2012 04-30 Horowitz Vs Green Mountain Coffee Roasters - Second Consolidated Class Action Complaint

UNITED STATES DISTRICT COURT
DISTRICT OF VERMONT
DAN M. HOROWITZ, Individually and on )
Behalf of All Others Similarly Situated, )
Plaintiff,
)
)
)
vs. )
GREEN MOUNTAIN COFFEE ROASTERS, ~
INC., et al., )
Defendants.
)
)
__________________________ )
No. 2:10-cv-00227-wks
(Consolidated)
CLASS ACTION
2fil2 APR 30 Ati II: 48
SECOND CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR
VIOLATIONS OF FEDERAL SECURITIES LAWS
Case 2:10-cv-00227-wks Document 72 Filed 04/30/12 Page 1 of 62
Lead Plaintiffs Jerry Warchol, Robert M. and Jennifer M. Nichols, Loren Marc Schmerler
and Mike Shanley ("Plaintiffs" or "Lead Plaintiffs"), have alleged the following based upon the
investigation of Plaintiffs' counsel, which included information obtained from confidential
witnesses, including former Green Mountain Coffee Roasters, Inc. ("GMCR" or the "Company")
and M.Block & Sons, Inc. ("MBlock") employees, a review of United States Securities and
Exchange Commission ("SEC") filings by GMCR, as well as regulatory filings and reports,
securities analysts' reports and advisories about the Company, and media reports, press releases and
other public statements issued by or about the Company. Plaintiffs believe that substantial additional
evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for
discovery.
NATURE OF THE ACTION
1. This is a federal securities class action on behalf of purchasers of the common stock
ofGMCR between July 28, 2010 and September 28, 2010, inclusive (the "Class Period"), seeking to
pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act").
2. Defendant GMCR is engaged in the specialty coffee and coffee maker business,
selling a variety of whole bean and ground coffee, cocoa, and teas under more than a dozen brand
names. The Company's business is largely concentrated in the manufacture and marketing of
gourmet single-cup coffee and tea brewing systems under the Keurig brand name. The Keurig
brewing system consists primarily ofK-Cups, or single-cup brewing packages, and K-Cup brewers
and related accessories, which, during fiscal2010, respectively accounted for approximately 62%
and 24% of the Company's total revenue.
3. This case concerns deceptive accounting and financial reporting practices at GMCR.
As detailed further herein, GMCR has admitted to certain improper accounting practices, which are
primarily associated with the Company's reporting of revenue, and has restated its previously issued
financial statements. In addition, the Company has also reported that the SEC has an on-going
"inquiry" into GMCR's revenue recognition practices, the outcome of which "could require the
filing of additional restatements of our prior financial statements." GMCR's accounting practices
have also garnered attention from the financial press. For example, in a February 13, 2011 Seeking
Alpha article entitled "Green Mountain Coffee: Only Thing Brewing Is Trouble," author Jason
Merriam, noted "[t]he accounting practices at Green Mountain Coffee Roasters (GMCR) are not
baffling ... they are downright ludicrous." Similarly, on February 15, 2011, Sam Antar began his
Seeking Alpha article, entitled "More Mucky Disclosures For Green Mountain Coffee Roasters,"
with the following sentence: "Just about every time I examine financial reports issued by Green
Mountain Coffee Roasters (NASDAQ: GMCR), I find new troubling accounting practices and
financial disclosures."
4. Prior to and during the Class Period, Defendants issued numerous statements and
filed reports with the SEC regarding the Company's then-current financial performance and future
earnings. These statements were materially false and misleading because Defendants knew, but
failed to disclose that: (i) the Company had improperly recorded revenue on shipments of product to
its primary fulfillment vendor, MBlock; (ii) the Company improperly overstated its royalty income;
(iii) the Company improperly understated customer incentive and marketing related expenses; (iv)
the Company improperly accounted for inter-company transactions causing inventory and earnings
to be overstated; (v) the Company publicly disseminated materially misstated financial statements
that were presented in violation of Generally Accepted Accounting Principles ("GAAP"); and (vi)
despite Defendants' attestations to the contrary, GMCR operated with material weaknesses in its
system of internal controls over financial reporting.
5. On September 28, 2010, GMCR shocked the market by announcing both a
cumulative $7.6 million overstatement of pre-tax income over a multi-year period (net of tax, the
cumulative error resulted in a $4.4 million overstatement of net income or an overstatement of
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earnings per share by $0.03) and that the SEC's Division of Enforcement was conducting an
accounting inquiry into the Company's financial statements and had made a request for documents
and information associated with the Company's revenue recognition practices and "one of' its
fulfillment companies. In response to this announcement, the price of GMCR stock declined more
than 16%, on almost ten times the average trading volume.
6. According to GMCR, it was informed of the SEC's inquiry eight days earlier, on
September 20, 2010. Suspiciously, the very next day, September 21, 2010, GMCR executive officer
Michelle Stacy ("Stacy"), President of the Company's Keurig division, exercised stock options that
did not expire until2018 and 2019, and sold 5,000 shares ofGMCR stock at $37 a share.
7. Approximately one month earlier, both Stacy and Scott McCreary ("McCreary"), the
President of GMCR's other business division, the Specialty Coffee Business Unit ("SCBU"),
unloaded a total of230,000 Company shares for proceeds of more than $7.5 million. These sales,
which also occurred shortly before the Company's official announcement of an SEC inquiry, were
made after the SEC's initial contact with GMCR. Prior to these sales, there had not been significant
insider trading activity since June 2009.
8. As did the Company's division presidents, GMCR also engaged in a large stock sale
just before the SEC inquiry became public. In August 2010, GMCR sold more than 8.5 million
common shares to Italian coffee maker giant, Luigi Lavazza S.p.A. ("Lavazza") for $250 million.
On September 14, 2010, GMCR announced it acquired all ofthe issued and outstanding shares of
LJVH Holdings, Inc., its Canadian rival Van Houtte, for C$915 million.
9. After the Class Period, on November 19, 2010, GMCR announced that investors
"should no longer rely upon" the Company's previously issued financial statements for fiscal years
2007, 2008, 2009 and for the first three quarters of 2010.
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10. On December 9, 2010, GMCR issued a press release announcing its financial results
for the fiscal fourth quarter and year ended September 25, 2010 and filed with the SEC its Form 1 O-
K for the year ended September 25,2010 (the "2010 Form 10-K"). The 2010 Form 10-K included
GMCR's restated prior period financial statements and set forth the material weaknesses in the
Company's system of internal controls. The 2010 Form 10-K also revealed that GMCR's net
income for the 39 weeks ended June 26, 2010 had been overstated by approximately 6.2% and its
accrued expenses at June 26, 2010 were understated by more than 5%.
JURISDICTION AND VENUE
11. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.
13 31 and Section 27 of the Exchange Act.
12. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the
Exchange Act [15 U.S.C. 78j(b) and 78t(a)] and Rule 10b-5 promulgated thereunder by the SEC
[17 C.F.R. 240.10b-5].
13. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28
U.S.C. 1391(b). GMCR maintains its principle corporate offices in this District and many of the
acts charged herein, including the preparation and dissemination of materially false and misleading
information, occurred in substantial part in this District.
14. In connection with the acts alleged in this Complaint, Defendants, directly or
indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to,
the mails, interstate telephone communications and the facilities of the national securities markets.
PARTIES
15. Lead Plaintiffs, as set forth in their certifications previously filed with this Court and
incorporated by reference herein, purchased the common stock of GMCR during the Class Period
and have been damaged thereby.
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16. Defendant GMCR, formed in 1993 in the State of Delaware, maintains its corporate
headquarters at 33 Coffee Lane, Waterbury, Vermont 05676. The Company (together with its
subsidiaries) operates in the specialty coffee and coffee maker businesses. The Company's fiscal
year ends on the last Saturday in September, with each fiscal year consisting of 52 weeks.
17. Defendant Lawrence J. Blanford ("Blanford") is, and was at all relevant times, the
President, Chief Executive Officer and a Director of GMCR.
18. Defendant Frances G. Rathke ("Rathke") is, and was at all relevant times, the Chief
Financial Officer, Treasurer, Secretary, and Principal Financial and Accounting Officer ofGMCR.
Until December 2011, Rathke was described on the Company website as being a Certified Public
Accountant, even though her license had expired years earlier. According to a report issued in 2012
by The LongShortTrader ("LST"), entitled "GAAP-uccino 1.5," GMCR removed the reference to
Rathke being a CPA after it was brought to its attention by Sam Antar, a blogger who regularly
published reports critical ofGMCR during the Class Period. LST further noted that GMCR's Forms
1 0-K issued between 2003 and 2008, that were certified pursuant to the Sarbanes-Oxley Act of2002
("SOX") as being accurate by Rathke herself, inaccurately identified Rathke as a CPA.
19. Defendants Blanford and Rathke are referred to herein as the "Individual
Defendants."
20. During the Class Period, the Individual Defendants, as senior executive officers
and/or directors of GMCR, were privy to confidential and proprietary information concerning
GMCR, its operations, finances, financial condition and present and future business prospects. The
Individual Defendants also had access to material adverse non-public information concerning
GMCR, as discussed in detail below. Because of their positions with GMCR, the Individual
Defendants had access to non-public information about its business, finances, products, markets and
present and future business prospects via internal corporate documents, conversations and
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connections with other corporate officers and employees, attendance at management and/or board of
directors meetings and committees thereof and via reports and other information provided to them in
connection therewith. Because of their possession of such information, the Individual Defendants
knew or recklessly disregarded that the adverse facts specified herein had not been disclosed to, and
were being concealed from, the investing public. Moreover, the Individual Defendants were high-
level corporate officers who signed SEC filings. As signatories to the SEC filings, the Individual
Defendants had a duty to familiarize themselves with the Company's accounting practices and the
financial reporting of those operations. The Individual Defendants breached these duties by making
statements concerning the Company's financial statements while ignoring reasonably available data
about the Company's accounting practices that would have indicated to the Individual Defendants
that those statements were false or misleading.
21. The Individual Defendants are liable as direct participants in the wrongs complained
of herein. In addition, the Individual Defendants, by reason of their status as senior executive
officers and/or directors, were "controlling persons" within the meaning of Section 20(a) of the
Exchange Act and had the power and influence to cause the Company to engage in the unlawful
conduct complained ofherein. Because of their positions of control, the Individual Defendants were
able to and did, directly or indirectly, control the conduct ofGMCR's business.
22. The Individual Defendants, because of their positions with the Company, controlled
and/or possessed the authority to control the contents of its reports, press releases and presentations
to securities analysts and through them, to the investing public. The Individual Defendants were
provided with copies of the Company's reports and press releases alleged herein to be misleading
prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or
cause them to be corrected. Thus, the Individual Defendants had the opportunity to commit the
fraudulent acts alleged herein.
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23. As senior executive officers and/or directors and as controlling persons of a publicly
traded company whose common stock was, and is, registered with the SEC pursuant to the Exchange
Act, and was, and is, traded on the NASDAQ Global Market ("NASDAQ") and governed by the
federal securities laws, the Individual Defendants had a duty to promptly disseminate accurate and
truthful information with respect to GMCR's financial condition and performance, growth,
operations, financial statements, business, products, markets, management, earnings and present and
future business prospects, and to correct any previously issued statements that had become
materially misleading or untrue, so that the market price of GMCR common stock would be based
upon truthful and accurate information. The Individual Defendants' misrepresentations and
omissions during the Class Period violated these specific requirements and obligations.
24. The Individual Defendants are liable as participants in a fraudulent scheme and
course of conduct that operated as a fraud or deceit on purchasers of GMCR common stock by
disseminating materially false and misleading statements and/or concealing material adverse facts.
The scheme: (i) deceived the investing public regarding GMCR's business, operations and
management and the intrinsic value of GMCR common stock; (ii) enabled the Company to procure
debt financing on favorable terms to fund a major acquisition; (iii) allowed GMCR to sell8,566,649
common shares in a private transaction at artificially inflated prices; (iv) allowed insiders to sell
240,000 GMCR shares at artificially inflated prices; and (v) caused Plaintiffs and members of the
Class to purchase GMCR common stock at artificially inflated prices.
CLASS ACTION ALLEGATIONS
25. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b )(3) on behalf of a class consisting of all those who purchased the common
stock ofGMCR between July 28,2010 and September 28, 2010, inclusive, and who were damaged
thereby (the "Class"). Excluded from the Class are Defendants, the officers and directors of the
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Company, at all relevant times, members of their immediate families and their legal representatives,
heirs, successors or assigns and any entity in which Defendants have or had a controlling interest.
26. The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, GMCR common stock was actively traded on the
NASDAQ. While the exact number of Class members is unknown to Plaintiffs at this time and can
only be ascertained through appropriate discovery, Plaintiffs believe that there are hundreds or
thousands of members in the proposed Class. Record owners and other members of the Class may
be identified from records maintained by GMCR or its transfer agent and may be notified of the
pendency of this action by mail, using the form of notice similar to that customarily used in
securities class actions.
