Interesting Issues in Timing of Green Mountain Insider Stock Sales and Disclosure of SEC Inquiry

Interesting timing

On Monday, September 20, 2010, Green Mountain Coffee Roasters (NASDAQ: GMCR) was notified of a Securities and Exchange Commission informal inquiry and request for voluntary information concerning “revenue recognition practices and the Company’s relationship with one of its fulfillment vendors.”

On Tuesday, September 21, 2010, executive officer Michelle Stacy exercised 5,000 options and immediately sold her shares at $37 per share. Of the 5,000 shares bought and sold, options for 4,375 shares did not expire until November 3, 2018 and options for 625 shares did not expire until March 12, 2019. What was the urgency in exercising her options so soon?

After the stock market closed on September 28, 2010, Green Mountain finally disclosed the SEC inquiry to investors in an 8-K filing which included certain other material disclosures.

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.

According to the SEC:

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.

Michelle Stacy will have to answer questions about the timing of her option exercise and simultaneous sale of stock after Green Mountain received notice of the SEC inquiry, but before the company disclosed it to investors. The SEC might want to find out if Stacy any prior knowledge of  the SEC inquiry when she sold her stock before it was disclosed to investors.

Will Stacy claim that even though she is among the five most highly-paid executive officers of the company and is President of its key Keurig business segment, that she did not know anything about the SEC inquiry and her sale of stock was a mere coincidence?

Green Mountain Coffee Roasters Code of Ethics

According to Green Mountain’s Code of Ethics:

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 laws and Securities and Exchange Commission (SEC) regulations with respect to insider information. These laws and rules 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. If you have questions about whether certain information may be disclosed, please check with our Chief Financial Officer or the VP of Human Resources and Organizational Development. [Emphasis added.]

Apparently, information not yet disclosed in Green Mountain's “10-Q's, 10-K's and 8-Ks” is considered "confidential information" and the company prohibits its employees from using such “confidential information” for personal profit. When Michelle Stacy sold her stock, news of the SEC inquiry was not yet disclosed to investors and such information could be considered confidential under Green Mountain's Code of Ethics.

If Michelle Stacy claims that she did not know about the SEC inquiry when she sold her shares, did Green Mountain Coffee have any procedures in place to alert executive officers of certain possible undisclosed material events, such as an SEC inquiry, before they sell their stock?

Should Green Mountain have disclosed the SEC inquiry a few days earlier?

If Green Mountain considered SEC inquiry material enough for disclosure it when it filed its 8-K report on September 28, why didn’t the company notify investors earlier? 8-K reports are required “to be filed or furnished within four business days after occurrence of the event.” Why didn’t the company disclose the inquiry on September 25 or “within four business days after occurrence" of that specific event?

SEC guidance on materiality

Green Mountain should have checked out the SEC's website for some guidance on materiality:

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."

As I detailed above, Green Mountain’s shares dropped $5.95 per share to close at $31.06 per share or a 16.1% drop in market value after the company disclosed the SEC inquiry to investors. Apparently, investors thought that news of the inquiry was material. The old adage taught in securities law classes “When in doubt, disclose.” seems to apply here.

Other insider stock sales and potential issues

In the weeks before Green Mountain was notified about the SEC inquiry, Michelle Stacy and Scott McCreary, President of Green Mountain's other key business segment, the Specialty Coffee Business Unit, simultaneously exercised and sold large amounts of shares.

On August 13, 2010, Michelle Stacy exercised 30,000 options at $6.20 per share and simultaneously sold those shares at $30.95 per share for gross proceeds of $928,500. On September 13, 2010 she exercised another 5,000 options at $6.20 per share and sold those shares at $35.40 for gross proceeds of $177,000.

On August 18, 2010, Scott McCreary, President of Green Mountain's other key business segment, the Specialty Coffee Business Unit, exercised 200,000 options and $1.47 per share and simultaneously sold his shares at $33.08 per share for gross proceeds of $6.616 million.

If the SEC does find malfeasance in Green Mountain's “revenue recognition practices and the Company’s relationship with one of its fulfillment vendors” the agency will investigate whether or not Stacy or McCreary knew anything about them before they sold any of their stock.

Closing comment

After Green Mountain disclosed the SEC inquiry to investors, several lawsuits seeking class action status were filed against the company and its officers alleging securities law violations. On one side, the company and its officers will have to contend with the SEC who has almost unlimited resources and on the other side they must contend with hungry class action lawyers with a profit motive who smell blood. Back in my criminal days, I hated them both equally.

Right now, there is an only an "informal inquiry" by the SEC and "request for voluntary information." If the informal SEC inquiry turns into a formal investigation and the regulator issues subpoenas compelling witnesses to testify and the production of documents, Green Mountain and its officers will have a lot more to worry about.

In any case, it looks like an early Christmas for lawyers representing the company and its officers as they prepare to rack up huge legal fees in defending their clients. Hopefully, a lesson learned by the Antar family, who ran Crazy Eddie back in my criminal days, does not apply here, "Your lawyers will defend you to your very last dollar."

Written by,

Sam E. Antar

Follow up Blog Post:

December 2, 2010 - Green Mountain Coffee Roasters, Time to Spill the Beans?

