberate wrongdoing. Unfortunately, none of those answers bode well for the company. In any case, a rational question to ask is “Why are these clowns still running a $3.74 billion market cap public company?”


On May 8, 2012, Green Mountain Coffee Roasters (NASDAQ: GMCR) stripped its founder Robert Stiller of his title as Chairman of the Board of Directors and ousted fellow director William Davis from his role as Lead Director. Both Stiller and Davis would no longer serve on any board committees and not receive any future compensation until further notice. The press release said that Stiller and Davis had violated its internal trading policies. In December 2011, the company prohibited its directors from making new pledges of stock as collateral for loans (margining stock), effective January 2, 2012. Stock pledges that were made before January 2 were grandfathered by the board. However, board members were prohibited from selling any stock during certain periods when the trading window was closed (even to satisfy a margin call) pursuant to company policy.

Misleading press release did not mention securities law violation

Green Mountain Coffee’s press release made it appear that Stiller and Davis only violated its internal policies by selling their stock during a period when the trading window was closed the company. It made no mention of possible securities law violations. The press release further mentioned that Davis had pledged new shares of stock after January 1, 2012 in violation of company policies. According to Item 403(b) of the Securities Act of 1993 companies must disclose:

… by footnote or otherwise, the amount of shares that are pledged as security and the amount of shares with respect to which such persons have the right to acquire beneficial ownership as specified in Rule 240.13d-3(d)(1) of this chapter.

When the S.E.C. drafted rules requiring the disclosure of stock pledges, it noted:

...we believe that the existence of these securities pledges could be material to shareholders and should be disclosed. We therefore are amending Item 403 of Regulations S-K and S-B to require this disclosure as well as disclosure regarding directors’ beneficial ownership of qualifying shares. [Emphasis added.]

Robert Stiller's stock pledges were disclosed in by the company in its recent proxy report. However, the proxy report did not include any information about William Davis's stock pledge. Later, Davis acknowledged to the Wall Street Journal that information about the stock pledge was omitted from the proxy report, but the article also did not mention any securities law violation.

Was Robert Stiller incredibly negligent or did he stage a forced margin call?

On May 7, 2012, Robert Stiller violated company policy by selling approximately $123.4 million of stock to satisfy a margin call at a time when the trading window was closed. Forbes Magazine reported that:

The sale… was forced by Deutsche Bank, Stiller explained, after they cut the percentage he was allowed to borrow against his equity stake due to the protracted fall in Green Mountain’s stock price. “They gave me no warning, [they just said] we’re only going to give you 30%,” explained Stiller, referring to how much he could borrow against his shares.
The former billionaire explained that he “has no income” and needs to sell shares to pay for his lifestyle. “But it’s been very hard to sell some of the shares that I have,” he noted, “so I’ve borrowed against them. [Emphasis added.]

However, Stiller’s excuses appear to be contradicted by other facts. It was not hard to sell “some” of his stock. In addition, he had plenty of income and available cash. For example, from March 14, 2011 to March 26, 2012, he gifted 268,609 shares of Green Mountain Coffee stock totaling $14.608 million in market value. From May 4, 2011 to February 23, 2012, he sold another 1.81 million shares of Green Mountain Coffee stock and pocketed $141.210 million in proceeds. He earned another $101,000 in cash compensation and another $74,296 in option awards as a director during the fiscal year ended September 24, 2011.

As of May 8, 2012, Robert Stiller still had 6,529,328 shares pledged as collateral. So far, those shares were not subject to a margin call. It is not publicly known how much in cash proceeds he received from pledging those shares. On Friday, May 18, 2012, Green Mountain Coffee stock closed at $24.05 per share. If we assume a maximum allowable margin of 50% of market value, Stiller could have potentially received as much as $78 million additional cash from pledging his stock (6.5 million shares multiplied by $12 per share cash received from pledging stock). Therefore, between Stiller’s stock gifts, stock sales, director’s fees, and stock pledges to raise cash, he had as much as $234 million in available cash to maintain his lifestyle before he pocketed another $123.4 million from selling his stock to pay for a margin call. If he did not have the available cash, he could have pledged assets other than stock to avoid the margin call.

