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Sam E. Antar is a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, Mr. Antar helped mastermind one of the largest securities frauds uncovered during the 1980s. Today, Sam E. Antar advises federal and state law enforcement agencies about white-collar crime and trains them to... More
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  • To the Securities and Exchange Commission: Green Mountain Coffee Roasters selectively spills the beans and its numbers still don't add up
    Note to readers:

    Over the last four weeks, I sent several letters to Mary Schapiro, Chairman of Securities and Exchange Commission detailing, what I believe, are Regulation FD violations and questionable financial reporting by Green Mountain Coffee Roasters (NASDAQ: GMCR). Currently, the company's financial reports are being probed by two separate divisions of the SEC: The Enforcement Division and the Division of Corporation Finance. Yet under the SEC's nose, the company is apparently continuing to engage in improper behavior. After reading excellent investigative reporting by best-selling author Roddy Boyd in his blog today, it seems that Green Mountain Coffee is an $11 billion market cap company operating like a penny stock. --- Sam E. Antar

    To Mary Schapiro (Chairman of the Securities and Exchange Commission):

    Starting around May 9, 2011, Green Mountain Coffee Roasters (NASDAQ: GMCR) provided certain material non-public financial information about its sales returns reserves to a few selected analysts and investors that were not disclosed in financial reports filed with the SEC. Those analysts and investors were concerned about questions raised by CNBC Senior Stocks Commentator Herb Greenberg and this blog about factors contributing to the company's reduction in sales returns reserves in the thirteen-week period ended March 26, 2011. As I will describe below, the non-public numbers that Green Mountain Coffee used to explain its reduction in sales return reserves simply don't add up. In addition, the company admitted that its financial reports from one period to the next period were "...apples to oranges." Furthermore, Green Mountain Coffee's selective disclosure of material non-public information apparently violated Securities and Exchange Commission Fair Disclosure Regulations (Regulation FD).

    Background

    On May 5, 2011, CNBC Senior Stocks Commentator Herb Greenberg raised questions about the quality of Green Mountain Coffee's earnings for the thirteen-week period ending March 26, 2011. It appeared that Green Mountain Coffee had a negative $22.259 million provision for its sales returns. Normally, the provision for sales returns reflects amounts added to that reserve and should be a positive number, rather than a negative number. Greenberg wanted to know if there was a certain adjustment to reserves ("a reversal") that helped Green Mountain Coffee beat analysts' earnings estimates. At the time, the company was not available to comment because it was busy on a road show selling stock to investors.

    On May 9, 2011, I followed-up on Greenberg’s questions with a blog post in an effort to answer questions about Green Mountain Coffee’s sales returns accounting. According to my calculations, Green Mountain Coffee made an adjustment and reversed a significant overstatement of its sales returns reserves in the latest thirteen-week period ended March 26, 2011 from the previous thirteen-week period ended December 25, 2010. Those calculations showed that such an adjustment of reserves probably added over $20 million in revenue to its latest quarter. See below (Click on image to enlarge):

     
     
    Calculations

    In making my calculations, I started by examining sales returns disclosures in Green Mountain Coffee’s fiscal year ended December 25, 2010 10-K report. The company‘s reconciliation of its sales returns reserves showed $40.139 million “Charges to Costs and Expenses” during the fiscal year ended September 25, 2010 (See Page F-67). In its Statement of Cash Flows, the $40.139 million amount was reflected as an addition to “Cash flows from operating activities” under the caption “Provision for sales returns” (See Page F-8).

    The company did not provide a reconciliation of its sales returns reserves in its subsequent 10-Q reports for periods ended December 25, 2010 and March 26, 2011. The company combined the balances of its sales returns reserves and allowance for doubtful accounts in its Balance Sheet disclosures in both subsequent 10-Q reports, instead of reporting such amounts separately.

    In its December 25, 2010 10-Q , Green Mountain Coffee reported a $27.521 million “Provision for sales returns” in its Statement of Cash flows for the thirteen-week period ended December 25, 2010. It reported a combined balance of allowance for doubtful accounts and sales returns reserve of $28.989 million on its Balance Sheet.

    In its March 26, 2011 10-Q , Green Mountain Coffee reported a $5.262 million as “sale returns” in its Statement of Cash Flows for the twenty-six week period ended March 26, 2011. It reported a combined balance of allowance for doubtful accounts and sales returns reserve of $20.565 million on its Balance Sheet.

