Bloomberg News

Green Mountain Founder Sold Stock Before Starbucks Threat

March 26, 2012

Green Mountain Coffee K-Cups at the company's visitor center and cafe in Waterbury, Vermont on Feb. 18, 2011. Photographer: Herb Swanson/Bloomberg

Green Mountain Coffee K-Cups at the company's visitor center and cafe in Waterbury, Vermont on Feb. 18, 2011. Photographer: Herb Swanson/Bloomberg

Robert P. Stiller, founder and chairman of Green Mountain Coffee Roasters Inc. (GMCR), sold $66.3 million of his stock before it plunged the most in four months on news that Starbucks Corp. (SBUX) had developed a rival to its K-Cup brewer.

Stiller’s combined sales on Feb. 15 and 24 were his largest in a single month since at least 2003, when the stock traded below $2, data compiled by Bloomberg show. He would have received $13.7 million less had he sold after March 9, when the shares fell 16 percent on Starbucks’ introduction of a machine for home-brewing single cups of espresso and coffee, a challenge to Green Mountain’s Keurig system.

“We recently learned of Starbucks’ planned initiative in the espresso-based single-cup category,” Green Mountain said in a March 9 regulatory filing, a day after the machine was announced. “However, we were not made aware of any additional capabilities.” Spokesmen for Green Mountain wouldn’t specify when it learned of the plan.

Green Mountain is struggling to hold market share as it braces for the September expiration of its main patents on K- Cups. The plastic pods have dominated single-serve coffee making in the U.S., with flavors including Gloria Jean’s Butter Toffee Coffee and Wolfgang Puck’s Jamaica Me Crazy blends. As other companies prepare their own machines, the Waterbury, Vermont- based brewer’s stock has almost halved to $53.51 in the six months through last week.

The shares dropped 2 percent to $52.45 at 4:30 p.m. in New York, after reaching as high as $54.75 during the session.

Must Abstain

“It’s something that the SEC would want to look at,” said James D. Cox, a securities law professor at Duke University in Durham, North Carolina. “If he has inside information, he has to withdraw from the market.” Florence Harmon, a Securities and Exchange Commission spokeswoman, declined to comment.

Starbucks informed Green Mountain of its plans before its announcement, according to Alisa Martinez, a spokeswoman for the Seattle-based company. She wouldn’t elaborate. Darren Brandt, a spokesman for Green Mountain, declined to comment on behalf of the company and Stiller.

Stiller reduced his direct stake last month by 6.9 percent, selling a total of 1 million shares, according to regulatory filings with the SEC. The sales aren’t marked as so-called 10b5- 1 transactions, a type of pre-programmed trade that managers set up in advance to show they aren’t basing decisions on inside information. Starbucks’ March 8 announcement after the close of trading sent Green Mountain’s stock down the next day. By the end of last week, it had regained 1.8 percent.

Stiller’s Background

Stiller, the second-biggest shareholder of Krispy Kreme Doughnuts Inc. (KKD) and the largest stakeholder of pizza chain Noble Romans Inc. (NROM), also co-founded the rolling paper maker E-Z Wider. He founded Green Mountain in 1981 as a small Vermont cafe and remains the largest individual shareholder with 13.4 million shares, or 8.7 percent of the company, according to Bloomberg data. Stiller was listed as 68 in a February proxy statement.

The company has faced criticism from hedge-fund manager David Einhorn, who in October questioned its accounting and said its market share has peaked.

“With Green Mountain’s patents expiring this fall, Starbucks’ entry is part of the competitive onslaught hitting Green Mountain,” said Einhorn, 43, president of New York-based Greenlight Capital Inc., in an e-mail earlier this month.

Stiller submitted paperwork dated Aug. 4 to the SEC showing he wanted to sell as much as 2 million shares. He sold only 500,000 that day, a separate filing shows.

Rival Machines

Even if those documents showed intent to further reduce his stake, the February trades would be “problematic” if he had information from Starbucks about its plans, said Onnig Dombalagian, a professor at Tulane University Law School in New Orleans and former fellow at the SEC.

Green Mountain says its K-Cup system and a new brewer, called Vue, are different from the new Starbucks machine, called Verismo. Green Mountain’s machines use “low pressure to extract maximum flavor,” as opposed to espresso machines using “high pressure and high temperature to produce a more intense taste profile,” according to its March 9 statement.

Starbucks had an existing agreement to sell coffee for Green Mountain’s K-Cup system before introducing the Verismo. On March 21, the companies said Starbucks will also sell cups that work with the Vue. Green Mountain jumped 10 percent on that announcement.

Stiller’s trades probably aren’t the most important of the “smorgasbord of cases” the SEC could be interested in, Boston University School of Law professor Tamar Frankel said. The commission’s resources “are not unlimited -- far from it.”

To contact the reporters on this story: Max Abelson in New York at mabelson@bloomberg.net; Leslie Patton in Chicago at lpatton5@bloomberg.net.

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Robin Ajello at rajello@bloomberg.net.


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