If we take accept Robert Stiller’s excuse that he was forced to sell his stock on May 7, 2012 to meet a margin call, it appears that he was grossly irresponsible in managing his personal finances. Stiller apparently wants investors to believe that his own negligence in not anticipating the margin call caused him to violate Green Mountain Coffee’s internal trading policies.

Perhaps Robert Stiller is much smarter than he wants anyone to believe? Stiller could have purposely set himself up to face a forced sale of stock to make it appear as though he was not dumping stock in anticipation of a bad outcome to a concurrent Securities and Exchange Commission probe into Green Mountain Coffee’s accounting practices and class action lawsuits alleging that the company falsified profits and that Stiller and others illegally profited from insider trading.

In any case, the forced sale of stock due to a margin call is not a defense against allegations of illegal insider trading. Last week, I told Reuters that I tried that trick at Crazy Eddie and the S.E.C. still fined me for illegal insider trading. (Video of interview.)

Did William Davis deliberately conceal his pledge of stock?

Robert Stiller’s stock pledges were made before January 2, 2012 and were grandfathered by the board of directors when it changed its policy in prohibiting new stock pledges. He violated company rules by selling stock when its trading window was closed. Similarly, from May 4 to May 7, 2012, William Davis also violated company policy by selling approximately $13.8 million of stock to satisfy a margin call at a time when the trading window was closed. Furthermore, unlike Stiller, Davis violated company policy by pledging more shares after January 1, 2012. Robert Stiller’s stock pledges were disclosed in the company’s proxy statement filed on February 2, 2012, but William Davis’s stock pledges were not disclosed. S.E.C. rules require the disclosure of stock pledges.

The Wall Street Journal reported that:

The lack of disclosure was an oversight, says Green Mountain – Mr. Davis had indicated that he’d pledged approximately 775,000 shares, but “an inadvertent clerical error left the information out of the company’s February 2012 proxy statement.” [Emphasis added.]

Apparently, William Davis wants investors to believe that he’s incredibly negligent, but it’s difficult to believe that based on his qualifications. Green Mountain Coffee’s proxy report filed on February 2, 2012 praises Davis’s abilities:

In addition to separate Chairman and Chief Executive Officer positions, we have also elected to have a Lead Director, a position currently held by Mr. Davis. In recognition that our Chairman is not independent under the NASDAQ Rules, and that Mr. Davis, having been a Director of our Company since its founding, has a wealth of knowledge about our Company, has a strong relationship with our Chairman and is otherwise himself a skilled senior executive, we believe that the position of Lead Director is a valuable tool in our Board’s leadership structure. As determined by your Board, the Lead Director’s responsibilities include:
Chair all meetings of the independent and non-management Directors.
Serve as liaison between the Board Chairman and the independent Directors and the Chief Executive Officer and all of the Directors.
Consult with the Board Chairman and the Chief Executive Officer on matters to be presented at Board and committee meetings.
Call meetings of the Board, as appropriate or necessary.
Chair any meeting of the Board when the Chairman is not present or able to preside.
Chair Executive Sessions of the Board. [Emphasis added.]

William Davis was a member of Green Mountain Coffee's audit committee and chaired the governance and compensation committees. The audit committee oversees its compliance with securities laws and accounting rules. The governance committee oversees its compliance with internal policies. In addition, the company deems him to be an “audit committee financial expert.” If William Davis did not deliberately violate Green Coffee’s internal trading policies and inadvertently forgot to report his new stock pledge, then he is incredibly stupid.

William Davis must have had a role in drafting new internal rules prohibiting future stock pledges, based on his various positions at the company. Therefore, it's improbable that Davis did not know that he violated company rules by pledging his stock. Furthermore, it’s difficult to believe that Davis did not deliberately conceal his stock pledge after January 1, 2012. That's probably why the company failed to report his stock pledge in its proxy report as required by S.E.C. rules.