    My computations showed that Green Mountain Coffee had a negative $22.259 million provision for its sales return and positive $13.810 deductions from its reserves during the thirteen-week period ended March 26, 2011 ($5.262 million minus $27.521 million). In other words, it appeared that both the provision and deduction numbers went in the opposite direction. Therefore, I reported that the Green Mountain Coffee apparently added over $20 million to revenues through a “reversal” of previously overstated reserves in its latest thirteen-week period.

    In the above calculations, I assumed that Green Mountain Coffee was consistent in its presentation of “Provisions for sales returns” in its 10-K report and subsequent 10-Q reports as required under GAAP and SEC rules. Unfortunately it wasn’t.

    Green Mountain Coffee violated Regulation FD by selectively disclosing material financial information about its sales returns reserve to certain analysts and investors

    Other analysts and investors drew the same conclusions based on Green Mountain Coffee’s murky financial disclosures and made inquiries to the company. The company did not respond to Herb Greenberg, but responded to them:
    It’s a bit of apples and oranges as with Q2’11 we modified the presentation in our cash flow to better show the change in the sales return reserve.
    - Q1’11 shows the $27,521 on the cash flow as “Provision for sales returns”. That is the total provision for sales returns. - Q2’11 shows the $5,262 on the cash flow as “Sales returns”. That is the CHANGE in the reserve from the beginning of fiscal Q1’11 to the end of fiscal Q2’11. - Q1’11 beginning reserve of $13 million. Q2’11 ending reserve of $18 million. The $5 million in the cash flow is the increase or CHANGE. - The sales return provision in Q2’11 was $12 million. - There was no reversal, no change in cash from operations and no impact to the statement of operations.
    I hope that’s of help.
    Suzanne
    Note: Suzanne's full name is Suzanne DuLong. She is the Vice-President of Investor Relations and Corporate Communications at Green Mountain Coffee.
     
    Green Mountain Coffee explained to those analysts and investors that the reduction in its sales return reserves for the thirteen-week ended March 26, 2011 did not result from reversing an overstatement of it reserves in the previous reporting period ended December 25, 2010:
    There was no reversal, no change in cash from operations and no impact to the statement of operations
    In my opinion, the company violated Regulation FD since it provided certain material non-public financial information about its sales returns reserves to selected analysts and investors that were not disclosed in its SEC filings. It wanted to make its case and counter the above calculations provided in my blog. 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.
    For example, Green Mountain Coffee did not disclose the 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 (See page 1). However, the company disclosed to certain analysts and investors that the separate balance for its sales returns reserve was $18 million:
    Q2’11 ending reserve of $18 million.
    In addition, it selectively disclosed to certain investors and analysts that:
    The sales return provision in Q2’11 was $12 million.
    Such material information about its sales returns were not disclosed in its 10-Q report for the period ended March 26, 2011, but was disclosed to certain selected investors and analysts.

    Did Green Mountain Coffee's fail to properly disclose inconsistencies in its financial reporting of sales returns reserves?

    As I detailed above, I assumed that Green Mountain Coffee was consistent in its presentation of its provisions for sales returns in its fiscal year 2010 10-K reports and subsequent 10-Q reports, as required under GAAP and SEC rules. According to "Financial Accounting: The Impact on Decision Makers" by Gary A. Porter and Curtis L. Norton, "Consistency means that financial statements can be compared within a single company from one accounting period to the next." (See page 58). However, as detailed below, Green Mountain Coffee made changes in its Statement of Cash Flows without disclosing them to investors.

    Green Mountain Coffee included the “Provision for sales returns” in its Statement of Cash Flows as an addition to “Cash flows from operating activities” in both its fiscal year 2010 10-K report and its subsequent 10-Q report for the period ended December 25, 2010. The company included a line item called “Sales returns” totaling $5.262 million in its Statement of Cash Flows as an addition to “Cash flows from operating activities” in its 10-Q report for the period ended March 26, 2011.

    Like many other analysts and investors, I assumed that the line item “sales returns” listed in its Statement of Cash Flows in its 10-Q report for the period ended March 26, 2011 was the same as its “Provision for sales returns” in the Statement of Cash Flows in its previous 10-Q and 10-K reports. It turns out that the "Sales returns" line item was not a "Provision for sales returns." Instead, the "Sales returns" line item reflected the total change in the sales returns reserve from the period ended December 25, 2010 to the period ended March 26, 2011.

    In other words, Green Mountain Coffee deceptively changed its presentation of its sales returns reserve numbers in its Statement of Cash Flows without telling investors. It could have used the term “Change in sales returns reserve” instead of “Sales returns reserve” to avoid misleading and confusing investors. It didn’t.