Recommended Reading:

WCAX.COM - Whistleblower alleges insider trading at GMCR

Seeking Alpha - Green Mountain Coffee: Beware the Valley Below

One More Cup of Coffee Addendum

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 our 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.

For example, I exposed GAAP violations by Overstock.com (NASDAQ: OSTK) 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).

In addition, the SEC is now investigating possible GAAP violations by Bidz.com (NASDAQ: BIDZ) after I alerted them about the company's inventory accounting practices.

I do not own any securities in any of the companies listed in this blog post, long or short.

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 investigation of Overstock.com, Bidz.com, and Green Mountain Roasted Coffee is a freebie for securities regulators to get me into heaven, though I doubt I will ever get there

Open Memo to Medifast Chief Executive and CFO Michael S. McDevitt: Cut the BS and Address Troubling Issues Raised by Barry Minkow

See update at bottom of blog post

Open Memo to Medifast Chief Executive and CFO Michael S. McDevitt:

I read Medifast’s (NYSE: MED) self-serving proclamations attacking my friend convicted felon turned fraud fighter Barry Minkow (co-founder of Fraud Discovery Institute or FDI) in both its Q3 2009 10-Q issued last November and reiterated in today’s press release detailed in part below:

An Independent Committee composed of distinguished members of the Board of Directors of Medifast, Inc. (NYSE: MED) was constituted in February, 2009 to review public allegations of a third party, convicted felon Barry Minkow, and his network of alleged independent experts, posted on Minkow's website alleging illegal activities of Take Shape For Life, Inc., a direct selling company and a subsidiary of Medifast, Inc.

The independent Directors' Committee, after investigation of facts and information concluded the allegations were false, misleading, and/or without merit. The same is true for the re-issue of the report posted January 8, 2010 – the allegations are false, misleading, and/or without merit.

The company has made a formal complaint to the United States Securities and Exchange Commission and the Maryland Securities Commissioner.

Note: I added links to Fraud Discovery's Medifraud.net web site and reports for clarity.

While Medifast's so-called “independent” directors may meet the legal tests of independence under New York Stock Exchange rules as you claim, they are certainly less independent than Bagell, Josephs, Levine & Company, the company's so-called independent auditors. Each director holds stock or stock options in Medifast, unlike the company's auditors who cannot own stock in an audit client (Source: Medifast Proxy Statement dated August 25, 2009). In any case, your auditors seem to have their own share of independence and competency issues, too (detailed here).

However, Medifast is attempting in smear Barry Minkow because he has publicly disclosed that he is a short seller and his company Fraud Discovery Institute has issued various reports raising serious issues about Medifast's questionable financial disclosures, business model, and marketing practices backed up with an outside expert's report and other data made fully available to the public for examination. According to Fraud Discovery's recent rebuttal:

According to FDI Co-Founder Barry Minkow, “there is only one problem with the above statement. Neither FDI nor myself made the detailed allegations in previous reports released on the official FDI website. On the contrary, FDI sought the outside opinion of nationally recognized, multi-level marketing expert Robert Fitzpatrick, who has testified for law enforcement on numerous occasions about these kinds of schemes. Mr. Fitzpatrick is not a short-seller and has never had a financial interest in Medifast’s stock at any time nor would Mr. Fitzpatrick, for the nominal fee paid for his analysis of the Medifast business model, make up out of thin air the specific problems inherent with the company.

In contrast, Medifast has utterly failed to issue any detailed line-by-line rebuttal of any issues raised in Fraud Discovery Institute's reports concerning the company. Simply disclosing that Medifast issued a “formal complaint to securities regulators” without issuing a detailed public rebuttal of FDI's reports seems like an attempt to scare off Minkow with threats of a government investigation, rather than transparently address the serious issues raised in those reports. In addition, I remind you that Barry Minkow has a first amendment right to critique your company, notwithstanding the fact that he publicly disclosed that he holds a short position in your company and is a convicted felon.

Back in November 2008, Medifast claimed that it made a “formal complaint to the United States Securities and Exchange Commission and the Maryland Securities Commissioner.” However, Barry Minkow informs me that he has not been contacted by either regulator regarding your formal complaints.

I can assure you that Barry Minkow would welcome scrutiny from any regulator along with their concurrent scrutiny of Medifast’s questionable financial disclosures, business model, and marketing practices. Minkow is unafraid to defend FDI's detailed case that your company is a scam preying on the hopes and dreams of thousands of unsuspecting gullible people who buy into your multi-level marketing scheme, never to collect any net profits on their investments.

Here’s a suggestion. Why don’t you publicly debate Barry Minkow in front of TV cameras (without lawyers to sanitize your communications) about the issues raised in his reports? In other words, cut the BS and show some balls: put up or shut up.

Respectfully,

Sam E. Antar

Leading securities litigation law firm Barack, Rodos, & Bacine announced that it is investigating Medifast's financial disclosures for possible violations of federal securities law as a result of reports issued by Fraud Discovery Institute. Read the press release here.

Suggested reading:

Fraud Files Blog: Medifast multi-level marketing scheme called into question by expert

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes, simply because I could.

If it weren't for the 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.

I do not own Medifast securities short or long. From time-to-time, I do research on scam companies for Fraud Discovery Institute. However, this open letter is an unsolicited freebie. In any case, please feel free to add my name to any allegations you make to securities regulators and see if I give a damn.