William Davis was involved in internal investigation that claimed no wrongdoing by Green Mountain Coffee

On September 20, 2010, the Securities and Exchange Commission started a probe of Green Mountain Coffee’s accounting practices. Afterwards, the company restated its financial reports from fiscal year 2006 to fiscal year 2010 to correct certain violations of Generally Accepted Accounting Principles (GAAP). Those accounting violations caused the company to overstate its reported earnings in previous fiscal years. A class action lawsuit was filed against the company that cited information provided by over a dozen informants who allege that it manipulated earnings and committed securities fraud in fiscal year 2010 and prior years. In addition, the lawsuit cites other violations of securities law and accounting rules detailed in this blog, a scathing report issued by money manager David Einhorn and analysis provided in other financial blogs.

Green Mountain Coffee has attempted to derail the S.E.C. investigation and dismiss class action lawsuits by claiming that its independent audit committee, which includes Davis as a member, conducted an impartial internal investigation and found no wrongdoing by the company. Can the audit committee’s internal investigation be trusted in light of William Davis’s subsequent violations of the company’s internal trading rules and his failure to disclose his stock pledges?

Incestuous relationship between Green Mountain Coffee and William Davis

Green Mountain Coffee, Robert Stiller, and William Davis have engaged in some questionable chummy financial dealings in the past when it was a much smaller company. Back in 2000, William Davis served on Green Mountain Coffee’s board of directors and audit committee while he was the CEO and President of At that time, Robert Stiller was Chairman of the Board of Directors, CEO, and President of Green Mountain Coffee. He was only Chairman of the Board of Directors when the company stripped him of his title on May 8, 2012 due to violating its internal trading policies.

On March 21, 2000, borrowed $100,000 from Green Mountain Coffee at an interest rate of 8% per annum to mature on or before May 31, 2000. had the right to extend the promissory note for a period not exceeding ninety days (until August 29, 2000) without cost or penalty. It agreed to give Green Mountain Coffee an option to convert its loan into an equity investment in a future private placement. could not pay the note balance due at maturity or convert the loan into equity. Therefore, the loan was extended for another ninety days. In its 10-Q report for the quarter ended July 1, 2000, Green Mountain Coffee disclosed that there was a delay in’s private placement and “recorded a 50% reserve” against the promissory note.

On September 20, 2000, Green Mountain Coffee finally was able to convert its loan into an equity investment in Despite having already taken a $50,000 reserve against the promissory note, Green Mountain Coffee reported its investment in “at its original cost of $104,000 at September 30, 2000” in its fiscal year 2000 10-K report (computed by adding $100,000 promissory note and $4,000 interest earned from March 21 to September 20).

However, in its 10-Q quarter ended April 14, 2001, Green Mountain Coffee reported that “During the second quarter of fiscal 2001, the Company recorded an impairment charge of $52,000 against its $104,000 minority ownership investment in, Inc. due to the fact that is experiencing a slower than expected sales ramp due to difficulties in raising adequate growth capital.” The $52,000 impairment charge is roughly the same amount of the $50,000 reserve it had previously taken against the note. Finally, in 10-Q report for the quarter ended April 13, 2002, Green Mountain Coffee recorded another “impairment charge of $52,000 against its minority investment in, Inc., reducing the value of that investment to zero.”

Closing comment

To date, no director or key executive has been fired or resigned from Green Mountain Coffee because of the S.E.C. probe, class action lawsuits, and restatements of financial reports to correct overstatements of income, and other ongoing improprieties. Robert Stiller and William Davis are still on the board of directors. Only their paltry director fees have been suspended. The same players responsible for continuing mishaps plaguing Green Mountain Coffee are all still at the company.

Written by:

Sam E. Antar

Recommended Reading

May 22, 2012: Philadelphia Inquirer - Crazy Eddie’s one-time CFO offers tips on spotting financial fraud by Erin E. Arvedlund


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 white-collar crime classes for various government entities, professional organizations, businesses, and colleges and universities. I do not seek or want forgiveness for my vicious crimes from my victims. My past sins are unforgivable.

I do not own any Green Mountain Coffee Roasters securities long or short.


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Unknown said...

Post-Enron, nothing really surprises me in the markets anymore. Everyone from management to company directors are increasingly motivated by greed, and I am increasingly of the belief that the market is effectively rigged against the little guy.
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