    The company conceded that it confused investors by telling certain analysts and investors that:
    It’s a bit of apples and oranges as with Q2’11 we modified the presentation in our cash flow to better show the change in the sales return reserve.
    [Snip]
    Q2’11 shows the $5,262 on the cash flow as “Sales returns”. That is the CHANGE in the reserve from the beginning of fiscal Q1’11 to the end of fiscal Q2’11. [Emphasis added.]
    In its 10-Q report for the period ended March 26, 2011, the company made the following disclosure:
    The Company has revised the classification of certain information presented in its fiscal 2010 audited consolidated financial statements [10-K report] to conform to its fiscal 2011 presentation. [Bracketed information added for clarity.]
    However, when the company detailed its revision of its Statement of Cash Flows, it failed to mention any change in presenting its sales returns numbers from previous reporting periods. See below:
    Revision to Fiscal 2010 Year-End Consolidated Statement of Cash Flows
    In preparing the consolidated financial statements for the thirteen weeks ended December 25, 2010, management identified that certain amounts previously disclosed within the Consolidated Statement of Cash Flows for the fiscal year ended September 25, 2010 required reclassification. These misstatements had no effect on the Company’s cash and cash equivalents. Specifically, the supplemental disclosure of fixed asset purchases included in accounts payable and not disbursed was overstated by approximately $8.2 million. This resulted in an $8.2 million understatement on the capital expenditures for fixed assets line and net cash used for investing activities category for fiscal 2010 and a corresponding understatement of the change in accounts payable line and an overstatement of net cash used in operating activities. The Company will make this immaterial correction when the fiscal 2010 financial statements are next issued. [Emphasis added].
    None of the revisions disclosed by the company relate to its change in presenting its sales returns reserve numbers in the Statement of Cash Flows in its 10-Q reports.

    Green Mountain Coffee's troubling explanation of impact of changes in sales returns reserve on cash flows

    Green Mountain Coffee claimed that:
    It’s a bit of apples and oranges as with Q2’11 we modified the presentation in our cash flow to better show the change in the sales return reserve.
    The company explained to certain analysts and investors that:
    Q2’11 shows the $5,262 on the cash flow as “Sales returns”.
    [Snip]
    The $5 million in the cash flow is the increase or CHANGE.
    It's hard to see how Green Mountain Coffee's financial reporting was improved by modifying its presentation of cash flows. The $5.262 million change in its sales returns reserve balance is not, by itself, an addition to cash flows from operating activities in the Statement of Cash Flows for the twenty-six week period ended March 26, 2011. The change in the sales returns reserve reflects the difference between provisions for sales returns and deductions from the sales returns account.

    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 increases the sales returns reserve and reduces revenues. Therefore, the provision for sales returns can be reflected as an addition to cash flows from operating activities in the Statement of Cash Flows.

    When customers return products to the company, the accounting entry reflects a deduction in the sales returns reserve and either increases accounts payable (liability to the customer) or reduces accounts receivable (amounts owed to the customer). Deductions from the sales return reserve are not additions to cash flows from operating activities in the Statement of Cash Flows since it has no effect on cash or net working capital.

    Since the $5.262 million change in sales returns reserve includes deductions from that reserve, it is not an addition to cash flows from operating activities in the Statement of Cash Flows. Certain analysts and investors asked the company about the discrepancy, but the company did not respond to them.

    A new can of worms – numbers that don’t add up

    As I detailed above, Green Mountain Coffee reported separate balances for its sales returns reserve and for its allowance for doubtful accounts in the fiscal year ended September 25, 2010 10-K of $12.742 million and $1.314 million. However, Green Mountain Coffee combined the balances of its sales returns reserves and allowance for doubtful accounts in its Balance Sheet disclosures in its subsequent 10-Q reports for the periods ended December 25, 2010 and March 26, 2011. In both subsequent 10-Q reports it showed a beginning September 25, 2010 combined balance of both reserves totaling $14,056 million. The combined balance its sales returns reserve and its balance for the doubtful accounts was $20.565 million in twenty-six week period ended March 26, 2011 10-Q report.  The combined amount of both reserves increased $6.509 million during the twenty-six week period ($20.565 million minus $14.056 million). See excerpt from Balance Sheet below (Click image to enlarge):
     

    In both its fiscal year ended September 25, 2010 10-K 2010 report and its subsequent 10-Q report for the period ended December 25, 2010, it included a “Provision for doubtful accounts” in its Statement of Cash Flows as an addition to “Cash flows from operating activities.” In its March 26, 2011 10-Q , Green Mountain Coffee reported $0.400 million as “Bad debts” in its Statement of Cash Flows for the twenty-six week period ended March 26, 2011.

