I've just begun following the adventures of Green Mountain Coffee Roasters (NASDAQ:GMCR), and I must say that I find it to be a fascinating company in many respects: taste, aroma, and stock fraud. I used to not want to write about it, but I've obviously changed my mind.
The company's accounting has come under severe criticism from people I respect, and is the subject of an inquiry by the Securities and Exchange Commission. And that brings me to my subject today, which is that inquiry. Is it really an inquiry or is it actually a formal investigation?
In a Form 8-K filed by the company on Sept. 28, 2010, Green Mountain disclosed the inquiry thusly:
On September 20, 2010, the staff of the SEC’s Division of Enforcement informed the Company that it was conducting an inquiry and made a request for a voluntary production of documents and information. Based on the request, the Company believes the focus of the inquiry concerns certain revenue recognition practices and the Company’s relationship with one of its fulfillment vendors. 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.
In its Form 10-K for the fiscal year that ended Sept. 24, 2011 (now that's one hell of a fiscal year ending date!), the company said:
We face risks related to the ongoing SEC inquiry.
As previously disclosed the staff of the SEC’s Division of Enforcement informed us that it was conducting an informal inquiry into matters at the Company. At the direction of the audit and finance committee of our board of directors (audit committee), we are 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 may continue to 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 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.
So, not surprisingly, everybody calls it an inquiry: the company and its critics alike. Take a look at slide 82 in this presentation by David Einhorn. Remember that an investigation is a considerably tougher ball of wax than an inquiry, with executives subject to subpoena. Unless the SEC wimps out, it can result in sanctions against a company.
The SEC does not allow its inquiries to go on indefinitely. According to the SEC Enforcement Division Manual:
Investigations are opened in two ways: 1) the investigation is opened when a MUI [Matter Under Inquiry] is converted to an investigation (which occurs automatically sixty days after the MUI is opened), or, 2) an investigation is opened independently, either prior to the sixtieth day automatic conversion of a MUI or without any history of a MUI in the case. In both cases, the opening of an investigation requires that the assigned staff (at the Assistant Director level and below) conduct an evaluation of the facts to determine the investigation’s potential to address conduct that violates the federal securities laws. The analysis for whether to convert a MUI to an investigation, or open an investigation, differs from the analysis for whether to open a MUI. While a MUI can be opened on the basis of very limited information, an investigation generally should be opened after the assigned staff has done some additional information-gathering and analysis. It may also be appropriate at this time to revisit whether the office has a nexus to the MUI.
The 10-K was filed on Nov. 14, 2011, well over a year since the inquiry commenced. That's more than sixty days, isn't it?
So it seems to me that the SEC inquiry should have automatically become an investigation, since more than sixty days have elapsed since it was opened two Septembers ago.
Hey, I'm just raising the question. It's a question of simple arithmetic, which has never been Green Mountain Coffee's strong suit.