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A Legal Expert Dissects Coffee Stock Claims

Local Matters


Published November 3, 2010 at 10:31 a.m.

A Vermont Law School professor with four decades of experience in securities law sees “red flags” in the stock sales of an executive at Green Mountain Coffee Roasters. Bud Carrey has examined recent shareholder lawsuits brought against GMCR and says some of the trading activity raises questions.

Numerous class-action lawsuits filed by GMCR shareholders in recent weeks accuse company officers and directors of insider trading. One executive in particular, Keurig president Michelle Stacy, has come under scrutiny for allegedly cashing in 95 percent of her stock holdings — worth $1.3 million — in a five-week period before the company revealed accounting errors and a federal securities inquiry that caused its stock to lose 16 percent of its value overnight. The lawsuits allege she did so while in possession of “material, nonpublic” information about company finances — as in, “important stuff” only an insider would know about.

“Presumably she had a reason for wanting to liquidate almost her entire holdings,” says Carrey, who worked for decades in private practice in New York City and later as corporate general counsel at Telemundo Inc. “You may find she needed cash to close on a winter house in the Bahamas, or to pay college tuitions due October 1. But it certainly raises flags, no question about it.”

In all, the lawsuits accuse seven GMCR executives and board members of insider trading totaling $184 million: Stacy; GMCR founder and chairman Bob Stiller; president and CEO Larry Blanford; Specialty Coffee Business Unit president R. Scott McCreary; and board members Jules A. del Vecchio, Hinda Miller and David E. Moran.

McCreary sold $6.6 million worth of stock on August 18 — representing three-quarters of his holdings — five weeks before the accounting errors were reported, according to the lawsuits. Most of the trades noted in the lawsuits are far older than that; some date back to 2006, when GMCR stock was trading for just $3.41 a share.

No executive has attracted the attention that Stacy has, however, and Carrey suggests that’s because of the timing and volume of her trades. Stacy heads GMCR’s Keurig single-serve business unit, where the $4.4 million accounting error occurred.

Between August 13 and September 21, Stacy exercised options on 40,000 shares that expired in 2018 and 2019, according to filings with the U.S. Securities and Exchange Commission. Her final sale came one day after the SEC told GMCR it was looking into its accounting practices, and seven days before that news became public, records indicate.

On October 28, Stacy filed an amended form with the SEC that sheds light on her sales. It reveals that Stacy entered into a so-called Rule 10b5-1 trading plan on August 13. Enacted in 2000, these trading plans allow officers, directors and other insiders at publicly traded companies to buy and sell their company shares at all times, not just during open trading windows. Every plan, however, must specify the amount, price and date of stock sales to be executed. Stacy’s filing of August 17, detailing a stock sale four days earlier, doesn’t mention a 10b5-1 plan.

According to Carrey, prescheduled trading plans are often used by executives who need cash available at certain times of the year — for paying estimated taxes, a child’s college tuition or some other expense. Insiders aren’t allowed to adopt the plans when they’re in possession of material nonpublic information about their company, Carrey notes. That would constitute insider trading.

Carry questions why Stacy or the company didn’t report her 10b5-1 plan to the SEC at the time she adopted it.

The accounting and legal troubles are an unexpected speed bump in GMCR’s explosive growth trajectory. Since its founding as a small café in Waitsfield in 1981, the company has expanded into a global leader in the specialty coffee business, and earned a reputation for social and environmental responsibility, fair trade, and ethical business practices. In August, GMCR was ranked #2 on Fortune’s annual list of “100 Fastest-Growing Companies.”

On September 28, GMCR revealed in a public SEC filing that it had discovered a three-year-old bookkeeping error and that SEC investigators were probing its revenue- recognition practices. By the time the next day’s opening bell rang, the stock had dropped by $5.95 per share, to $31.62, and $856 million in market value had evaporated.

GMCR has declined to discuss the lawsuits. Suzanne DuLong, vice president of investor relations and corporate communications, wouldn’t address the insider-trading allegations, or make Stacy or other executives and directors available for questions.

“We cannot comment on pending litigation,” DuLong says.

Next up, according to Carrey, the plaintiffs’ lawyers will duke it out to have their client named “lead plaintiff,” a process he likens to a “beauty contest.” The process determines which shareholder best represents the “class” — as in “class action” — and, consequently, which law firm will earn the lucrative attorney fees.

Carrey says many shareholder cases are settled out of court and believes that “whatever settlement they reach isn’t going to break the bank at Green Mountain.

“It’s not going to be a $100 million case,” he says, “ but these are very serious issues.”