    Now that the company has clarified its reporting of sales returns numbers, we can assume that the $0.400 million amount listed as “Bad debts” in the Statement of Cash Flows is the change in that reserve balance for the twenty-six week period ended March 27, 2011 and not a “Provision for doubtful accounts”. See excerpt from Statement of Cash Flows below (Click on image to enlarge):

      
    Green Mountain Coffee claimed to certain analysts and investors that its sales returns reserve increased $5.262 million during the twenty-six week period ended March 27, 2011. Likewise, the allowance for doubtful accounts increased $0.400 million during the same period. The total increase in both reserves should be $5.662 million ($5.262 million plus $0.400 million). However, according to the Balance Sheet in the March 27, 2011 10-Q report, the combined amount of both reserves increased $6.509 million during the twenty-six week period. Therefore, there is a $0.847 million discrepancy in the company’s reserve numbers.

    See my revised calculations below, based on the company's selective disclosures to certain analysts and investors (Click on image to enlarge):

     
     
    The numbers add up for the previous year's thirteen-week period ended March 27, 2010 but don't add up for the current year's period ended March 26, 2011.

    Recommendations
     
    The Securities and Exchange Commission must require Green Mountain Coffee to file an 8-K report so that all analysts and investors are privy to the same information it selectively provided to certain analysts and investors. The company should be required to clarify its misleading sales returns reserve disclosures and discrepancies in its numbers, too. Further, the SEC should investigate and subpoena all of Green Mountain Coffee’s emails to analysts and investors for possible additional FD violations. The ball is in your court!

    Respectfully,

    Sam E. Antar

    Other reports

    June 6, 2011: StreetInsider.com - Green Mountain Coffee (GMCR) Falls After Blogger Sends Reg FD Violation Report to SEC

    June 6, 2011: Benzinga - Financial Investigator Warns About Green Mountain Coffee Roasters by Paul Quintaro

    June 6, 2011: The Financial Investigator - GMCR: From Small Beans Big Trouble One Day Brews by Roddy Boyd


    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.
    Tags: GMCR
    Jun 07 8:49 PM | Link | Comment!
  • 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.
    May 25 2:03 PM | Link | 2 Comments
  • Is Michelle Stacy a shrewd insider, a psychic or just plain lucky?
    In my last blog post I asked the following question about Green Mountain Coffee Roasters (NASDAQ: GMCR) Keurig Division President Michelle Stacy:
    Is Michelle Stacy a shrewd insider, a psychic or just plain lucky? Perhaps the people who designed and administer her purported 10b5-1 trading plan are geniuses?
    On February 14, 2011, Green Mountain Coffee stock opened for trading at $42.14 per share. At 11:00 AM Reuters reported:
    Green Mountain Coffee Roasters Inc's (GMCR.O) shares fell as much as 4 percent after Starbucks Corp (SBUX.O) said it plans to announce a new product for the single-cup coffee market, a move that could threaten Green Mountain's dominance in the fast-growing sector.
     
    The stock price of Green Mountain shares dropped to a low of $41.53 per share in intra-day trading. At around 3:25 PM (Eastern) that afternoon, Green Mountain Coffee shares spiked up from just under $42 per share to $45 per share. See the Bloomberg chart below (times posted on chart are Central time):

    Click on image to enlarge.

    At around 3:34 PM (Eastern) that afternoon, Reuters citing an unnamed source reported:
    Starbucks Corp (SBUX.O) and Green Mountain Coffee Roasters (GMCR.O) are in partnership negotiations, a source close to the talks told Reuters on Monday, sending Green Mountain shares surging.
    On that same day, Michelle Stacy exercised 10,000 options at $6.20 per share and simultaneously sold her shares at $45.13 per share through her 10b5-1 trading plan. Green Mountain Coffee's shares did not trade above $45 per share until after 3:25 PM (Eastern) according to the above chart. Green Mountain Coffee shares closed at $46.35 per share. On February 15, 2010, the market value of Green Mountain Coffee stock closed at $43.53 per share, a drop of $2.82 per share from the previous day's closing price of $46.35 per share.

    Timing of Michelle Stacy’s other stock sales

    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. On September 13, 2010, exercised 5,000 options at $6.20 per share and simultaneously sold those shares at $35.20 per share.

    On September 20, 2010, Green Mountain Coffee claimed that it was notified by the Securities and Exchange Commission (SEC) of an informal inquiry concerning its “revenue recognition practices and the Company’s relationship with one of its fulfillment vendors.” However, the company did not disclose news of the SEC inquiry to investors until seven days later.

