Green Mountain Margin Call Latest Sign Market Is Stuck in 1929
NEW YORK (TheStreet) -- The recent share tumble of Green Mountain Coffee Roasters(GMCR) harkens back to the stock crashes of Chesapeake Energy(CHK) and Goldman Sachs(GS) during the financial crisis, and in fact, all the way back to the Great Depression.
That's because in each case the issue of whether top executives and board members should be permitted to use their company stock as collateral for personal investments has been raised. It's a question yet to be answered definitively by the corporate world, even after similar problems first surfaced more than 80 years ago.
The risk of more market implosions triggering margin calls is significant, according to data from Institutional Shareholder Services. Approximately 23% of S&P 500 companies have executives or company officers who have pledged company shares. Only 62.4% of S&P 500 companies have a policy in place prohibiting the hedging of shares by executives.
On Monday, Green Mountain Coffee Roasters ousted its chairman and founder Robert Stiller after he was forced to sell $125.5 million in stock to meet margin calls.
The sales, which violated company prohibitions on trading shares during earnings, were made as Green Mountain tumbled 48% on May 2 on a weak first quarter earnings report. Because Stiller had roughly 12.5 million of his Green Mountain shares in margin accounts for personal loans that Bloomberg reports were used to buy a 164-foot yacht, the falling value of Green Mountain shares precipitated margin calls and his stock sale.
Stiller may face Securities and Exchange Commission scrutiny over the sales, according to a Reuters report, because the sales came during a restricted period for insider selling.