Ex-Crazy Eddie CFO Joins Einhorn in Slamming Green Mountain

BOSTON (TheStreet) -- Is Green Mountain Coffee Roasters (GMCR) cooking the books?

Many think so, especially after reading the recently released 110-page thesis from hedge fund manager David Einhorn. In the piece (titled "GAAP-uccino"), Einhorn lays out an elaborate analysis highlighting the company's expiring K-Cup patents in 2012, alleged accounting irregularities and a lack of transparency from management. Since the release of the report Monday, the stock has plummeted 25%. (Still, the stock has more than doubled this year.)

One person who isn't surprised by the news is Sam E. Antar, a convicted felon and former CFO of Crazy Eddie, the electronics chain that went belly up in the 1980s. Antar helped mastermind an A-level fraud that eventually cost investors hundreds of millions of dollars. To atone for his sins, Antar now spends his time teaching others about accounting shenanigans, helping to identify and catch the crooks.
Green Mountain's accounting practices aren't making the company friends on Wall Street.

Antar became interested in Green Mountain after a blogger asked him a question about the company in 2010. Once he started looking at the books, it was obvious there were problems, he says. "All I can tell you is that Green Mountain is clearly violating SEC Disclosure Laws and GAAP rules," Antar said in a phone interview.

Kathleen Shaffer, Green Mountain's investor-relations coordinator, was unavailable to comment on claims made by Einhorn and Antar when contacted by TheStreet. Sandy Yusen, director of public relations, is out of the office until Oct. 25.

Antar has been blogging about what he says are accounting irregularities at Green Mountain since late 2010. While much of Einhorn's analysis is focused on the fundamental flaws with Green Mountain's business, Antar is reviewing only accounting.

What's Green Mountain doing that looks so fishy? According to Antar:

1. On Sept. 20, 2010, the company was notified of a Securities and Exchange Commission inquiry and request for voluntary information concerning "revenue recognition practices and the company's relationship with one of its fulfillment vendors." The next day, Michelle Stacy, the head of the Keurig unit, exercised 5,000 options and immediately sold her shares at $37 per share.

A day after the information for the SEC inquiry was released to the public (Sept. 28) via an 8-K, Green Mountain's stock dropped to $31.06. Antar finds it "hard to believe that Stacy did not know anything about the SEC inquiry and that her sale of stock was not a mere coincidence." There's a class-action lawsuit against Green Mountain, alleging Stacy and other insiders engaged in illegal insider trading.

2. In the 8-K released Sept. 28, Green Mountain disclosed that it discovered an "immaterial accounting error" in the K-Cup business affecting financial reports from 2007 to 2010. Turns out, the company overstated cumulative pre-tax income by $7.6 million. If the error had been deemed material, Green Mountain would have been required to disclose that its previously issued financial reports can't be relied upon and to restate its financial reports to correct the error.

3.On Nov. 19, Green Mountain disclosed three new overstatements totaling $3.2 million in pre-tax income and one new understatement of $700,000 in pre-tax income. Those errors, plus the K-Cup profit-margin error, resulted in a total overstatement of $10.1 million.

That time, the company said it would restate financial reports from 2007 to 2010. Antar says Green Mountain "should have identified the K-Cup margin error as a material accounting error in its Sept 28, 2010, 8-K report, and it should have informed investors that its previous financial reports could not be relied on." He says further: "Under SEC rules, a material accounting error is required to be disclosed on form 8-K within four business days. It wasn't until Nov. 19 that Green Mountain disclosed that its financial reports could not be relied upon by investors and that it would restate its earnings reports issued from 2007 to 2010 to correct accounting errors."

4. Green Mountain reported income before taxes for its Timothy's Coffee of the World subsidiary that exceeded revenue by nearly $2.4 million in the 13 ended June 26, 2010. How is that possible? Antar isn't sure, and makes a plea to the company's CFO to explain.

Antar's three possible explanations: one, there's non-operating income somewhere that wasn't detailed in the 10-Q (a good scenario, but Antar says this is highly unlikely); two, Green Mountain understated revenue and this was all part of the previous accounting guffaws (a bad scenario Antar says, because how could the auditors or management miss this?); or three (the very bad scenario), the difference could have come from negative operating expenses, which according to Antar are "caused by an adjustment to the current period's operating expenses, because of an error in a previous reporting period."

Therefore, Antar says, "Green Mountain may have been aware of material weaknesses in internal controls as early as June 2010 and not on Nov. 19, 2010, when it first admitted to such problems." While the numbers have since been restated, Antar notes in a recent blog post that the numbers still don't add up.

5. In February of this year, allegations from former employees about deceptive practices were filed in a lawsuit against Green Mountain, including accusations that the company deliberately violated Generally Accepted Accounting Principles (GAAP) and prematurely recognized income on the shipment of products to M. Block and Sons, its primary fulfillment vendor. Antar notes that the complaint "effectively describes M. Block, in what is known in fraud investigation circles, as a "black box entity" used by fraudsters to play shell games with inventory and inflate income."

Antar says "back in the day at Crazy Eddie, we took advantage of our cozy relationship with certain third-party entities and effectively used them as 'black box entities' to help us inflate our earnings." Interestingly, Einhorn summarizes findings of interviews with several Green Mountain and M. Block employees. According to Einhorn: "The research shows that Green Mountain and M. Block are potentially engaged in a variety of shenanigans that appear designed to mislead auditors and to inflate financial results."

And there's more, including the suggestion of questionable ethical practices and other accounting irregularities relating to reserves. I suggest you check out Antar's blog, which has information about Green Mountain. Antar has offered management the opportunity to debate the issues in an open forum. He's even sent several letters to SEC Chairman Mary Schapiro, detailing what he believes are violations and questionable financial reporting.

"The numbers just don't add up," Antar says. "Could it be stupidity? Yeah, sure, but there are so many violations here, I just have to believe that something is wrong."

Antar says he has no vested interest in the demise of Green Mountain. He says he has no position in the stock and, according to his Web site, "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."

Equity research manager Chris Stuart, CFA, joined TheStreet Ratings after working as a senior investment analyst with Merrill Lynch covering small-cap equity and alternative investment strategies. Prior to that, Stuart worked for One Beacon Insurance as an actuarial analyst and at H&R Block as a financial adviser.

Stuart earned his bachelor's degree in finance from the University of Massachusetts, Amherst. He holds a Chartered Financial Analyst (CFA) designation and is a member of the Boston Security Analysts Society (BSAS) and the CFA Institute.

More from Investing

3 Fierce Chinese Tech Stocks to Gamble on Right Now

3 Fierce Chinese Tech Stocks to Gamble on Right Now

Why Retirees Should Stick With Stocks

Why Retirees Should Stick With Stocks

3 Ways for Retirees to Protect Their Portfolios In Volatile Stock Markets

3 Ways for Retirees to Protect Their Portfolios In Volatile Stock Markets

BlackBerry CEO Talks Impact of Trump's Tariffs Among His Big Automaker Clients

BlackBerry CEO Talks Impact of Trump's Tariffs Among His Big Automaker Clients

Trump Sowing the Seeds of a 10% Stock Market Correction?

Trump Sowing the Seeds of a 10% Stock Market Correction?