    On September 21, 2010, Michelle Stacy exercised 4,375 options at $6.20 per shares and simultaneously sold her shares at $37 per share. In addition, Stacy exercised another 625 options at $9.14 per share and simultaneously sold those shares at $37 per share.

    After the market closed on September 28, 2010, Green Mountain Coffee finally disclosed news of the SEC inquiry to investors. In addition, the company disclosed that it discovered an "immaterial accounting error" involving its K-Cup margin percentages which resulted in a $7.6 million cumulative overstatement of pre-tax income in financial reports issued from 2007 to June 26, 2010. A significant amount of those accounting errors came from the Keurig segment which is headed by Michelle Stacy.

    On September 29, 2010, the next trading day, Green Mountain Coffee stock dropped $5.95 per share to close at $31.06 per share as investors reacted to news of the SEC inquiry, a 16.1% drop in market value that day.

    By October 11, 2010, the market value of Green Mountain Coffee’s shares dropped to $26.87 per share, far below the price per share that Stacy sold her stock on August 13 ($30.95), September 13 ($35.20), and September 21, 2010 ($37.00).

    On October 21, 2010, I raised questions about the timing of Michelle Stacy's stock sales.

    On October 28, 2010, Stacy belatedly filed amended Form 4 reports and claimed she established a Rule 10b5-1 trading plan on August 13, 2010. A Rule 10b5-1 trading plan provides certain safe harbors which help executives defend against potential allegations of illegal insider-trading by removing their discretion to decide when their stock is bought or sold. She amended certain SEC Form 4 filings for her stock sales on September 13 and September 21 to reflect her 10b5-1 trading plan. However, her sale of 30,000 shares on August 13 was not pursuant to a 10b5-1 trading plan. According to Stacy's amended SEC filings, her 10b5-1 trading plan only covered future stock transactions.

    On November 5, 2010, Michelle Stacy exercised 10,000 options at $6.20 per share and simultaneously sold her shares at $35 per share.

    On February 7, 2011, Michelle Stacy exercised 10,000 options at $6.20 per share and simultaneously sold her shares at $40.00 per share. In addition, she exercised another 5,561 options at $9.14 per share and simultaneously sold those shares at $40 per share.

    On Thursday, March 10, 2011, Green Mountain announced a “strategic relationship” with Starbucks. In reaction to the news, the market value of Green Mountain Coffee common stock rose $21.07 per share to close at $61.71 per share, or a 46% increase from the prior day’s closing price. That same day, Michelle Stacy exercised 9,375 options at $6.20 per share and simultaneously sold them at $55.54 per share, $11.90 per share higher than the previous day's closing price per share. Other Green Mountain insiders were not as fortunate as Michelle Stacy. MarketWatch reported:
    Green Mountain insiders miss big option gain Options priced after Green Mountain stock jumps 41% in single day
    SAN FRANCISCO (MarketWatch) —March 10 was options day for insiders at Green Mountain Coffee Roasters. Too bad it was the day the stock hit a record high and the options are presently worthless.
    Their latest batch of stock options were priced Thursday as Green Mountain(GMCR 58.86, -2.85, -4.62%)  shares ran up 41% on news the company had struck a deal for Starbucks (SBUX 36.56, -1.41, -3.71%)  to make coffee for its Keurig single-cup coffee brewers. Read Starbucks, Green Mountain brew K-Cup deal.
    According to filings Friday afternoon with the Securities and Exchange Commission, eight directors were each granted 2,300 stock options at Thursday’s closing price of $61.71 a share — a record high on a split-adjusted basis. The previous day the stock had closed at $43.64.
    From August 13, 2010 to March 10, 2011, Michelle Stacy made a gross profit of $2.689 million from exercising options and selling shares.


    In the quarter ended December 25, 2010, Green Mountain Coffee's Keurig segment reported a $1.955 million loss before taxes.

    Class-action lawsuit

    The amended class-action complaint alleges that Green Mountain Coffee knew that the SEC was poking around as early May 2010 or three months before Michelle Stacy claims she adopted a 10b5-1 trading plan. See paragraphs 68, 69, 103, and 104). If a corporate executive already has nonpublic knowledge of certain adverse events such as undisclosed weaknesses in internal controls, accounting errors, or an SEC inquiry, a 10b5-1 plan cannot provide a safe harbor against illegal insider trading allegations.

    Final comment
     

    Every corporate insider should seek out who designed and administers Michelle Stacy's 10b5-1 trading plan and hopefully, they can be as lucky as she is. In any case, Stacy's got great timing!

    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.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Mar 28 12:32 AM | Link | 6 Comments
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