27. Plaintiffs' claims are typical of the claims ofthe members ofthe Class as all members
of the Class are similarly affected by Defendants' wrongful conduct in violation of federal law
complained ofherein.
28. Plaintiffs will fairly and adequately protect the interests of the members of the Class
and have retained counsel competent and experienced in class action and securities litigation.
29. Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
(a) whether the federal securities laws were violated by Defendants' acts as
alleged herein;
(b) whether statements made by Defendants to the investing public during the
Class Period misrepresented material facts about the business and operations of GMCR;
(c) whether the prices of GMCR common stock were artificially inflated during
the Class Period; and
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(d) to what extent the members of the Class have sustained damages and the
proper measure of damages.
30. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the
damages suffered by individual Class members may be relatively small, the expense and burden of
individual litigation make it impossible for members of the Class to individually redress the wrongs
done to them. There will be no difficulty in the management of this action as a class action.
SUBSTANTIVE ALLEGATIONS
The Company and Its Business
31. Defendant GMCR describes itself as a leader in the specialty coffee and coffee maker
businesses and markets over 200 whole bean and ground coffee selections, cocoa, teas and coffees in
K-Cup portion packs, Keurig single-cup brewers and other accessories. The Company manages its
operations through two business segments, the SCBU and the Keurig business unit.
32. SCBU sources, produces and sells coffee, cocoa, teas and other beverages inK-Cup
portion packs and coffee in more traditional packaging. These varieties are sold primarily to
wholesale channels, including supermarkets and convenience stores, restaurants and hospitality, and
to office coffee distributors and directly to consumers.
33. Keurig sells single-cup brewers, accessories and coffee, tea, cocoa and other
beverages inK-Cup portion packs produced by SCBU and other licensed roasters to consumers for
home use (referred to by the Company and herein as the "AH" market) principally via retailers, who
principally process their sales orders through fulfillment entities. Keurig also sells single-cup
brewers and K-Cup portion packs for non-home use (referred to by the Company and herein as the
"AFH" market).
34. In recent years, the significant driver of the Company's growth has been the sale of
K-Cups and Keurig brewing systems. While the Company claims to sell its products to customers in
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North America, a substantial ofits business is done in the U.S., with approximately 97% of its fiscal
2010 revenues being made to U.S. customers.
35. GMCR utilizes a "razor/razor blade" type business model, whereby it sells brewers at
or below cost to help increase the brewers installed base so that it can generate a recurring stream of
high-margin future revenues on K-Cup sales. During the past few years, GMCR has been able to
increase its K-Cup market share, in part, by acquiring virtually all of the coffee companies
("roasters") that competed in the K-Cup market space.
36. While GMCR has been able to establish a market leading position, the patent to the
Company's single-cup brewing system technology is set to expire in 2012. With larger, high
resourced competitors looming and ready to enter the market when the Company's patent expires
(including, for example, Starbucks, which announced in March 2012 that it would introduce its own
single-serve espresso machine before the holiday season), GMCR' s survival beyond the Class Period
was largely dependent upon its perceived ability to rapidly grow and secure brand loyalty with
consumers.
GMCR's Deceptive Financial Reporting
37. Prior to and during the Class Period, Defendants represented that GMCR's financial
statements were presented in conformity with GAAP and that the Company maintained a sound
system of internal controls over its financial reporting.
38. Defendants have now admitted that such representations were materially false and
misleading and that investors "should no longer rely upon" GMCR's previously issued financial
statements for fiscal years 2006, 2007, 2008, 2009 and the first three quarters of 2010 given that
such financial statements were materially misstated. Defendants have also admitted that material
weaknesses exist in the Company's system of internal controls over its financial reporting.
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The SEC's Financial Reporting Inquiry, GMCR's Admitted
Violations of GAAP and Financial Restatements
39. On September 28, 2010, GMCR filed with the SEC a Form 8-K (the "September 28,
2010 Form 8-K") disclosing that, 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.
40. In addition to this disclosure, the September 28, 2010 Form 8-K noted that the
Company's management discovered an "immaterial" error related to the accounting of inter-
company K-Cup inventory. This error resulted in the overstatement of reported inventory and
income and the understatement of expenses prior to and during the Class Period.
41. Approximately a month and a half later, GMCR's "immaterial" accounting error
coalesced into the restatement of all of the Company's published financial statements over a more
than four-year period. On November 19, 2010, GMCR issued a press release (the "November 19,
2010 press release") announcing that investors "should no longer rely upon" the Company's
previously issued financial statements for fiscal years 2007, 2008, 2009 and the first three quarters of
2010.
42. In reaching this determination, Defendants have admitted that such financial
statements were materially misstated at the time they were issued because GAAP provides that only
previously issued financial statements that are materially misstated need to be retroactively restated.
See, e.g., Accounting Standards Codification 250.
43. Moreover, as SEC's Staff Accounting Bulletin No. 99 points out, "qualitative factors
may cause misstatements of quantitatively small amounts to be material" and "the staffbelieves that
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a registrant and the auditors of its financial statements should not assume that even small
quantitative misstatements in financial statements associated with the following are immateria/:"
1
misstatements that mask a change in earnings or trends;
misstatements that mask a failure to meet analysts' expectations; or
misstatements concerning a portion of the registrant's business that has been
identified as playing a significant role in the registrant's operations.
44. On December 9, 2010, the Company filed the 2010 Form 1 0-K with the SEC, which
included GMCR's restated prior period financial statements and identified material weaknesses in
the Company's system of internal controls. The Company's restated financial statements reveal that
GMCR's undistributed earnings from its inception through June 26, 2010 had been overstated by
more than 3%. The Company's restated financial statements also reveal that GMCR's net income
for the 39 weeks ended June 26, 2010 had been overstated by approximately 6.2% and its accrued
expenses at June 26, 2010 were understated by more than 5%.
45. Prior to and during the Class Period, Defendants represented that the Company's
financial statements were presented in conformity with GAAP. These representations were
materially false and misleading when made because Defendants, in violation ofGAAP, knowingly
or recklessly employed improper accounting practices that materially overstated GMCR's reported
net income during the Class Period.
46. Indeed, compliance with GAAP is a basic fundamental obligation of publicly traded
companies. As set forth in SEC Rule 4-0l(a) of SEC Regulation S-X, "[f]inancial statements filed
with the [SEC] which are not prepared in accordance with [GAAP] will be presumed to be
misleading or inaccurate." 17 C.F.R. 210.4-01(a)(1).
Unless indicated otherwise herein, all emphasis is added.
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47. Defendants have now admitted that: (i) investors "should no longer rely upon" the
Company's financial statements for fiscal years 2006,2007,2008,2009 and the first three quarters
of201 0 given that they were materially misstated; and (ii) material weakness exist in the Company's
system of internal controls over its financial reporting.
2
48. In the 2010 Form 10-K, Defendants classified the Company's violations ofGAAP
and misstatements in GMCR's prior financial statements as being associated with errors in the
accounting and reporting of:
(a) royalty income on inter-company transactions that were not eliminated from
the Company's consolidated financial statements, which resulted in the overstatement of reported
inventory and earnings and the understatement of reported cost of sales;
(b) royalty income that was improperly recognized when Keurig purchased K-
Cup inventory from third-party roasters, which resulted in the overstatement of reported inventory,
sales and earnings;
(c) customer incentive and marketing expenses that were not recorded, which
resulted in the understatement of reported liabilities and expense and the overstatement of income;
and
(d) other adjustments that GMCR previously deemed to be immaterial and went
unrecorded.
49. As a result ofthe foregoing violations ofGAAP, during the Class Period GMCR's
reported net income for the 39 weeks ended June 26, 2010 was overstated by approximately 6.2%.
2
Although the November 19, 2010 press release announced that investors should no longer
rely upon the Company's financial statements for fiscal years 2007, 2008, 2009 and the first three
quarters of201 0, the 2010 Form 1 0-K added the Company's fiscal2006 financial statements to the
list of GMCR's previously issued misstated financials.
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.-------------------------------------------
50. Indeed, GMCR's manipulation of product royalty income demonstrates Defendants'
financial sleight of hand. Prior to the beginning of the Class Period, GMCR and several coffee
roasters and tea packers entered into licensing arrangements, whereby GMCR granted such licensees
the right to manufacture, distribute and sell K-Cups on an exclusive or non-exclusive basis in
exchange for royalty payments.
3
51. In its Form 1 0-K for the year ended September 26, 2009 (the "2009 Form 1 O-K"),
4
the following was disclosed as the Company policy of accounting for royalty income:
Royalty revenue is recognized upon shipment of K-Cups by roasters as set forth
under the terms and conditions of various licensing agreements.
5
52. Accordingly, during the Class Period, GMCR earned royalty income whenever
licensed third-party roasters shipped K -Cups to their customers. Although not disclosed in the 2009
Form 1 0-K, prior to and during the Class Period, GMCR purchased K-Cup inventory from its
licensed vendors for resale by Keurig. Since GMCR's accounting policy, albeit improperly, allowed
the Company to recognize royalty income at the time third-party roasters shipped K-Cups to GMCR,
Defendants were able to, and did, manage the Company's reported earnings by causing GMCR to
recognize royalty income on an as needed basis by simply ordering K-Cups from licensed third-party
roasters and warehousing such inventory at its or MBlock's facilities.
3
Certain of these licensed coffee roasters have now been acquired by GMCR.
4
GMCR amended its 2009 Form 10-K's "Management's Report on Internal Control Over
Financial Reporting." Although the 2009 Form 10-K had, as did the 2006-2008 Forms 10-K,
expressly stated that Defendants Blanford and Rathke participated in the assessment of the
effectiveness of GMCR's internal controls over financial reporting, the Form 10-K/A, filed on
March 11, 2010, deleted references to their participation in the process.
5
While the 2007 Form 1 0-K stated that revenue was only recognized upon product delivery,
the 2008 Form 10-K adds that, in addition, revenue is recognized "in some cases upon product
shipment."
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53. As illustrated in the following chart, on GMCR's July 28, 2010 conference call,
Defendant Blanford indicated GMCR was rapidly ramping up its inventories "as we get into the fall
season with the expectation that we are going to continue to exceed our own expectations on brewer
sales:"
85.0%
80.0%
75.0%
70.0%
65.0%
60.0%
55.0%
50.0%
Mar2010
Green Mountain Coffee Roasters, Inc,
Year over Year Change in Inventory
During the quarters end
Jun2010
54. However, the Company's projected year-over-year sales guidance for the September
2010 quarter continued the trend of decelerating sales growth that the Company experienced in the
June 2010 quarter:
69.0%
68.0%
67.0%
66.0%
65.0%
64.0%
63.0%
62.0%
610%
Mar2010
Green Mountain Coffee Roasters, Inc,
YearoverYear Change in Sales
During the quarters ended
Jun2010 Sep2010
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55. Accordingly, Defendants' reasoning for the Company's then-current increase in
inventory was contradicted by their own guidance for GMCR's sales, while GMCR's policy of
accounting for royalty income coupled with the Company's practice of purchasing ofK-Cups from
licensed roasters afforded Defendants a means of managing the Company's earnings during the
Class Period.
56. Prior to and during the Class Period, GMCR's royalty income had been a significant
element of the Company's profitability. As disclosed in the 2009 Form 10-K, "[a] significant and
increasing percentage of our total revenue has been attributable to royalties and other revenue from
sales of K-Cups for use with our Keurig single-cup brewing systems." In fact, $39.5 million, or
approximately 44%, ofGMCR's 2009 pre-tax income of$90.4 million, as reported in the 2009 Form
1 0-K, was derived from third-party royalty income.
57. Then, GMCR, as part of the Company's financial restatement, revealed in the 2010
Form 1 0-K that it purchased K-Cups from licensed third-party roasters for resale by Keurig and that
it had changed its policy of accounting for royalty income on such purchases:
Roasters licensed by Keurig to manufacture and sell K-Cup portion packs, both to
Keurigfor resale and to their other coffee customers, are obligated to pay a royalty
to Keurig upon shipment to their customer. Keurig records royalty revenue upon
shipment ofK-Cup portion packs by licensed roasters to third-party customers as set
forth under the terms and conditions of various licensing agreements. For shipments
of K-Cup portion packs to Keurig for resale, this royalty payment is recorded as a
reduction to the carrying value of the related K-Cup portion packs in inventory.
* * *
Keurig earns royalty income from KCup portion packs when shipped by its licensed
roasters, except for shipments of K-Cup portion packs by third party roasters to
Keurig, for which the royalty is recognized as a reduction to the carrying cost of
the inventory and as a reduction to cost of sales when sold through to third parties
byKeurig.
