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
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Green Mountain Margin Call Latest Sign Market Is Stuck in 1929

NEW YORK (TheStreet) -- The recent share tumble of Green Mountain Coffee Roasters (GMCR) harkens back to the stock crashes of Chesapeake Energy (CHK) and Goldman Sachs (GS) 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

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

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
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

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
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, 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
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

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

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
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!
DOW 17,083.80 -2.83 -0.02%
S&P 500 1,987.98 +0.97 0.05%
NASDAQ 4,472.1080 -1.5890 -0.04%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

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