By Emily Flitter
July
2, 2012
NEW
YORK, July 2 (Reuters) - A U.S. Securities and Exchange Commission
investigation into the accounting practices of Green Mountain Coffee Roasters
is casting a spotlight on M. Block & Sons, a little-known consumer products
distributor.
The 18-month Green
Mountain probe marks the third time in a dozen years that securities regulators
have looked at the accounting practices of a company that used Chicago-based M.
Block to store and help deliver its products to major retailers.
One of the previous
investigations led the SEC to charge former Sunbeam Corp Chairman Albert Dunlap
with overseeing a massive accounting fraud. The other case involved mobile
technology accessories maker iGo Corp, whose executives were charged with
inappropriately using M. Block's services to record revenues ahead of schedule.
Neither M. Block nor
any of its employees has been charged with wrongdoing as a result of the three
investigations. But in the Sunbeam and iGo cases, court records show SEC
lawyers interviewed M. Block executives about the company's procedures for
warehousing and delivering goods for its customers.
Green Mountain has
disclosed in regulatory filings that the SEC has asked questions about its
business dealings with M. Block and about the terms of its contract with the
distributor.
Century-old M.
Block's warehouses serve as the main distribution points for Green Mountain's
single-cup coffee products to big retailers like Macy's Inc and Bed Bath &
Beyond Inc. Critics, including short-sellers betting on a decline in Green
Mountain's shares, have raised concerns that the company relies too much on M.
Block to get these items to market.
Experts say it is not
unusual for regulators looking into allegations of improper accounting
practices at a consumer goods company to examine its relationship with its
distributors, especially ones on which it is heavily dependent.
Fast-growing Green
Mountain said in 2010 that M. Block had "processed" about 43 percent
of its consolidated net sales. "The inability of M. Block to perform its
obligations" because of a systems problem or a deterioration in its
finances "could result in significant losses," Green Mountain said in
a regulatory filing.
Manufacturers can use
their distributors to improperly boost revenue by making shipments to or from
their warehouses at inappropriate times. In an accounting probe, one thing
regulators look for is evidence that a company is trying to juice its earnings
by improperly recognizing revenue before a product is actually sold.
Green Mountain has
said regulators have inquired about its procedures for recognizing revenues
from sales. The company, which makes most of its money from a single-cup coffee
product, says it does not record a sale until the product leaves its
distributor's warehouse to be sold either by a retailer or directly to a
customer, which experts say is not uncommon in the industry.
The accounting
practices that Green Mountain uses for products that are stored on "our
property and on other properties, including fulfillment companies like M.
Block" are appropriate, said Suzanne DuLong, the company's head of
investor relations.
A lawyer for M. Block
did not return calls and emails seeking comment. M. Block Chief Executive
Officer Bruce Levy also did not return several phone calls.
An SEC spokesman
declined to comment on the Green Mountain investigation.
So far, the Green
Mountain investigation has not resulted in any charges against the coffee
company or its employees.
But the ongoing probe
has provided fodder for shareholder lawyers and prominent hedge fund managers
like David Einhorn, who have raised questions about Vermont-based Green
Mountain's accounting practices and its reliance on M. Block to distribute its
products.
Einhorn, in an
often-cited presentation last October, blasted Green Mountain's bookkeeping and
said the company and M. Block were "potentially engaged in a variety of
shenanigans that appear designed to mislead auditors and to inflate financial
results." He said he had interviewed former M. Block employees about the
company's relationship with Green Mountain.
Shares of Green
Mountain, which peaked at $115.98 in September, have fallen to around $21.50,
in part because of concerns about the ongoing SEC probe and the company's
growth prospects as competitors enter the single-cup coffee market.
In November 2010,
Green Mountain restated its earnings for several fiscal years after a review by
a board committee set up in response to the SEC investigation. The committee
said it had found errors in the company's financial statements, but no misconduct
by any of Green Mountain's employees.
OCCUPATIONAL HAZARD
"Companies'
shipping goods to their distribution channel partners to create fictitious
revenue is a common method of fraud," said former SEC Chief Accountant
Lynn Turner, who was not commenting specifically about Green Mountain or M.
Block.
But accounting
experts caution that a distribution company often is not aware that a customer
is improperly booking or recording sales revenues.
In the Sunbeam
investigation, SEC lawyers deposed current M. Block CEO Levy, who at the time
was president of the company, court records show. A copy of the deposition was
not available because the case against Dunlap, whom the SEC charged in 2001,
did not go to trial.
Nicknamed
"Chainsaw Al" because of his history of slashing jobs at the
companies he ran, Dunlap paid a $500,000 fine to the SEC in 2002 to settle the
accounting fraud case and was permanently barred from serving as an officer or
director of a public company.
A lawyer for Dunlap
did not respond to a request for a comment.
M. Block, which owns
warehouses in Illinois, California and Tennessee, also handles products for
Procter & Gamble Co, Arc International and small housewares maker Tristar
Products. Goods from these companies also end up at department stores, showrooms
and big-box retailers.
Interviews with a
dozen former M. Block employees revealed a quick transition in 2008 from a
business that mainly moved small appliances to grocery stores to an increased
focus on distributing Green Mountain products.
STALE COFFEE
A pending shareholder
lawsuit against Green Mountain says the coffee manufacturer "managed"
its revenues by using M. Block "as a captive warehouse to park its
products."
Green Mountain, in
court papers, has denied the allegations. It won a motion to dismiss the
litigation, but the judge in the case allowed the shareholders to file an
amended complaint. The case is still pending.
In the original
complaint, the shareholder's lawyers said large shipments went to M. Block
facilities without the proper paperwork and that some warehouses were filled
with unsold coffee that was past its expiration date.
Several former M.
Block employees confirmed that the company's warehouses sometimes were
overstocked with expired Green Mountain coffee, which led the distributor to
encourage periodic giveaways.
Patrick McCoy, a
former loss prevention manager in Illinois, said that every few months M. Block
would give out industrial-sized, 44-gallon garbage bags for its employees to
fill with single-cup Green Mountain coffee pods.
"That coffee was
usually outdated or damaged, coffee that hadn't been sold in time," McCoy
said. "But it still tasted great."
McCoy said he did not
have information on how Green Mountain was recognizing its revenues.
DuLong said she would
not comment on "a situation that is alleged to have taken place with an
employee that is not a GMCR employee, at a facility that is not a GMCR
facility."