58. Although the quantitative materiality associated with Keurig's manipulation of
royalty income was reported in GMCR's restated financial statements, the magnitude of such
manipulation in GMCR's Class Period financial statements is muted by the fact that, prior to the
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beginning of the Class Period, GMCR acquired certain third-party roasters from whom Keurig
purchased K-Cups. Accordingly, the Company's 2010 Form 10-K revealed that GMCR's
acquisitions will result in the diminution of royalty income on a going forward basis:
Due to the Company's completed and pending acquisitions of third party licensed
roasters, these purchases and the associated royalties [i.e., K-Cups purchased from
licensed resellers by Keurig for resale] had less impact, since the post-acquisition
royalties from these wholly-owned roasters are eliminated in the Company's
consolidated financial statements.
* * *
As a result of the acquisitions discussed above [of previously third-party roasters],
the Company believes that royalty revenue will decrease materially in the future.
The SEC Inquiry
59. As noted above, on September 28, 2010, GMCR filed the September 28,2010 Form
8-K with the SEC, which stated, in pertinent part:
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 staffs inquiry.
60. Analysts that follow GMCR have stated that the fulfillment vendor referred to in the
September 28, 2010 Form 8-K is MBlock. In addition, in the 2010 Form 10-K, GMCR discloses
that "Keurig relies on a single order fulfillment entity, M.Block & Sons ("MBlock"), to process the
majority of sales orders for its AH single-cup business with retailers in the United States." The 2010
Form 10-K also reveals that U.S. customers were responsible for approximately 97% of the
Company's fiscal2010 revenues.
61. Based on information and belief, Lead Plaintiffs allege herein that the single
fulfillment company referred to in the September 28, 2010 Form 8-K is MBlock.
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65. Upon issuing its restated financial statements from 2006 through and including 2010,
GMCR represented that "none of the financial statement errors are related to the Company's
relationship with M.Block & Sons, Inc." Consequently, should the SEC inquiry identify additional
revenue recognition violations, further restatements of the Company's financial statements may be
required.
62. According to its website, MBlock provides end-to-end supply chain solutions in
warehousing, distribution, logistics, sales and marketing, IT, customer service and finance for
manufacturers and retailers operating in traditional commerce channels. MBlock's website also
states that it became Keurig's U.S. distributor in 2003.
63. Information provided by former GMCR and MBlock employees described the
companies' relationship as one where GMCR dictated their business dealings and being something
other than on an arms-length basis.
64. For example, Confidential Witness "CW" No. 1, or CW1, was a former GMCR
distribution planning manager, employed with the Company from 2009 through March 2010.
CW1 's position included significant accounting duties, such as: profit and loss responsibilities, cost
allocation and accrual accounting, preparing accounting timelines and managerial-type decision
making concerning the Company's return on investments at all relevant times. CW1 was well-
versed in the accounting rules for revenue recognition and had 15 years of experience working with
accountants in various roles. CW1 has detailed knowledge of different accounting areas, including
purchasing, distribution, logistics and inventory control. CW1 reported to Don Holly, a Director of
Operations ("Holly"), and also performed work during the Class Period for GMCR Vice President of
Operations Jonathan Wettstein ("Wettstein"). Wettstein reported to SCBU President McCreary.
CW 1 noted that:
- 18-
(a) He/she, who had initially been hired to work on IT projects, observed that
GMCR had no warehouse management system, no enterprise resource planning system, no
transportation system, no supply chain management system, no inventory control systems and that
none of GMCR's warehouses were linked.
6
It was explained to CW1 by Holly that, instead of
implementing these systems, GMCR was going to focus on growing the Company through
acquisitions (as further alleged herein, these inadequate systems only served to exacerbate problems
when acquired companies also used different software from the two divisions of GMCR);
(b) Prior to mid-2009, GMCR had made a significant investment in MBlock,
specifically to support its infrastructure (MBlock opened its third distribution center in 2009 and its
fourth in 2010);
(c) There were weekly production meetings held among 20 employees, some
participating by webcam, and smaller, twice weekly meetings were also held. Present at the larger
meetings were: a person from Tina Bissonette's ("Bissonette") finance team, product schedulers,
schedulers from each site, site managers, procurement personnel, operations representatives, the
transportation manager, line managers from the roasters, coffee expert Lindsey Bolger, Vermont
operations manager David Tilgner, and GMCR senior managers Holly and Wettstein. The group
discussed forecasted demand, inventory levels, production goals and what had been sold to Keurig
and MBlock. Holly had direct control of production and received his direction from Wettstein.
CW1 indicated that Wettstein and Holly did not set production levels based upon prior ordering
history or inventory levels. Instead, to give the illusion of continued growth to shareholders - and
to receive bonuses, which were based upon production- they knowingly caused the Company to
6
CW1 recalled that in 2003, the FDA gave GMCR unti12009 to comply with regulations that
tracked recalls by lot numbers. However, during CW1 's tenure, lot numbers were not controlled.
When CW1 brought this to the attention of Tom Novak, Vice President of Product and Process
Development, CW1 was told to mind his/her own business.
- 19-
overproduce products. Thereafter, CWI believed that GMCR, in particular the Keurig division
(which, through its Director of Logistics and Transportation, Mike Neyhus, had the Company's
initial relationship with MBlock), directed MBlock to hold more product than it could immediately
ship and that, due to overstocking at MBlock, product had to be destroyed when it remained in the
warehouse past its expiration date. (CW2, defined below, confirmed that product stored in
warehouses would remain so long as to go past its expiration date. CW3, a market analyst at Keurig
for a brief period in 201 0, prior to the Class Period, also mentioned product "returns" from MBlock
whereby out-of-date product stored in MBlock's warehouses had to be destroyed.);
(d) Because GMCR, in essence, controlled the warehousing process and MBlock
did not immediately pay for the products it bought, CW1 believed that revenue was improperly
recorded on "sales" to MBlock; and
(e) CWI further indicated that MBlock used rudimentary spreadsheets to track
orders and delivery and that its poor tracking systems allowed GMCR to bury inventory, controlling
the process and shuffling items into and out ofMBlock's warehouses.
65. A former regional sales manager for GMCR from late 2008 until late 2010 ("CW2")
stated that anyone at the Company would acknowledge that MBlock was, in essence, a captive
company and would do as GMCR instructed. CW2 indicated that his/her current employer is careful
in its dealings with MBlock because it is aware of the close relationship between GMCR and
MBlock.
66. A former employee ofMBlock from 2001 through early 2009, who worked in direct
contact with MBlock's owners in MBlock's Chicago headquarters ("CW4"), noted that, in addition
to taking orders, MBlock also had as much as 500,000 square feet of warehouse space, storing both
brewers and coffee. CW 4 recalled that a physical inventory was taken once a year and was an "all
hands" project. Prior to mid-2009, GMCR represented 20% ofMBlock's business. However, after a
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new nationwide contract was entered into, around July 2009, GMCR's business quickly grew to
approximately 75% ofMBlock's total business.
67. Moreover, although the September 28, 2010 Form 8-K indicates that, "[o]n
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," CW1 stated that by no later than the first week of May 2010, he/she was contacted by
Company officers and managers and employees, including Multi-Site Scheduling Manager Dan
Redding ("Redding"), Global Transportation Manager Jennifer Burkhardt ("Burkhardt"), Production
Manager Scott Russ, and Demand Planning & Budget Manager David Hull, all of whom either
asked if he/she had been the whistleblower in the SEC investigation of GMCR and/or called to
discuss the investigation. At that time, CW1 learned that the investigation involved MBlock and
inventory. The callers expressed concern about the investigation's potential effect on GMCR's stock
price.
68. CW1 further stated that the SEC investigation was well known at the Company by
January 2010, when CW1 was still employed at GMCR (CW1 recalled the time period because it
was just around the time bonuses were received and several people expressed concern about future
bonuses because of an SEC investigation).
69. CW5, who worked at GMCR from 2008 until 2010 to help transition Keurig's
accounting system from Great Plains to PeopleSoft, recalled SEC personnel at Keurig speaking with
the division's staff accountants.
70. Thus, numerous Company employees were aware of the SEC investigation for many
months prior to the issuance of the September 28,2010 Form 8-K (in which the Company disclosed
that the SEC had informed the Company that it was conducting an inquiry and made a request for a
voluntary production of documents and information on September 20, 2010).
- 21 -
GMCR Improperly Recognizes Revenue on Product Shipments to MBlock
71. CW1 noted that GMCR improperly recognized revenue on 150 truck loads of coffee
K-Cups that were shipped to MBlock during the quarter ended December 26, 2009. This former
GMCR manager stated that he/she and other Company employees, including Burkhardt, were unable
to locate the requisite paperwork, including purchase orders, material requisition orders, or product
shipment authorizations, traditionally used by GMCR to validate the sale. CW1 calculated that, at
the time of the shipment, based on the size of the trucks, the number of pallets that would fit in the
truck and the type of the K-Cup, the conservative value of this shipment was between $7.5 million
and $15 million.
7
72. Specifically, CW1 stated that because there was no order for those products, no
payment was ever made on the 150-truckload shipment, and oddly enough, the shipment remained
on GMCR's books as an account receivable. At the time this undocumented shipment took place,
CW1, who believed that GMCR improperly recognized revenue on this shipment because it went to
an MBlock warehouse that was in essence under GMCR's control, discussed his/her concerns about
the shipment with Global Transportation Manager Burkhardt and Multi-Site Scheduling Manager
Redding. Specifically, at quarter-end in December 2009, MBlock sent CW1 a spreadsheet indicating
that MBlock would be picking up 150 truck loads of product. Unaware of the order, CW1 was
unable to find it on the production forecast schedule and went to Burkhardt. They were unable to
find either a Purchase Order or an internal Materials Requisitions Order to transfer the inventory to
MBlock.
7
CW 14, a material handler who worked at the Williston, Vermont warehouse from early 2009
until November 2010, and was responsible for shipping and receiving orders valued at more than
$100,000, confirmed that the value of a shipment depended upon the contents of the truck and that a
truckload ofK-Cups could be worth more than $100,000, while shipments ofbags of coffee could be
worth even more.
-22-
73. CWI stated that, at a minimum, the following GMCR executives were aware of this
shipment: Wettstein (whose responsibilities included being informed about accounting for shipments
and who regularly provided updates to CEO Blanford), SBCU President McCreary and Vice
President of Finance Tina Bissonette.
74. In particular, Wettstein provided business updates to Defendant Blanford and others
by conducting regularly scheduled weekly, or sometimes bi-weekly, meetings, some of which, upon
information and belief, were conducted during the Class Period. CWI stated it was difficult to hold
these meetings with less frequency- i.e., on a quarterly basis- because of the constant adjustments
that were made to the Company's inventory. CWI, who attended a portion of some of these
meetings and occasionally presented information at these meetings, stated that other Company
officers and employees also attended these meetings, including: Defendants Blanford and Rathke,
McCreary (CFO and President of SCBU), Bissonette (VP of Finance), Dave Tildner {"Tildner")
(Operations Manager at Vermont facility) and Redding (Multi-Site Scheduling Manager). CWI
prepared information for Wettstein prior to these meetings, including running queries for reports and
producing pivot tables. CWI stated that detailed agendas for those weekly meetings were prepared
by people at GMCR who reported directly to Wettstein and, in the meetings, decisions were made as
to:
the type of products to be produced;
the locations of these productions;
the locations where the products would be stored;
the way that inventory would be transported from facility to facility; and
the disposal of excess inventory.
CWI stated that in November 2009 and December 2009, the Company's revenue recognition
practices and policies were discussed at the weekly and/or bi-weekly meetings.
- 23-
7 5. CW 1 had confronted Wettstein about the Company's inventory processing practices
on numerous prior occasions. Indeed, in October 2009, Wettstein and Holly instructed CW1 to
employ an inventory process for calculating product inventory that was inappropriate for consumer
products, such asK-Cups. CW1 stated that the standard way of counting inventory was the "ABC"
rule and that everyone in the industry was aware of this rule, including Holly and Wettstein. Using
the rule, all products would be categorized as fast, medium, or slow moving items. Wettstein and
Holly insisted that the inventory methodology to be used was "standard deviation plus 3," meaning
that products were bunched and replaced when the inventory fell below the standard deviation plus 3
days of working inventory. CWl stated to Wettstein that using this method was "skewed" and
would result in the production of expired and expensive products to be produced solely to "carry-
over" the inventory from one period to the next. Eventually, the expired product would be dumped
once the shelf life expired.
76. Wettstein responded to CWl 's complaint by stating that using that methodology
"best met our needs." CWl understood from Wettstein's response that Holly and Wettstein were
knowingly manipulating inventory. CWl took subsequent actions in an attempt to change senior
management's decisions, including having a production employee review the inventory procedure
used by GMCR and produce documentation explaining why the process was faulty.
77. CW1 forwarded the findings to both Holly and Wettstein and, as part of CW1 's
normal meetings with Holly and Wettstein, there were discussions concerning the documentation,
but again they told CW1 that GMCR was not going to employ the correct inventory process.
78. CW6, a former Vice President of Operations at one of the Company's roasters and a
Certified Public Accountant, worked as a consultant in California for Diedrich Coffee, a company
that was acquired by GMCR, from October 2008 through April 2010. After the acquisition, CW6
worked for GMCR, from May 2010 until August 2010, and reported directly to VP Wettstein. A
-24-
significant amount of the production of the Diedrich/GMCR Castroville plant was shipped to
MBlock and, as far as CW6 knew, was booked as a sale. CW6 stated that the accounting department
in Vermont told CW 6 to book shipments to MBlock as a sale. In fact, CW 6 did not know ifMBlock
ever owned the products shipped to it. CW6 further stated that he/she understood that the SEC was
questioning the existence of an arms-length relationship between GMCR and MBlock and whether
the transactions between the two companies could be recorded as sales.
79. CW7, a lower-level employee in the Company's shipping department in Knoxville,
Tennessee, who worked at the Company from August 2009 through August 2011, also witnessed
GMCR improperly transferring product from one plant to the next for no apparent reason. CW7
stated that, throughout his/her employment, material was moved improperly to MBlock throughout
the Company via material shipping requests ("MSRs") and not through the ordinary order
management system. CW7 stated that the Company was shifting inventory with MBlock and that a
few of the Company's own employees were managing the shifted inventory at MBlock. CW7
recalled numerous instances (approximate} y 1 0-12 times), and upon information and belief, instances
during the Class Period, when he/she shipped skids of product to Williston, Vermont that were
returned untouched within one week to one month from the date of shipment.
80. CW1 stated that all employee bonuses were awarded annually based upon the amount
of product produced, not based on the amount of product sold. CW1 stated that for lower level
employees, the bonuses ranged from 25% to 50% of their annual compensation. CWl stated that at
the weekly and bi-weekly meetings he/she attended, senior management stressed the need to
continue to produce product regardless of whether or not the product could be sold. This created
excess inventory problems and, at times, necessitated substantial product to be destroyed. CW1
stated that one of the ways that they "got rid of inventory" was to load dated or expired coffee onto
trucks and, prior to the arrival of the Company's auditors, park the trucks a few blocks away from
-25-
--------------------,
the warehouse. After the auditors left the warehouses, the trucks would return to the warehouse and
the product was then returned to inventory. Upon the return ofthe product to inventory, CWI stated
it was common for him/her to hear inventory control employees comment that "oh, we must be
having an audit." CW1 stated that he/she and others witnessed this occur on many occasions and
that Wettstein was fully aware ofthese fraudulent practices, which were designed to manipulate the
Company's accounting records. CW1 stated that after the coffee product expired, the coffee was
given to pig farmers for inclusion in silage, or to local farmers to acidize their fields. CW7
corroborated CW1 's account as he/she witnessed millions of K-Cups worth of products being
dumped in land-fills near the Knoxville, Tennessee production plants; the dumped product was then
covered with dirt by GMCR employees in order to conceal the destroyed product.
81. As a result of the foregoing, GMCR violated GAAP's criteria of revenue recognition,
which provides that the conditions for revenue recognition ordinarily are met when the seller's price
to the buyer is substantially fixed or determinable at the date of sale; the buyer has paid the seller, or
the buyer is obligated to pay the seller and the obligation is not contingent on resale ofthe product;
the buyer's obligation to the seller is not changed in the event of theft or physical destruction of the
product; the buyer has economic substance apart from the seller; the seller does not have significant
future performance obligations to the buyer; and the amount of future returns, if any, can be
reasonably estimated. See, e.g., Accounting Standards Codification 605.
82. GMCR also violated its revenue recognition policy, as disclosed in its 2010 Form 10-
K, when it prematurely recorded revenue on shipments of product to MBlock:
The Company recognizes revenue when the fulfillment entities ship the product
based on the contractual shipping terms, which generally are upon product shipment,
and when all other revenue recognition criteria are met.
-26-
83. CW1 also noted that GMCR had earlier changed the wording of its revenue
recognition policy because the auditors had found discrepancies and senior management was thus
aware that GMCR was accounting for revenue incorrectly.
David Einhorn and Others Corroborate Defendants' Scheme
to "Mislead Auditors and to Inflate Financial Results"
84. David Einhorn ("Einhorn") is the founder and president of Greenlight Capital, a
hedge fund with over $8 billion in assets that invests in publicly-traded stocks. At the seventh-
annual Value Investing Conference, which took place on October 17, 2011, Einhorn presented a 110-
slide presentation, entitled "GAAP-uccino" (the "Einhorn Presentation").
85. The Einhorn Presentation's main focus was GM CR' s improper business practices and
its improper relationship with MBlock. Einhorn's research into GMCR was exhaustive and included
field research, "channel checks" and numerous interviews with current and former employees at
GMCR and its partners. Many of the facts included in the Einhorn Presentation confirm the
allegations set forth herein.
86. Indeed, the Einhorn Presentation dedicated almost an entire slide to the allegations set
forth herein, and cites verbatim the allegations concerning GMCR' s improper revenue recognition of
product that was shipped to MBlock during the Class Period.
87. The Einhorn Presentation further describes GMCR's "unusual relationship" with
MBlock and the Company's effective control over MBlock, since "GMCR [wa]s by far MBlock's
biggest relationship." Einhorn describes how GMCR exploited the relationship to engage in "a
variety of shenanigans that appear designed to mislead auditors and to inflate financial results." As
to the Company's control ofMBlock, the witnesses interviewed by Einhorn stated that:
tt{ijt was clear that Keurig and Green Mountain control MB/ock";
"it felt like they worked for Keurig .. .I really never even had a boss while I
was at MBlock";
-27-
"[n]obody in that [MBlock] warehouse can tell you what [product] is MBlock's,
what is Keurig['s], what is Green Mountain's, nobody can tell you that";
and
"[GMCR was] not treated like clients as the other customers were ... so weird."
88. These statements demonstrate that GMCR's control over MBlock permitted
GMCR to engage in improper inventory management in order to book sales to MBlock as
shipments in connection with a fraudulent scheme to improperly boost profits.
89. Einhorn's independent research further corroborates Plaintiffs' allegations.
Specifically, the Einhorn Presentation cites numerous accounts from witnesses concerning the
scheme, including the following:
"We would do more transferring of inventory than we physically did
shipping .... Keurig would ship stuff to themselves, I mean truckloads of stuff
they'd ship [from MBlock] to themselves";
"the deliberate overproduction of K-Cups" and a "refusal to ship from multiple
locations gave cover for a shell game that Green Mountain was playing across all its
facilities";
"odd material movements" between GMCR and MBlock, "irregularities" that
usually occurred around the time ofMBlock's inventory audits;
"We would remove product and preload trailer trucks to ship to retailers because
we didn't have room on the floor. Then we'd load more product on trailer trucks
to nowhere";
MBlock had a "skeleton inventory of approximately 50%"; and
"[a trucker] delivering [GMCR] merchandise to Kenco, picking it up later
on, sealing the truck, and delivering it 10 bay doors down at the same warehouse."
90. One former employee described a "phantom" shipment of 500,000 brewers that was
accounted for as an order purportedly for QVC immediately prior to an audit at MBlock;
however, the brewers were never shipped and, following the audit, the inventory was simply
restocked at MBlock.
-28-
91. Finally, the Einhorn Presentation detailed how the Company over-exaggerated the
demand for its products and expounded upon the problems that the Company experienced with
respect to expired product, including the following accounts by witnesses:
"manager of demand planning ... would talk about how far over the demand
forecast actual production was";
"significant problem with expired coffee";
"MBlock received truckloads of expired coffee directly from Green Mountain";
"plant managers ... say[] they have space taken up by the inordinate amount of
expired coffee"; and
"at least one third of [MBlock's] warehouse is more than likely expired coffee."
92. On October 19,2011, the Einhorn Presentation was published online by The Wall
Street Journal, which published an article entitled "Here's the Einhorn Presentation that Killed
Green Mountain Shares" and which stated, in relevant part:
On Monday, investor David Einhorn laid out in 110 PowerPoint slides outlining
his concerns about the health of Green Mountain Coffee. The presentation from
Einhorn, known for his eventually true suspicions about Allied World and
Lehman Brothers, drove down Green Mountain shares by 10% on Monday.
93. Other financial experts and investigators, such as Sam Antar (mentioned supra) have
also reported on, and discussed, Defendants' schemes to defraud investors. For example, on January
4, 2011, on his blog "White Collar Fraud," Sam Antar, a former CFO convicted of fraud, explained
how the K-Cup margin error, which the Company disclosed as an accounting error, was a "material"
error under SEC Staff Accounting Bulletin No. 99:
Based on the analysis above, Green Mountain's assertion that the K-Cup margin
error was "immaterial" in its September 28, 2010 8-K report appears to be wishful
thinking. According to SEC Staff Accounting Bulletin No. 99, "Among the
considerations that may well render material a quantitatively small misstatement of a
financial statement item are... whether the misstatement hides a failure to meet
analysts' consensus expectations for the enterprise .... " The K-Cup margin error
caused Green Mountain to overstate income and meet analysts' consensus
expectations for earnings m the quarter ended March 27, 2010.
-29-
Green Mountain claims that it properly evaluated "the quantitative and qualitative
aspects of the error in accordance ... Staff Accounting Bulletins published by the
SEC." It would be interesting to know how its management came to that conclusion.
While outsiders could not have performed these calculations until Green Mountains
1 0-K was released on December 9, 2010, presumably, Green Mountain would have
had the information on September 28, 2010.
94. On February 13, 2011, Mr. Antar posted an article on his blog entitled "Green
Mountain Coffee Roasters: Murky Financial Disclosures," in which he noted potential "stealth
restatements" during the Class Period that revised, in a subsequent SEC Filing, the reporting of total
assets and income before taxes for the 39-week period ended June 27, 2009 and the Keurig
segment's profits:
Just about every time, I examine financial reports issued by Green Mountain
Coffee Roasters (NASDAQ: GMCR), I find new troubling accounting practices
and financial disclosures. For example, in my last blog post I questioned whether
the company correctly considered a certain accounting error as an "immaterial
accounting error" when it was originally reported to investors. In this blog post, I will
examine Green Mountain's segment reporting and non-GAAP financial presentations
and raise questions whether they properly comply applicable accounting and SEC
disclosure rules. In addition, I will discuss other new reporting errors disclosed by
Green Mountain in its latest 1 0-Q report.
* * *
According to Statement of Financial Reporting Standards No. 131 (SF AS No. 131 ):
An enterprise shall provide an explanation of the measurements of segment profit or
loss and segment assets for each reportable segment. At a minimum, an enterprise
shall disclose the following ... [t]he nature of any changes from prior periods in the
measurement methods used to determine reported segment profit or loss and the
effect, if any, ofthose changes on the measure of segment profit or loss.
However, Green Mountain made no reference to any change in its "measurement
methods" used to determine profit and losses for its segments from 2009 to 2010.
The company did not disclose that it revised 2009 earnings for its Keurig segment.
As detailed above, Green Mountain revised its income before taxes for the thirty-nine
weeks ended June 27, 2009 for its Keurig segment from $26.116 million in its Q3
2009 1 0-Q report to $29.725 million for the same period in its Q3 201 0 1 0-Q report.
According to SFAS No. 131, Green Mountain Coffee should have disclosed that it
changed its computations for reporting profits for its Keurig segment. The company
effectively restated its segment numbers without telling anyone.
- 30-
------------------------------- ----------
95. That same day, Jason Merriam posted an article on Seeking Alpha entitled "Green
Mountain Coffee: Only Thing Brewing is Trouble," in which he described the Company's
accounting practices as "downright ludicrous":
The accounting practices at Green Mountain Coffee Roasters (GMCR) are not
baffling ... they are downright ludicrous. We read balance sheets for a living and
after fifteen years, you learn a thing or two about what some managers will do to
make their numbers. Back in the days of Sunbeam (circa AI Dunlop), channel
stuffing was the balance sheet elixir du jour and more acute than is practiced now.
Sunbeam was notorious for leaving semi-truck trailers parked behind now defunct
Montgomery Wards stuffed with blenders and toasters. The problem however, was
that shelves in the store were stuffed too. Dunlop and his gang shoved the inventory
down the "Monkey's" throat, booked it as revenue and smiled about their turnaround
efforts- while getting rich from their stock options. The post-Enron era ushered in
more creative accounting techniques, most of it perfectly legal under GAAP rules. As
this evolved, managers got better at stylistic comparisons of pro forma and non-
GAAP presentations. GMCR it would appear, is following party line and
aggressively.
96. On May 5, 2011, CNBC produced a video report with the caption "Serious questions
are being raised about Green Mountain Coffee's earnings. CNBC's Herb Greenberg has the latest
details." In the report, CNBC questioned a $22 million reserve reversal in the first quarter of2011
that appeared to allow GMCR to meet analyst estimates. GMCR responded to CNBC's report and
explained the discrepancy as a change in reporting methods, but only disclosed this information in a
private email sent to a handful of people rather than to all investors. After being accused of
selectively disseminating material information, GMCR posted the explanation on its website- but
the figures still did not mesh.
97. One blog seriously questioned the Company's self-proclaimed "social responsibility''
and questioned the environmental effects of disposable single-use plastic and foil K-Cups. On
February 5, 2011, a blog called Socially Responsible Investing posted an article entitled "Green
Mountain Coffee: The Dr. Jekyll & Mr. Hyde of SRI," which noted that, in late 2010, the firm Audit
Integrity gave GMCR a socially responsible investment "score of6 ("very aggressive"), indicat[ing]
it had higher accounting and governance risk than 94% of companies."
- 31 -
Materially False and Misleading Statements
Issued During the Class Period
98. The Class Period begins on July 28, 2010. On that date, GMCR issued a press release
announcing its financial results for the fiscal201 0 third quarter, the 13 and 39 week periods ended
June 26, 2010. The press release announced "Continued Strong Sales and Earnings Growth for
Fiscal 2010 Third Quarter," with net sales for the quarter increasing 64% to $311.5 million as
compared to $190.5 million reported in the third quarter of fiscal2009. The press release also stated:
According to Generally Accepted Accounting Principles ("GAAP"), net income for
the third quarter offiscal2010 totaled $18.6 million, or $0.13 per fully diluted share.
* * *
Key Business Drivers & Metrics
The two primary drivers of the $121.0 million, or 64%, increase in the
Company's net sales were increases in total K-Cup portion pack net sales and Keurig
brewer and accessory sales.
o Approximately 86% of consolidated net sales in the third quarter was
from the Keurig brewing system and its recurring K-Cup portion pack
revenue.
o Net sales from K-Cup portion packs totaled $197 million in the
quarter, up 90%, or $93.1 million, over 2009.
o Net sales from Keurig brewers and accessories totaled $64 million in
the quarter, up 69%, or 26.2 million, from the prior year period.
For the Keurig business unit, net sales for the third quarter of fiscal 2010,
after the elimination of inter-company sales, were $157.2 million, up 74% from net
sales of$90.1 million in the third quarter offiscal2009.
For the Specialty Coffee business unit (SCBU), net sales for the third quarter
of fiscal 2010, after the elimination of intercompany sales, were $154.3 million, up
54% from net sales of $100.4 million in the third quarter of fiscal 2009.
Costs, Margins and Income
Third quarter 2010 gross profit increased to 35.2% of total net sales compared
to 33.6% for the corresponding quarter in 2009. This was as a result of higher
manufacturing gross margin derived from the increase in volume of the Company's
manufactured K-Cups as a percentage of total system volume.
- 32-
---------------------------------------------- --------------- -
During the third quarter, the Company experienced continued higher levels of
warranty expense and sales returns related to a quality issue associated with certain
brewer models produced primarily in late calendar 2009. As previously disclosed,
the Company implemented hardware and software changes which it believes has
corrected the issue. The Company reached agreement with its suppliers and will
recover approximately $6 million as reimbursement related to this issue. This
recovery was reflected in the third quarter cost of sales as a reduction to warranty
expense and substantially offsets the higher warranty expense and sales returns costs
incurred in the fiscal third quarter.
Selling, general and administrative expenses as a percentage of net sales for
the third quarter were 23.0% as compared to 21.7% in the prior year. Third quarter
2010 general and administrative expenses include $4.0 million related to the Diedrich
acquisition as well as the amortization of identifiable intangibles of$4.3 million due
to the Company's prior acquisitions as compared to $1.5 million in the prior year
third quarter.
The Company increased its GAAP operating income by 68%, to $38.2
million, in the third quarter offiscal201 0, as compared to $22.8 million in the year
ago quarter, and improved its GAAP operating margin to 12.3% from 12.0% in the
prior year period. Excluding the impact of the $4.0 million transaction-related
expenses in the third quarter of fiscal 2010, the Company's non-GAAP operating
income was up 85% to $42.2 million and represented 13.5% of sales compared to
$22.8 million, or 12.0% of sales in the prior year.
Interest expense was $1.5 million in the third quarter of fiscal 2010,
compared to $1.1 million in the prior year quarter.
Income before taxes for the third quarter of fiscal 2010 increased 70% to
$36.7 million as compared to $21.7 million in the third quarter offiscal2009.
The Company's tax rate for the fiscal third quarter was 49.5% as compared to
34.7% in the prior year quarter reflecting the tax effect of the recognition of the
estimated total $12 million non-deductible acquisition-related expenses incurred
during the Company's first, second and third quarters of fiscal 201 0 for the Diedrich
acquisition which closed during the Company's fiscal third quarter.
Defendant Blanford commented on the results, stating, in part:
In our fiscal third quarter, through the strong efforts of all our employees, we
delivered excellent results on our key financial performance metrics including
revenue, gross margin, operating margin and net income. We have now achieved 11
consecutive quarters of better than 40 percent net sales growth. For the first nine
months of fiscal 2010 we have produced net sales growth of 70% and non-GAAP
earnings per share growth of 89% over the same period for fiscal year 2009.
Continued execution of our strategic business initiatives, including most recently, our
acquisition of Diedrich, is driving GMCR's growth and enabling us to advance
adoption and awareness of our growing portfolio of compelling brands. We believe
- 33-
the inherent strength of our business model, combined with our passionate
employees, the strong support of our business partners and our fervent belief that we
can transform the way the world views business are key drivers behind our growth
and success.
The corning holiday buying season is shaping up to be another exciting opportunity
for us to help more consumers discover and enjoy outstanding beverages with the
convenience and choice of the Keurig Single-Cup brewing system. We are looking
for a strong kickoff to our fiscal year 2011 and are providing our initial fiscal year
2011 estimate for sales growth in a range ofbetween 44% to 50% and earnings per
share of $1.15 to $1.20.
Defendants also disseminated the following slide associated with GMCR's 2009 third quarter
results:
so.ao
$0.70
00.60
so.oo
$0.40
$0.30
S0.20
$0.10
so.oo
FY'07
Non-GAAP* EPS
Compound 3-year Annual EPS Growth Rate
of 68% ('07-'09) and 80% ('08-'10 Est.)
FY'08 FY'09
+ 8 2 % - 8 7 ~
FY'10 E.lilt'l!
FY'10 Eat
$0.51
2
$0.27
1
YTDQ3'09 YTD Q3'10
1
FY'09 and YTD 03'09 Non-GAAP EPS exclude $17 million pre-tax income, or $0 09 per share, patent litigation settlement
paid in Oct '08. Patent htigat1on legal expenses of $0.02 per share are Included in FY'OB
2FY'10 and YTD 03'10 Non-GAAP EPS exclude $4 million transaction-related expenses Incurred in 03'10 as well as the tax
effect of revers1ng the tax benefit of $3.2 million associated w1th $8.1 million in Diednch acquisition-related costs recorded
during the first and second quarters of fiscal 2010, or $0 10 per share. Per company-provided estimates on July 28, 2010
Note: A reconciliation of GMCR's GAAP to non-GAAP results is provided in the tables supplemental to the Company's 03'10 results press release
,and as pa'1pf thiS prese:ntation
~
GMCR
99. Following the issuance of the press release, GMCR held a conference call with
analysts and investors to discuss the Company's earnings and operations. On the conference call,
Defendants made numerous positive statements about the Company's business, operations and
prospects, with GMCR's executive management touting the Company's sales growth, multi-channel
distribution model and the consistency in the shipments to the Company's distributors and in rate of
sale. The following exchanges took place:
Defendant Blanford:
- 34-
Our third quarter net sales of $311.5 million represent year-over-year growth of
64%. We continue to drive strong net income growth generating non-GAAP
improvement of 82%. Non-GAAP EPS increased 58% to $0.19 per share in the third
quarter from a comparable $0.12 per share in last year's third quarter. Our fiscal
third quarter results do include Diedrich's financials for a portion ofthe quarter as we
closed our acquisition ofDiedrich Coffee on May 11th, 2010. Integration into our
specialty coffee business unit is going well as Scott will talk to in more detail in his
remarks.
Success of the Keurig Single-Cup continues to drive our growth with system
related revenue accounting for 86% of our total revenue for the third quarter.
During the quarter there were shipments of 683 million K-Cup portion packs
system wide representing an increase of 72% over the same period last year. There
also were 846,000 brewers shipped system wide with Keurig branded brewing
technology including brewers shipped from our licensed partners Bravo and
Cuisinart. This compares to 444,000 breweries shipped system wide during the third
quarter offiscal2009.
* * *
Defendant Rathke:
In Q3 sales of the Keurig Single-Cup system to retailers, super market, Consumer
Direct and to the office coffee channels continue to drive GMCR's strong sales
growth. As Larry noted, Keurig Single-Cup related sales represented 86% of our
total $311.5 million in sales for the third quarter in a row. Net sales related to the
Timothy's brand which are included in the company's results since its acquisition in
November of 2009 represented approximately 8 percentage points of the 64%
increase in GMCR's total consolidated sales. Also, net sales related to the Diedrich
brand which are included in the Company's results since its acquisition on May 11
2010 represented approximately 4 percentage points ofthe 64% increase in GMCR's
total consolidated sales. Our gross margin was up 160 basis points over last year to
35.2%.
This improvement reflected higher manufacturing gross margins as a result of the
Timothy's and Diedrich's acquisitions which drove an increase in our manufactured
K-Cups as a% of total system volume. During the third quarter we experienced
continued higher levels of warranty expense and sales returns related to a quality
issue associated with certain brewer models produced primarily in late calendar
2009. As previously disclosed we implemented hardware and software changes
which we believe have corrected the issue. We reached agreement with our suppliers
and will recover approximately $6 million as reimbursement related to this issue.
This recovery was reflected in the third quarter cost of sales as a reduction to
warranty expense and offset a substantial amount of the higher warranty expenses
and sales returns incurred in the third quarter.
* * *
Michelle Stacy - President, Keurig Segment:
- 35-
For the current business unit net sales for the second quarter were $157.2 million, up
74% from the net sales of $90.1 million in the same period last year. We saw very
strong brewer shipments in the quarter with 846,000 Keurig system brewers sold.
As of last quarter we had begun to report a system wide brewer number which
includes brewers marketed and shipped by our licensed partner brand, Revel,
Cuisinart, and going forward Mr. Coffee. In our fiscal third quarter Keurig brand
brewers continued to represent the vast majority of the total system wide brewers and
we will remain the driving brand behind the current system.
* * *
Scott McCreary - Chief Operating Officer, GMCR:
The specialty coffee business units delivered another fantastic quarter as we continue
to drive Keurig Single-Cup brewer and K-Cup portion pack innovation and adoption.
Increasing our total sales to $154 million, up 54% over the same period last year.
Our multichannel distribution model continues to drive momentum across all our
channels and we're seeing particularly strong growth within in home and retail
sellers.
* * *
Mitch Pinheiro- Janney Montgomery Scott, Analyst:
Hello there. One question is tough so it'll be one topic here. Can you estimate the
impact on refilling store level inventory on the brewers side in this quarter? Is there
any estimate for that? And then related to that is there any impact on K-Cups on the
channel fill through the new distribution at grocery?
John Whoriskey- Keurig, General Manager:
Hi Mitch, this is John Whoriskey, I'll handle the first part of that question. Yes, we
would estimate the impact to be roughly 75,000 units, which is really just kind of a
catch up from the very strong sales that we had over the holiday season and now
we're really back to building our inventory levels at retail to where they need to be.
So with that I'll tum the question over to Jim Travis.
TJ Whalen - GMCR, VP of Marketing:
Hi, Mitch. This is TJ. In relation to grocery, we've been reporting fairly consistent
gains in both distribution and rate of sale and so we don 't see anything out of the
ordinary or kind of off trajectory in terms of either of those factors. We continue to
build grocery distribution and we continue to see sales accelerate above and beyond
that.
100. In response to the Company's announcement and Defendants' statements on the
conference call, the price ofGMCR stock rose $2.69 per share on July29, 2010, or more than 9%, to
close at $31.36 per share.
- 36-
101. On August 5, 2010, GMCR filed with the SEC its Form 10-Q for the 13 weeks ended
June 26, 2010 (the "201 0 Q3 Form 1 0-Q"), which was signed by Defendants Blanford and Rathke.
The 2010 Q3 Form 10-Q included GMCR's financial statements for the 13 and 39weeks ended June
26, 201 0, which were represented to have been presented in conformity with GAAP. In this regard,
the 2010 Q3 Form 1 0-Q stated:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim financial
information, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete consolidated financial
statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation of the interim financial data have been included. Results from
operations for the thirteen and thirty-nine week periods ended June 26, 2010 are not
necessarily indicative of the results that may be expected for the fiscal year ending
September 25, 2010.
In addition, the 2010 Q3 Form 1 0-Q included the following materially false and misleading
representations about GMCR's disclosure and internal controls:
As of June 26, 2010, the Company's management with the participation of its Chief
Executive Officer and Chief Financial Officer conducted an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls and
procedures pursuant to Rule 13a-15 and 15d-15 under the Securities Exchange Act of
1934 (the "Exchange Act"). Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures (as defined in Rule 13a-15 ofthe Exchange Act) are effective.
There have been no changes in the Company's internal control over financial
reporting during the most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over financial
reporting.
102. Defendants have now admitted that the above representations were materially false
and misleading, that "material weaknesses" in GMCR's internal controls existed during the Class
Period and that the Company's disclosure controls and procedures were "not effective" during the
Class Period. One of the material weaknesses now identified is associated with the "financial
statement consolidation process." Specifically, according to the 2010 Form 1 0-K:
- 37-
The company did not have effective controls to ensure the completeness and
accuracy of the accounting for intercompany transactions in its financial statement
consolidation process. The method used to identify all intercompany transactions
between the business segments for purposes of performing required eliminations, and
to process and to document the eliminations, was not accurately designed and
adequately performed during each reporting period.
1 03. Several former Company employees commented that the relationship between
GMCR's two business divisions likely caused or contributed to the problem:
(a) A consultant who worked for GMCR in the summer of2009 ("CW8") noted
that GMCR's accounting system used PeopleSoft software and Keurig's accounting system used
Great Plains software;
(b) A territory manager for GMCR from 2004 until late 201 0 ("CW9") stated that
Keurig maintained its own accounting department and operated somewhat separately from GMCR;
(c) An accounting manager who worked for both Diedrich (a roaster acquired by
GMCR) and the Company, from 2005 through the end of2010 ("CW10"), stated that GMCR used
Peoplesoft accounting software, but that the Keurig division used Great Plains software and
maintained its own accounting team. Additionally, at the time of the acquisition, Diedrich had been
using a Sage MAS-500 accounting system. CW1 0 commented that problems with inter-company
transfers could arise because of the fact that the two divisions used different systems.
104. In addition to the problems caused by non-interfacing accounting platforms, many
former employees described how GMCR's inventory control system was virtually non-existent, with
several noting that they were certain that inventory had been counted multiple times as a result:
(a) CW11, a marketing manager with an MBA who worked for GMCR from
August 2009 until July 2010, stated that, at the time of his/her employment, GMCR was
transitioning between computer systems and that problems arose because people were not properly
trained to use the new systems. Specifically, CW11 stated that he/she and others would see products
shipped by GMCR to MBlock, and they could not pin down whether those products were sold to
- 38-
Case 2:10-cv-00227-wks Document 72 Filed 04/30/12 Page 39 of 62. - - - - - - - - - - - - - ~ ~ ~ - - - - - - - - - - - ~ - - - - - - ----------- ---------------
MBlock or were shipped to MBlock for storage purposes. CW11 also stated that this appeared to be
a problem of double-counting inventory and that MBlock was "a catch all for customers [GMCR]
didn't ship to directly";
(b) CW12, a buyer located in Knoxville, Tennessee who worked for GMCR from
March 2010 through September 2011, stated that inventory counts were consistently incorrect due to
the different computer systems used to manage the Company's inventory. CW12 stated that
employees were constantly "double counting" inventory and submitting inventory adjustments
because the Company did not have processes or procedures in place to prevent "double counting" of
inventory. Attempts were made by Company employees to reconcile the separate computer systems,
but errors in the counting of raw materials, such as coffee, lids and K-Cups would, at times, cost the
Company tens of thousands of dollars a day. CW12 noted that there were five separate methods used
to manage inventory and raw materials (e.g., coffee, lids and K-Cups) at GMCR, including
Microsoft Excel, Microsoft Access, PeopleSoft, Oracle and Scolari - counts would be placed into
one system, moved to another and then moved back. As a result of this, inventory counts were
always "way off." There were constant adjustments as inventory would be missing or double-
counted, as personnel would take items from inventory without recording them. The problem was
well-known within the Company and many people worked to reconcile the figures from the separate
systems. A group consisting of Controller Patricia Bell, Operations Director Jane Payne, and
Distribution Manager Dale Pearson was aware of these problems and was responsible for informing
SCBU President McCreary of these problems and of the revised inventory numbers. Further
contributing to the inventory woes were complex movements of product among GMCR facilities and
storage at Kenco and MBlock.
(c) CW13, a contract employee who worked at GMCR' s warehouse in Knoxville,
Tennessee from August 2009 through September 2010, also stated that the different computer
- 39-
systems created problems for the Company. For example, CW13 stated that he/she created and
reviewed inventory reports for finished and raw products on a daily basis. At times, the inventory
reports were irreconcilable; inventory counts would come up short or over and products that were
supposed to be in inventory were unable to be found. CW13 stated that it was common to have to
recount the inventory due to system errors, errors which were known to employees who reported
directly to Defendant Rathke. One employee who reported to Rathke told CW13 that senior
management was aware of the problems with the Company's computer systems, and that when this
employee suggested to senior management to install newer computer systems, senior management
responded that the Company was not willing to pay for newer computer systems.
105. As a result of the foregoing, Defendant Blanford's and Rathke's certifications of
GMCR's internal and disclosure controls, which were included in the 2010 Q3 Form 1 0-Q, were also
materially false and misleading:
I, [Defendants Blanford and Rathke], certify that:
1. I have reviewed this quarterly report on Form 10-Q of Green Mountain
Coffee Roasters, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
-40-
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
106. On August 10, 2010, GMCR and Lavazza announced that the companies entered into
a $250 million common stock purchase agreement. Under the terms of the agreement, Lavazza
agreed to purchase $250 million of newly issued GMCR common shares, or approximately 7% of
GMCR's then-outstanding common stock, at a price per share equal to 92.5% of the 60 day volume
weighted average closing price ofGMCR stock. At the end of the Class Period, GMCR announced
that it issued 8,566,649 common shares in connection with the transaction. In connection with the
transaction, GMCR made representations and warranties concerning the accuracy of its SEC filings
since September 29, 2009, and the adequacy of its internal controls over financial reporting.
- 41 -
107. On August 11, 2010, GMCR presented at the Canaccord Adams Global Growth
Conference. During the conference, Defendant Blanford made numerous positive statements about
the Company's business, operations and prospects, and touted the Company's EPS growth. For
example:
So for business performance. I will just touch on these because the data from our
third quarter is readily available. But we have certainly been growing our top line in
a very robust manner. If you look over the last three years, 2008, 2009 and 2010,
2010 being estimated we have got one quarter left. We will have grown the top line
just under 60%. And for this fiscal year we are actually projecting to come in a little
higher than the three-year compound average growth rate in the 66% to 68%, and we
have driven 70% in the top line year-to-date.
Next. EPS growth. Non-GAAP. And only difference really being the deduction of
expenses due to one-time acquisition charges, have over that same time period, 2008
to 2010, estimated been growing faster than sales growth at nearly 80%, and for this
fiscal year we are projecting to end up a bit above that, 82% to 87%, and we are 89%
year-to-date.
Next. And as we have been growing the top line and the bottom line and making
investments in both organic growth and some acquisitions that I will reference later,
we have done so with a very strong focus of investing behind our strategy, and being
able to generate return on invested capital and return on equity that exceeds the
Russell 1 000 in both cases. So very good stewards of money.
In connection with its appearance at the conference, GMCR disseminated the following slide to
analysts and investors:
-42-
Stronger EPS Growth
$1.00
$0.80
$0.69-$0.71
2
FY'07 FY'08 FY'09 FY'10 Est.
2
FY'11 Est.' YTD Q3'09 YTD Q3'10
1
FY'09 and YTD 03'09 Non-GAAP EPS exclude $17 million pre-tax lncoma, or $0.09 per share, patent lklgation settlement
paid In Oct. '08. Patent lltlgetlon legel expenses of $0.02 per share are Included In FY'08.
2FY'10 and YTD 03'10 Non-GMP EPS exclude $4 million transaction-related expenses Incurred In 03'10 as well as the tax
effect of reversing the tax benefit of $3.2 million associated with $8.1 million In Diedrich acquisition-related costs recorded
during the first and second quarters of fiscal 2010, or $0.10 per share. Per company-provided estimates on July 28. 2010.
3
Per company-provided estimates on July 28, 2010
Note: A reconciliation of GMCR's GAAP to non-GAAP results is provided in the tables supplemental to the Company's 03' 10 results press release
and as part of this presentation.

GMCR
-

108. On August 19, 2010, GMCR issued a press release announcing that it ranked number
two overall on Fortune's annual list of the 100 Fastest-Growing Companies. The press release also
noted that GMCR was the highest-ranked consumer package goods company on the list, which
includes profitable, publicly-held companies with at least $50 million in annual revenue, and that
"[l]ast month, GMCR reported its 11th consecutive quarter of better than 40 percent net sales
growth. For the first nine months offiscal201 0, the [C]ompany has produced net sales growth of
70% over the prior year and excluding acquisition-related expenses, earnings per share growth of
89% over the same period for fiscal year 2009."
109. On September 14, 2010, GMCR announced that it had executed a share purchase
agreement pursuant to which GMCR agreed to acquire all the outstanding shares ofLJVH Holdings,
Inc., a leading gourmet coffee Canadian brand, from an affiliate of Littlejohn & Co., LLC, a private
equity firm headquartered in Greenwich, Connecticut, for a cash purchase price ofC $915 million or
$890 million based on the exchange rate as of September 13, 2010. The press release also stated that
- 43-
GMCR intended to finance the acquisition, which was subject to regulatory approval and was
expected to close by the end of calendar year 2010, through a combination of cash on hand and
$1.35 billion of new debt financing comprised of: (i) a $750 million five-year senior secured
revolving credit facility; (ii) a $250 million five-year senior secured term loan A facility; and (iii) a
$350 million six-year senior secured term loan B facility.
110. GMCR disclosed that the credit facilities will be utilized to finance the above
acquisition and transaction expenses, as well as to refinance the Company's existing outstanding
indebtedness and support its ongoing growth, and that GMCR secured a financing commitment for
the transaction from Bank of America Merrill Lynch and SunTrust Robinson Humphrey, Inc.
111. The statements referenced above in ~ ~ 9 8 - 9 9 , 101 and 105-107 were each materially
false and misleading when made because they misrepresented and failed to disclose the following
adverse facts, which were known to Defendants or recklessly disregarded by them:
(a) that the Company was engaged in improper accounting practices, which as
Defendants have now admitted, materially misstated GMCR's reported financial results during the
Class Period. Such improper accounting practices included the improper recognition and reporting
of revenue on shipments of product to MBlock, improper recognition and reporting of royalty
income and the improper understatement of customer incentive and marketing expenses;
(b) that the Company's internal controls were materially deficient;
(c) as a result of the foregoing, GMCR's Class Period financial statements, as
Defendants have now admitted, "should no longer [be relied] upon," were not fairly presented in
conformity with GAAP and were materially false and misleading; and
(d) based on the foregoing, Defendants lacked a reasonable basis for their positive
statements about the Company and its prospects.
-44-
The Truth Emerges
112. On September 28, 2010, GMCR filed the September 28, 2010 Form 8-K with the
SEC, which stated, in pertinent part:
In connection with its acquisition ofLJVH Holdings, Inc., or Van Houtte, a leading
gourmet coffee brand in Canada in the home and office channels, and the marketing
of the associated $1.3 5 billion debt financing, the Company hereby furnishes the
following information:
Intercompany adjustment correction
In connection with the preparation of its financial results for its fourth fiscal quarter,
the Company's management discovered an immaterial accounting error relating to
the margin percentage it had been using to eliminate the inter-company markup in
its K-Cup inventory balance residing at its Keurig business unit. Management
discovered that the gross margin percentage used to eliminate the inter-company
markup resulted in a lower margin applied to the Keurig ending inventory balance
effectively overstating consolidated inventory and understating cost of sales.
Management determined that the accounting error arose during fiscal 2007 and
analyzed the quantitative impact from that point forward to June 26, 2010.
As of June 26, 2010, there is a cumulative $7.6 million overstatement of pre-tax
income. Net of tax, the cumulative error resulted in a $4.4 million overstatement of
net income or a $0.03 cumulative impact on earnings per share.
* * *
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 staffs inquiry.
113. In response to these adverse disclosures about the Company's accounting practices
and the SEC's investigation ofthe Company's revenue recognition practices, the price ofGMCR
common stock, on September 29, 2010, fell $5.95 per share, or more than 16%, to close at $31.06
per share on about ten times the average trading volume.
-45-
Post-Class Period Disclosures
114. On November 19, 2010, GMCR issued a press release announcing that investors
"should no longer rely upon" the Company's previously issued financial statements for fiscal years
2007, 2008, 2009 and the first three quarters of201 0 as they were materially misstated and included
the following errors:
A $7.6 million overstatement of pre-tax income, cumulative over the restated
periods, due to the K-Cup inventory adjustment error previously reported in the
Company's Form 8-K filed on September 28, 2010. This error is the result of
applying an incorrect standard cost to intercompany K-Cup inventory balances in
consolidation. This error resulted in an overstatement of the consolidated inventory
and an understatement of the cost of sales. Rather than correcting the cumulative
amount of the error in the quarter ended September 25, 2010, as disclosed in the
September 28, 2010 Form 8-K, the effect of this error will be recorded in the
applicable restated periods.
periods, due to the under-accrual of certain marketing and customer incentive
program expenses. The Company also has corrected the classification of certain of
these amounts as reductions to net sales instead of selling and operating expenses.
These programs include, but are not limited to, brewer mark-down support and funds
for promotional and marketing activities. Management has determined that
miscommunication between the sales and accounting departments resulted in
expenses for certain of these programs being recorded in the wrong fiscal periods.
periods, due to changes in the timing and classification of the Company's historical
revenue recognition of royalties from third party licensed roasters. Because royalties
were recognized upon shipment of K-Cups by roasters pursuant to the terms and
conditions of the licensing agreements with these roasters, Keurig historically
recognized these royalties at the time Keurig purchased the K -Cups from the licensed
roasters and classified this royalty in net sales. Management has determined to
recognize this royalty as a reduction to the carrying cost of the related inventory.
The gross margin benefit of the royalty will then be realized upon the ultimate sale of
the product to a third party customer. Due to the Company's completed and, when
consummated, pending acquisitions of third party licensed roasters, these purchases
and the associated royalties have become less of a factor, since the post-acquisition
royalties from these wholly-owned roasters are not included in the Company's
consolidated financial statements.
An $800,000 overstatement of pre-tax income, cumulative over the restated periods,
due to applying an incorrect standard cost to intercompany brewer inventory
balances in consolidation. This error was identified during the preparation of the
fiscal year 2010 financial statements and resulted in an overstatement of the
consolidated inventory and an understatement of the cost of sales.
-46-
A $700,000 understatement of pre-tax income for the Specialty Coffee business unit,
due primarily to a failure to reverse an accrual related to certain customer incentive
programs in the second fiscal quarter of 2010. The over-accrual was not identified
and corrected until the fourth fiscal quarter of2010.
In addition to the errors described above, the Company also will include in the
restated financial statements certain other immaterial errors, including previously
unrecorded immaterial adjustments identified in audits of prior years' financial
statements.
The press release also stated that:
[N]one of the financial statement errors are related to the Company's relationship
with M.Block & Sons, the fulfillment vendor through which the Company makes a
majority of the at-home orders for the Keurig business unit's single-cup business sold
to retailers.
* * *
In accordance with Section 404 of the Sarbanes-Oxley Act of2002, the Company's
management has been assessing the effectiveness of the Company's internal controls
over financial reporting and disclosure controls. Based on this assessment, the
Company expects to report a material weakness in the Company's internal controls
over financial reporting, and, therefore, conclude that internal controls over
financial reporting as of September 25, 2010 are not effective.
115. Then, on December 9, 2010, the Company issued a press release announcing its
financial results for the fiscal fourth quarter and year ended September 25, 2010. For the quarter, the
Company reported net sales of $3 73.1 million and net income of $27 million, or $0.20 per diluted
share.
116. Also on December 9, 2010, GMCR filed the 2010 Form 10-K with the SEC, which
revealed that GMCR's net income for the 39 weeks ended June 26, 2010 had been overstated by
approximately 6.2%. The 2010 Form 10-K also reiterated, in all material respects, the financial
misstatements GMCR disclosed in the November 19, 2010 press release and disclosed that such
misstatements were not associated with the Company's relationship with MBlock, which, as GMCR
disclosed in the November 19,2010 press release, the Company believed was the focus ofthe SEC's
inquiry:
-47-
In addition, none of the financial statement errors are related to the Company's
relationship with M.Block & Sons, Inc., the fulfillment entity through which the
Company makes a majority of the at-home orders for the Keurig business unit's
single-cup business sold to retailers.
* * *
As previously disclosed, on September 20, 2010, the staff of the SEC's Division of
Enforcement informed the Company that it was conducting an inquiry into matters at
the Company. The Company, at the direction of the audit committee of the
Company's board of directors, is cooperating fully with the SEC staffs inquiry. At
this point, we are unable to predict what, if any, consequences the SEC inquiry may
have on us. However, the inquiry could result in considerable legal expenses, divert
management's attention from other business concerns and harm our business. If the
SEC were to commence legal action, we could be required to pay significant
penalties and/or other amounts and could become subject to injunctions, an
administrative cease and desist order, and/or other equitable remedies. The filing of
our restated financial statements to correct the discovered accounting errors will
not resolve the SEC inquiry. Further, the resolution of the SEC inquiry could
require the filing of additional restatements of our prior financial statements,
and/or our restated financial statements, or require that we take other actions not
presently contemplated. We can provide no assurances as to the outcome of the SEC
inquiry.
117. In addition, the 2010 Form 10-K disclosed material internal control weaknesses:
Background
As previously reported in the Company's Current Report on Form 8-K filed on
November 19,2010, on November 15,2010, the board of directors ofthe Company,
based on the recommendation of the audit committee and in consultation with
management, concluded that the Company's previously issued financial statements
for the fiscal years ended September 30, 2006, September 29, 2007, September 27,
2008 and September 26, 2009 and the first three fiscal quarters of 2010 should be
restated in order to correct certain identified errors. Accordingly, the Company has
restated its previously issued financial statements for those periods ....
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer, the Company conducted an
evaluation of the effectiveness of the design and operation of our disclosure controls
and procedures, as defined in Rules 13a-15(e) and 15d-15(e) ofthe Securities and
Exchange Act of1934, as amended (the "Exchange Act"), as ofSeptember25, 2010.
The Company's evaluation has identified certain material weaknesses in its internal
control over financial reporting as noted below in Management's Report on Internal
Control over Financial Reporting. Based on the evaluation of these material
weaknesses, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures were not
-48-
effective as of September 25, 2010 to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to management, including our Chief Executive Officer and
Chief Financial Officer, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure. Based on a number of factors,
including the completion of the Audit Committee's internal investigation, our
internal review that identified revisions to our previously issued financial statements,
and efforts to remediate the material weaknesses in internal control over financial
reporting described below we believe the consolidated financial statements in this
Annual Report fairly present, in all material respects, our financial position, results of
operations and cash flows as of the dates, and for the periods, presented, in
conformity with GAAP.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the
Exchange Act. The Company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of its financial
reporting and the preparation of its financial statements for external purposes in
accordance with GAAP and includes those policies and procedures that: (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors ofthe Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company's assets that could have a material
effect on the financial statements. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate.
Under the supervision of and with the participation of management, including the
Chief Executive Officer and Chief Financial Officer, the Company conducted an
evaluation of the effectiveness of its internal control over financial reporting based
on the criteria in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO"). A material
weakness is a control deficiency, or combination of control deficiencies, such that
there is a reasonable possibility that a material misstatement to the annual or interim
financial statements will not be prevented or detected on a timely basis. Based upon
that evaluation, management identified the following material weaknesses as of
September 25, 2010 in the Company's internal control over financial reporting,
principally related to the Company's period-end financial reporting and consolidation
processes.
-49-
1. Financial statement consolidation process. The Company did not have
effective controls to ensure the completeness and accuracy ofthe accounting for
intercompany transactions in its financial statement consolidation process. The
method used to identify all intercompany transactions between the business segments
for purposes of performing required eliminations, and to process and to document the
eliminations, was not accurately designed and adequately performed during each
reporting period.
2. Accruals related to marketing and customer incentive programs. The
Company did not have effective controls to ensure the completeness, accuracy and
proper classification of certain marketing and customer incentive programs and
related accrued liabilities. There was a lack of adequate communication between
the accounting function to gather the appropriate information from the sales and
marketing functions to accurately classify these liabilities and an insufficient number
of personnel with an appropriate level of GAAP knowledge and experience
evaluating the transactions related to these programs.
These material weaknesses resulted in the misstatement and audit adjustments of
financial statement line items and related financial disclosures, as disclosed in Note
3, Restatement of Previously Issued Financial Statements, to our consolidated
financial statements.
As a result of the material weaknesses in internal control over financial reporting
described above, management concluded that the Company's internal control over
financial reporting was not effective as of September 25, 2010 based on the criteria
established in Internal Control-Integrated Framework issued by the COSO.
Additionally, these material weaknesses could result in a misstatement of the
aforementioned account balances or disclosures that would result in a material
misstatement to the annual or interim consolidated financial statements that would
not be prevented or detected.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of September 25, 2010 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears herein.
Plan for Remediation of the Material Weaknesses in Internal Control Over Financial
Reporting
Management has been actively engaged in the planning for, and implementation of,
remediation efforts to address the material weaknesses, as well as other identified
areas of risk. These remediation efforts, outlined below, are intended both to address
the identified material weaknesses and to enhance the Company's overall financial
control environment. Management believes that these material weaknesses arose due
to the Company's rapid growth, both organically and through acquisitions, outpacing
the development of the Company's accounting infrastructure.
Management's planned actions to further address these issues in fiscal 2011
include:
-50-
the addition of more experienced accounting staff at the Company's
enterprise and business segment levels;
a formal training program for all accounting and finance personnel, so that
they remain current with accounting rules, regulations and trends as well as a
formal training program for sales and marketing personnel;
a thorough review of the finance and accounting departments to ensure
that the areas of responsibilities are properly matched to the staff competencies
and that the lines of communication and processes are as effective as possible;
a thorough review of the processes and procedures used in the Company's
intercompany accounting, including an evaluation of possible methods to simplify
and automate certain aspects of the intercompany accounting;
development of a standardized method for the review, approval, and
tracking of retail customer marketing and incentive programs, pricing and other
key terms and conditions; and
an evaluation of the Company's key accounting policies to ensure that they
are documented and standardized across business units, circulated within the
appropriate Company constituencies, and reviewed and updated on a periodic basis
with an view towards the interrelations of the policies across the enterprise.
The audit committee has directed management to develop a detailed plan and
timetable for the implementation of the foregoing remedial measures (to the extent
not already completed) and will monitor their implementation. In addition, under the
direction of the audit committee, management will continue to review and make
necessary changes to the overall design of the Company's internal control
environment, as well as policies and procedures to improve the overall effectiveness
of internal control over financial reporting.
Management believes the measures described above and others that will be
implemented will remediate the control deficiencies the Company has identified and
strengthen its internal control over financial reporting. Management is committed to
continuous improvement of the Company's internal control processes and will
continue to diligently review the Company's financial reporting controls and
procedures. As management continues to evaluate and work to improve internal
control over financial reporting, the Company may determine to take additional
measures to address control deficiencies or determine to modify, or in appropriate
circumstances not to complete, certain of the remediation measures described above.
118. The 2010 Form 10-K also included a report of independent registered public
accounting firm PricewaterhouseCoopers LLC ("PwC") that stated, in pertinent part, as follows:
We do not express an opinion or offer any other form of assurance on management's
statement referring to the Company's plan for remediation of the material
weaknesses in internal control over financial reporting.
-51 -
119. The market for GMCR common stock was open, well-developed and efficient at all
relevant times. As a result of these materially false and misleading statements and failures to
disclose, GMCR common stock traded at artificially inflated prices during the Class Period.
Plaintiffs and other members of the Class purchased or otherwise acquired GMCR common stock
relying upon the integrity of the market price of GMCR common stock and market information
relating to GMCR, and have been damaged thereby.
120. During the Class Period, Defendants materially misled the investing public, thereby
inflating the price of GMCR common stock, by publicly issuing false and misleading statements and
omitting to disclose material facts necessary to make Defendants' statements, as set forth herein, not
false and misleading. Said statements and omissions were materially false and misleading in that
they failed to disclose material adverse information and misrepresented the truth about the Company,
its business and operations, as alleged herein.
121. At all relevant times, the material misrepresentations and omissions particularized in
this Complaint directly or proximately caused, or were a substantial contributing cause of, the
damages sustained by Plaintiffs and other members of the Class. As described herein, during the
Class Period, Defendants made or caused to be made a series of materially false or misleading
statements about GMCR's business, prospects and operations. These material misstatements and
omissions had the cause and effect of creating in the market an unrealistically positive assessment of
GMCR and its business, prospects and operations, thus causing the Company's common stock to be
overvalued and artificially inflated at all relevant times. Defendants' materially false and misleading
statements during the Class Period resulted in Plaintiffs and other members of the Class purchasing
the Company's common stock at artificially inflated prices, thus causing the damages complained of
herein.
-52-
Case 2:10-cv-00227-wks Document 72 Filed 04/30/12 Page 53 of 62 ---------------
Additional Scienter Allegations
122. As alleged herein, Defendants acted with scienter in that Defendants knew that the
public documents and statements issued or disseminated in the name of the Company were
materially false and misleading; knew that such statements or documents would be issued or
disseminated to the investing public; and knowingly and substantially participated or acquiesced in
the issuance or dissemination of such statements or documents as primary violations of the federal
securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their receipt of
information reflecting the true facts regarding GMCR, their control over, and/or receipt and/or
modification of GMCR's allegedly materially misleading misstatements and/or their associations
with the Company which made them privy to confidential proprietary information concerning
GMCR, participated in the fraudulent scheme alleged herein.
123. Moreover, the fraudulent course of conduct alleged herein enabled Defendants to
procure $1.35 billion of debt financing on favorable terms so that GMCR could acquire LJVH
Holdings, Inc., as well as to refinance the Company's existing outstanding indebtedness and support
the Company's ongoing growth.
124. Defendants were further motivated to engage in the fraudulent course of conduct
alleged herein in order to raise much needed capital by enabling GMCR to sell $250 million of its
securities to Lavazza in a private transaction at artificially inflated prices during the Class Period.
Specifically, GMCR obtained a higher purchase price from Lavazza for its equity stake than it would
have received had the need for a restatement of past financial reporting and/or the existence of an
SEC investigation been disclosed prior to September 28, 2010.
125. In addition, the alleged improprieties noted herein enabled certain Company insiders,
namely McCreary and Stacy, the Presidents ofGMCR's two business segments, to exercise and sell
large amounts of their GMCR shares in August 2010. For example, McCreary, who realized a gain
-53-
of more than a $6.3 million, sold 200,000 shares on August 18, 2010, leaving him with 97,488
shares ofGMCR stock outstanding. Similarly, between August 13,2010 and November 5, 2010,
Stacy, who realized a gain of more than $1.3 million, sold 50,000 shares, leaving her with 1,994
shares of GMCR stock outstanding:
Insider Date Shares Price Proceeds
R. SCOTT MCCREARY 08/18/10 200,000 $33.08 $6,616,000
MICHELLE STACY 08/13/10 30,000 $30.95 $928,500
09/13/10 5,000 $35.40 $177,000
09/21/10 4,375 $37.00 $161,875
09/21110 625 $37.00 $23,125
11/05110 10,000 $35.00 $350,000
50,000 $1,640,500
Total: 250,000 $8,256,500
126. Prior to these sales, there had not been significant insider trading activity since June
2009. Not only did both division presidents sell the majority of their shares, but Stacy did so the day
after the SEC's information request and one week before GMCR made the SEC inquiry public.
127. Even worse, in October 2010, Stacy amended her Form 4s for the September sales,
claiming that she forgot to include in the original Form 4s that the sales were made pursuant to a
Rule 10b5-1 trading plan adopted on August 13,2010. Not only did the Company fail to inform the
SEC of the plan on the day it was adopted, but it failed to disclose the plan when Stacy's Form 4 for
the $928,500 sale was filed a mere four days after its adoption.
128. On March 14,2011, Mr. Antar devoted two articles to the surprising trades by Stacy.
The first article, entitled "Green Mountain Coffee Roasters: The Foul Aroma of Michelle Stacy's
Stock Sales," states, in relevant part:
One insider, Michelle Stacy who is President of Green Mountain Coffee's Keurig
Division seems to have made out like a bandit. She exercised 9,375 options at $6.20
per share and simultaneously sold them at $55.54 per share. Stacey sold her stock at
-54-
$11.90 per share higher than the previous day's closing price. Sometimes I wonder,
is Michelle Stacy a shrewd insider, a psychic, or just plain lucky?
* * *
On September 13, she sold 5,000 shares seven days before Green Mountain Coffee
claims it received notice of an SEC on September 20. On September 21, she sold
another 5,000 shares seven days before Green Mountain Coffee disclosed news of
the SEC inquiry to investors on September 28. That same day, Green Mountain
Coffee reported that it overstated pre-tax income by $7.6 million dollars.
On September 29,2010, the next trading day, Green Mountain Coffee stock dropped
$5.95 per share to close at $31.06 per share as investors reacted to news of the SEC
inquiry, a 16.1% drop in market value that day. By October 11, 2011, the market
value of Green Mountain Coffee's shares dropped to $26.87 per share, far below the
price per share that Stacy sold her stock on August 13 ($30.95), September 13
($35.20), and September 21, 2010 ($37.00).
In a blog post dated October 21, 201 0, I expressed my concern about the possibility
of illegal insider trading by Michelle Stacy based on the timing of her stock sales.
Seven days later, on October 28, 2010, Stacy belatedly filed amended Form 4 reports
and claimed she established a Rule 1 Ob5-1 trading plan on August 13, 2010. A Rule
1 Ob5-1 trading plan provides certain safe harbors which help executives defend
against potential allegations of illegal insider-trading by removing their discretion to
decide when their stock is bought or sold. She amended certain SEC Form 4 filings
for her stock sales on September 13 and September 21 to reflect her 1 Ob5-1 trading
plan. However, her sale of30,000 shares on August 13 was not pursuant to a 10b5-1
trading plan. According to Stacy's amended SEC filings, her 1 Ob5-1 trading plan only
covered future stock transactions.
* * *
Is Michelle Stacy a shrewd insider, a psychic or just plain lucky? Perhaps the people
who designed and administer her purported 1 Ob5-1 trading plan are geniuses.
* * *
If a corporate executive already has nonpublic knowledge of certain adverse events
such as undisclosed weaknesses in internal controls, accounting errors, or an SEC
inquiry, a 1 Ob5-1 plan cannot provide a safe harbor against illegal insider trading
allegations.
129. On March 24,2011, Mr. Antar posted an article, entitled "Is Michelle Stacy a shrewd
insider, a psychic or just plain lucky?," which further described Stacy's suspicious stock sales.
-55-
Loss Causation/Economic Loss
130. During the Class Period, as detailed herein, Defendants engaged in a scheme to
deceive the market and a course of conduct that artificially inflated the prices of GMCR common
stock and operated as a fraud or deceit on Class Period purchasers of GMCR common stock by
failing to disclose and misrepresenting the adverse facts detailed herein. When Defendants' prior
misrepresentations and fraudulent conduct were disclosed and became apparent to the market, the
price ofGMCR common stock fell precipitously as the prior artificial inflation came out. As a result
of their purchases ofGMCR common stock during the Class Period, Plaintiffs and the other Class
members suffered economic loss, i.e., damages, under the federal securities laws.
131. By failing to disclose to investors the adverse facts detailed herein, Defendants
presented a misleading picture of GMCR's business and prospects. Defendants' false and
misleading statements had the intended effect and caused GMCR common stock to trade at
artificially inflated levels throughout the Class Period, reaching as high as $37.55 per share on
September 27, 2010.
132. On September 28,2010, GMCR filed a Form 8-K with the SEC, which disclosed that:
(i) the Company's management discovered an immaterial accounting error; and (ii) the SEC's
Division of Enforcement was conducting an inquiry and made a request for a voluntary production
of documents and information. The Form 8-K indicates that the Company believes the nature of the
SEC's investigation "concerns certain revenue recognition practices and the Company's relationship
with one of its fulfillment vendors," namely MBlock.
13 3. In response to the announcement that the SEC was examining the Company's revenue
recognition practices, on September 29, 2010, the price of GMCR common stock fell $5.95 per
share, or more than 16%, to close at $31.06 per share on about ten times the average trading volume.
-56-
134. The above-noted decline in the price of GMCR common stock was a direct result of
the nature and extent of Defendants' fraud being revealed to investors and the market. The timing
and magnitude of the price decline in GMCR common stock negates any inference that the loss
suffered by Plaintiffs and the other Class members was caused by changed market conditions,
macroeconomic or industry factors or Company-specific facts unrelated to Defendants' fraudulent
conduct. The economic loss, i.e., damages, suffered by Plaintiffs and the other Class members was a
direct result of Defendants' fraudulent scheme to artificially inflate the prices of GMCR common
stock and the subsequent significant decline in the value ofGMCR common stock when Defendants'
prior misrepresentations and other fraudulent conduct were revealed.
Applicability of Presumption of Reliance:
Fraud on the Market Doctrine
135. At all relevant times, the market for GMCR common stock was an efficient market
for the following reasons, among others:
(a) GMCR common stock met the requirements for listing, and was listed and
actively traded on the NASDAQ, a highly efficient and automated market;
(b) as a regulated issuer, GMCR filed periodic public reports with the SEC and
the NASDAQ;
(c) GMCR regularly communicated with public investors via established market
communication mechanisms, including regular disseminations of press releases on the national
circuits of major newswire services and other wide-ranging public disclosures, such as
communications with the financial press and other similar reporting services; and
(d) GMCR was followed by several securities analysts employed by major
brokerage firms who wrote reports which were distributed to the sales force and certain customers of
theiuespective brokerage firms. Each of these reports was publicly available and entered the public
marketplace.
-57-
136. As a result of the foregoing, the market for GMCR common stock promptly digested
current information regarding GMCR from all publicly available sources and reflected such
information in the prices of the stock. Under these circumstances, all purchasers ofGMCR common
stock during the Class Period suffered similar injury through their purchase of GMCR common
stock at artificially inflated prices and a presumption of reliance applies.
No Safe Harbor
137. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.
Many of the specific statements pleaded herein were not identified as "forward-looking statements"
when made. To the extent there were any forward-looking statements, there were no meaningful
cautionary statements identifying important factors that could cause actual results to differ materially
from those in the purportedly forward-looking statements. Alternatively, to the extent that the
statutory safe harbor does apply to any forward-looking statements pleaded herein, Defendants are
liable for those false forward-looking statements because at the time each of those forward-looking
statements were made, the particular speaker knew that the particular forward-looking statement was
false, and/or the forward-looking statement was authorized and/or approved by an executive officer
of GMCR who knew that those statements were false when made.
COUNT I
Violation of Section 1 O(b) of the Exchange Act
and Rule lOb-S Promulgated Thereunder
Against All Defendants
138. Plaintiffs repeat and reallege each and every allegation contained above as if fully set
forth herein.
139. During the Class Period, Defendants disseminated or approved the materially false
and misleading statements specified above, which they knew or deliberately disregarded were
misleading in that they contained misrepresentations and failed to disclose material facts necessary
-58-
in order to make the statements made, in light of the circumstances under which they were made, not
misleading.
140. Defendants: (a) employed devices, schemes, and artifices to defraud; (b) made untrue
statements of material fact and/or omitted to state material facts necessary to make the statements not
misleading; and (c) engaged in acts, practices, and a course ofbusiness which operated as a fraud
and deceit upon the purchasers of the Company's common stock during the Class Period.
141. Plaintiffs and the Class have suffered damages in that, in reliance on the integrity of
the market, they paid artificially inflated prices for GMCR common stock. Plaintiffs and the Class
would not have purchased GMCR common stock at the prices they paid, or at all, if they had been
aware that the market prices had been artificially and falsely inflated by Defendants' misleading
statements.
142. As a direct and proximate result of Defendants' wrongful conduct, Plaintiff and the
other members of the Class suffered damages in connection with their purchases ofGMCR common
stock during the Class Period.
COUNT II
Violation of Section 20(a) of the Exchange Act
Against the Individual Defendants
143. Plaintiffs repeat and reallege each and every allegation contained above as if fully set
forth herein.
144. The Individual Defendants acted as controlling persons of GMCR within the meaning
of Section 20(a) of the Exchange Act as alleged herein. By reason of their positions as officers
and/or directors ofGMCR, and their ownership ofGMCR common stock, the Individual Defendants
had the power and authority to cause GMCR to engage in the wrongful conduct complained of
herein. By reason of such conduct, the Individual Defendants are liable pursuant to Section 20(a) of
the Exchange Act.
-59-
WHEREFORE, Plaintiffs pray for relief and judgment, as follows:
A. Determining that this action is a proper class action, designating Plaintiffs as Lead
Plaintiffs and certifying Plaintiffs as Class representatives under Rule 23 of the Federal Rules of
Civil Procedure and Plaintiffs' counsel as Lead Counsel;
B. Awarding compensatory damages in favor ofPlaintiffs and the other Class members
against all Defendants, jointly and severally, for all damages sustained as a result of Defendants'
wrongdoing, in an amount to be proven at trial, including interest thereon;
C. Awarding Plaintiffs and the Class their reasonable costs and expenses incurred in this
action, including counsel fees and expert fees; and
D. Such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
Plaintiffs hereby demand a trial by jury.
DATED: April30, 2012 ROBBINS GELLER RUDMAN
&DOWDLLP
SAMUEL H. RUDMAN
DAVID A. ROSENFELD
EDWARD Y. KROUB
~ 3 ~ r= ---
DAVID ACR6SENFELD
58 South Service Road, Suite 200
Melville, NY 11747
Telephone: 631/367-7100
631/367-1173 (fax)
GLANCY BINKOW & GOLDBERG LLP
LIONEL Z. GLANCY
COBY M. TURNER
1925 Century Park East
Suite 2100
Los Angeles, CA 90067
Telephone: 310/201-9150
310/201-9160 (fax)
-60-
GLANCY BINKOW & GOLDBERG LLP
ROBIN BRONZAFT HOWALD
30 Broad Street, #1401
New York, NY 1 0004
Telephone: 212/382-2221
Facsimile: 212/382-3944
Co-Lead Counsel for Plaintiffs
WOODWARD & KELLEY, PLLC
PHILIP C. WOODWARD
1233 Shelburne Road, Suite D-3
South Burlington, VT 05403
Telephone: 802/652-9955
802/652-9922 (fax)
Liaison Counsel for Plaintiffs
- 61 -

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