Coffee and Compliance

I just sat down with a fresh cup of coffee from Green Mountain Coffee Keurig brewer. The smell of coffee mixed with stench of compliance failures coming from Green Mountain Coffee Roasters, Inc.

You know there is trouble when Sam Antar, the convicted felon and criminal CFO of Crazy Eddie, has you in his sights.

SEC inquiry

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.

That’s from GMCR’s September 28 8-K filing.

When the SEC starts poking around your revenue recognition, it’s generally bad news for the company. The Motley Fool noticed that GMCR’s accounts receivables was growing faster than revenue growth. That increase in accounts receivables is seen when a company is trying to boost sales by giving its customers overly generous payment terms or aggressively trying book sales at the end of the quarter.

Then there is the timing of the disclosure. GMCR was notified on September 20, but did not file the report until 6 business days later on September 28. A 8-K report is supposed to be filed or furnished within four business days after occurrence of the event.

To top it off, there is the possibility of insider trading. Michelle Stacy, the president of the Keurig division sold some shares and options recently. On September 21, 2010, she exercised 5,000 options and then sold those shares for $37 per share.

The expiration dates for those options were not until November of 2018 and March of 2019. It seems a bit early to realize on those shares, but maybe she needed the cash. She had been exercising options.  On August 13 she exercised 30,000 options and exercised 5,000 options on September 13.

The problem is that she exercised options on the day after the company was informed of the SEC inquiry. It could just be a case of bad timing or it could be an illegal sale after acquiring material, nonpublic information.

That is the big problem with insider trading. It’s going to be hard to prove that she did not know about the SEC inquiry. With insider trading, there may be some email that contains a smoking gun. Or you could just be in an entirely implausible scenario.

Hopefully, GMCR has a program in place for corporate directors and employees to sell stock and exercise options. Then Ms. Stacy can show that she had started the program for exercising her options well before the SEC inquiry. Then she can prove that she did not know. Otherwise…..