This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Green Mountain Margin Call Latest Sign Market Is Stuck in 1929

Stocks in this article: GMCR GS CHK

NEW YORK ( TheStreet) -- The recent share tumble of Green Mountain Coffee Roasters (GMCR - Get Report) harkens back to the stock crashes of Chesapeake Energy (CHK - Get Report) and Goldman Sachs (GS - Get Report) during the financial crisis, and in fact, all the way back to the Great Depression.

That's because in each case the issue of whether top executives and board members should be permitted to use their company stock as collateral for personal investments has been raised. It's a question yet to be answered definitively by the corporate world, even after similar problems first surfaced more than 80 years ago.

The risk of more market implosions triggering margin calls is significant, according to data from Institutional Shareholder Services. Approximately 23% of S&P 500 companies have executives or company officers who have pledged company shares. Only 62.4% of S&P 500 companies have a policy in place prohibiting the hedging of shares by executives.

On Monday, Green Mountain Coffee Roasters ousted its chairman and founder Robert Stiller after he was forced to sell $125.5 million in stock to meet margin calls.

The sales, which violated company prohibitions on trading shares during earnings, were made as Green Mountain tumbled 48% on May 2 on a weak first quarter earnings report. Because Stiller had roughly 12.5 million of his Green Mountain shares in margin accounts for personal loans that Bloomberg reports were used to buy a 164-foot yacht, the falling value of Green Mountain shares precipitated margin calls and his stock sale.

Stiller may face Securities and Exchange Commission scrutiny over the sales, according to a Reuters report, because the sales came during a restricted period for insider selling.

However, forced selling of shares pledged in margin accounts for loans were also a problem for Chesapeake Energy CEO Aubrey McClendon in 2008 and led to the departure of a top executive at Goldman Sachs during the financial crisis, in addition to other instances at Boston Scientific (BSX) and Williams Sonoma (WSM).

There is uncertainty over whether margin accounts are a problem, and even less clarity on what is and isn't legal.

"Obviously it poses a problem, in so far as you are selling or collateralizing the stock for other purposes, you are diminishing the value of the company," says Kenneth Feinberg, a founder of law firm Feinberg Rozen and special master on executive pay in the Treasury's Troubled Asset Relief Program.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,678.70 +6.10 0.03%
S&P 500 2,057.09 +5.27 0.26%
NASDAQ 4,771.7630 +13.8840 0.29%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs