Green Mountain Founder Fights for Role After Ouster

Green Mountain Coffee Roasters Inc. (GMCR) founder Robert Stiller, ousted as chairman after stock sales that violated company rules, said he borrowed against his stock to buy a yacht and is determined to stay involved in the company he led for three decades.

“We have a strong history of being innovative and that will continue,” Stiller, 68, said in an interview yesterday. “I love it, and I will very much be a part of everything going forward.”

Stiller was stripped of his chairman title and board committee assignments May 8 after selling about $125.5 million in stock earlier in the week to meet a margin call on some loans. Those loans were taken out to buy a 164-foot yacht and to fund his Heritage Aviation business, he said.

The margin call was forced after the company reported second-quarter sales that trailed analysts’ estimates on May 2, causing a 48 percent plunge in Green Mountain shares the next day. Green Mountain said Stiller’s sale occurred during a time when officers were prohibited from trading in company shares.

The company, based in Waterbury, Vermont, called the forced sales by Stiller and similar ones by board member William D. Davis “disappointing” and said they will be required to settle outstanding margin loans by the end of this year.

The U.S. Securities and Exchange Commission is reviewing Stiller’s trades, though it may face obstacles in claiming securities laws were violated if the shares were sold as part of a pre-existing agreement, according to a person with knowledge of the matter.

Not Necessarily Violation

“A violation of company policy isn’t necessarily a securities law violation,” said Peter Henning, a former SEC attorney who is now a securities law professor at Wayne State University in Detroit. “You’re allowed to use your shares as collateral, though you’d hope that the company had some indication that they had pledged such a large percentage of their shares.”

Stiller, who will remain on the board without pay, said he hasn’t been contacted by the SEC and wouldn’t be surprised if he was eventually. Still, he said he was “stunned” by the dismissal.

“I didn’t think the consequences for what happened would be as great,” he said. “Certainly, I did violate some company policy and we do take that policy very seriously.”

The sale brought Stiller’s stake down to about 8.39 million shares, making him the fifth-largest holder, from 13.4 million as of March 27, according to data compiled by Bloomberg. Stiller also sold stock in Krispy Kreme Doughnuts Inc. (KKD) for almost $50 million on May 7, getting rid of his more than 8 million shares at $6.15 each, according to a filing yesterday.

Loan Backing

In general, executives take out loans backed by their stock as a way of obtaining funds without actually selling their shares. Loans are preferable to selling shares, which generate taxable capital gains and can look bad to investors.

If the shares decline in value, lenders will issue a margin call in which the executives must either pay down the loans or provide more collateral. If they fail to do so, the banks seek to recover their loans by selling some of the stock pledged as collateral in the open market.

Stiller has put about 12.5 million of his Green Mountain shares into margin accounts or pledged them as collateral for at least one loan, according to the company’s latest proxy statement. Green Mountain’s board amended the company’s internal trading policy in December to prohibit pledging shares as collateral as of Jan. 1 and grandfathered in Stiller’s positions.

One of those loans went to pay for Stiller’s yacht, dubbed Grace E. The vessel was built in 2004 by Italian shipyard Codecasa and can accommodate 12 people and 11 crew members, according to the Superyachts.com Ltd. website.

Company Founding

The yacht shows how far Stiller, who founded Green Mountain in 1981 as a small Vermont cafe and served as chief executive officer from 1981 until May 2007, has come since his early days in business. The executive had been “kind of a hippie” in his youth and wanted to retire and ski in Vermont after selling E-Z Wider, his cigarette rolling-paper company, in 1980, said John Trucano, who has known him since the early 1990s.

Even as chief executive officer of Green Mountain, Stiller didn’t seem the typical corner-office type, said Trucano, who made the first investment in the Keurig single-serve coffee brewer in 1995, years before it was sold to Green Mountain.

‘Final Decision’

“He let other people have most of the meetings and he would be involved in the final decision,” Trucano said. “He wasn’t all that active in the day-to-day work back then.”

Stiller entered the New York Military Academy in 1957, and participated in cross country, track and basketball. He later graduated from Parsons College in Fairfield, Iowa, with a bachelor’s degree in administration and accounting. He also studied industrial engineering at Syracuse University for three years.

His first job was with Stillman Manufacturing, before he co-founded Robert Burton Associates in 1971 with Burton Rubin. The two created and later sold their E-Z Wider extra-wide rolling paper business for $6.2 million.

Nearly a decade after creating Robert Burton Associates and after cashing out of his cigarette-paper venture, Stiller had a cup of joe in Waitsfield, Vermont, and decided to buy the cafe that served it to him.

Hippie Entrepreneurs

After starting as hippie entrepreneurs, they ``kind of morphed into being serious businessmen,” said Michael Gross, who interviewed both Stiller and Rubin for his 2001 book “The More Things Change: Why the Baby Boom Won’t Fade Away.” Stiller, who describes coffee as being spiritual, decided to invest in the first coffee shop because he saw the market potential, according to Gross’s interviews.

While CEO of Green Mountain, Stiller engineered the purchase of single-serve pioneer Keurig in 2006, turning his company into a real player in the coffee industry. Keurig’s dominance in the single-cup beverage market has forced Starbucks Corp. (SBUX) and Dunkin’ Brands Group Inc. (DNKN) to make pacts with Green Mountain to sell K-Cups. Green Mountain also sells Caribou Coffee Co. (CBOU) and Folgers brand portion packs.

Keurig sales sent the shares on a tear, gaining more than twelve-fold from the end of 2006 through last year. Such rapid success drew attention and criticism.

Einhorn Criticism

Hedge fund manager David Einhorn in October blasted the company, questioning its accounting practices and saying its market share had peaked. The company’s most recent blow came after reporting second-quarter sales of $885.1 million, trailing analysts’ average estimate of $971.7 million and setting off the shares’ biggest decline ever.

The company’s market value, which peaked at $17.1 billion in September, was about $4.08 billion at the close of regular trading yesterday.

“I never thought we would be as big as we are today nor have the potential to be so much better,” Stiller said. “I always thought maybe we’d be a $1 or $2 billion company.”

To contact the reporters on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net; Joshua Gallu in Washington at jgallu@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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