2012 03-27 Horowitz vs Green Mountain Coffee Roasters - Proposed Second Consolidated Amended Class Action Complaint (Marked Copy)

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

[PROPOSED] SECOND CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS

Case 2:10-cv-00227-wks Document 65-2 Filed 03/27/12 Page 1 of 64

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

of GMCR 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 of K-Cups, or single-cup brewing packages, and K-Cup brewers

and related accessories, which, during fiscal 2010, 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


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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.

the Company improperly accounted for inter-company transactions causing inventory and earnings

to be overstated; the Company publicly disseminated materially misstated financial statements that


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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 control 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

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 (10) 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 until 2018 and 2019, and sold 5,000 shares of GMCR 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 of 230,000 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 and coffee maker giant, Luigi Lavazza S.p.A. (“Lavazza”) for $250


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million. On September 14, 2010, GMCR announced it acquired all of the 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.

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 10-

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 thirty-nine 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.

§1331 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.


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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.

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 Robert P. Stiller (“Stiller”) is, and was at all relevant times, the Founder

and Chairman of the Board of Directors of GMCR.

17. 18.Defendant Lawrence J. Blanford (“Blanford”) is, and was at all relevant times, the

President, Chief Executive Officer and a Director of GMCR.

18. 19.Defendant Frances G. Rathke (“Rathke”) is, and was at all relevant times, the

Chief Financial Officer, Treasurer, Secretary, and Principal Financial and Accounting Officer of

GMCR. 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 of GMCR during the Class Period. LST further noted that

GMCR’s Forms 10-K issued between 2003 and 2008, that were certified pursuant to the Sarbanes-


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Oxley Act of 2002 (“SOX”) as being accurate by Rathke herself, inaccurately identified Rathke as a

CPA.

19. 20.Defendants Stiller, Blanford and Rathke are referred to herein as the “Individual

Defendants.”

20. 21.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

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. 22.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


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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 of herein. Because of their positions of control, the Individual

Defendants were able to and did, directly or indirectly, control the conduct of GMCR’s business.

22. 23.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.

23. 24.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. 25.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.


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The scheme: (i)25. deceived the investing public regarding GMCR’s business, operations and

management and the intrinsic value of GMCR common stock; (ii)25. enabled the Company to

procure debt financing on favorable terms to fund a major acquisition; (iii)25. allowed GMCR to sell

8,566,649 common shares in a private transaction at artificially inflated prices; (iv)25. allowed

insiders to sell 240,000 GMCR shares at artificially inflated prices; and (v)25. caused Plaintiffs and

members of the Class to purchase GMCR common stock at artificially inflated prices.

CLASS ACTION ALLEGATIONS

25. 26.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 of GMCR 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

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. 27.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. 28.Plaintiffs’ claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by Defendants’ wrongful conduct in violation of federal

law complained of herein.


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28. 29.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. 30.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

(d) to what extent the members of the Class have sustained damages and the

proper measure of damages.

30. 31.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. 32.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.


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32. 33.SCBU sources, produces and sells coffee, cocoa, teas and other beverages in K-

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. 34.Keurig sells single-cup brewers, accessories and coffee, tea, cocoa and other

beverages in K-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. 35.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 North America, a substantial of its business is done in the U.S., with approximately 97% of its

fiscal 2010 revenues being made to U.S. customers.

35. 36.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. 37.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, such as Nestle, Kraft Foods and Starbucks, 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


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season), GMCR’s survival is beyond the Class Period was largely dependant dependent upon its

current perceived ability to rapidly grow and secure brand loyalty with consumers.

GMCR’s Deceptive Financial Reporting

37. 38.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. 39.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.

The SEC’s Financial Reporting Inquiry, GMCR’s Admitted

Violations of GAAP and Financial Restatements

39. 40.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. 41.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 expense expenses prior to and during the Class Period.

41. 42.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


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previously issued financial statements for fiscal years 2007, 2008, 2009 and the first three quarters of

2010.

42. 43.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. 44.Moreover, as SEC’s Staff Accounting Bulletin No. 99 points out , “qualitative

factors may cause misstatements of quantitatively small amounts to be material” and that “the staff

believes that 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

immaterial:”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. 45.On December 9, 2010, the Company filed the 2010 Form 10-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 thirty-nine 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%.

1 Unless indicated otherwise herein, all emphasis is added.


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45. 46.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 of GAAP, knowingly

or recklessly employed improper accounting practices that materially overstated GMCR’s reported

net income during the Class Period.

46. 47.Indeed, compliance with GAAP is a basic fundamental obligation of publicly

traded companies. As set forth in SEC Rule 4-01(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).

47. 48.Defendants have now admitted that: (i)48. investors “should no longer rely upon”

the Company’s financial statements for fiscal years 2006, 2007, 2008, 2009 and the first three

quarters of 2010 given that they were materially misstated; and (ii)48. that material weakness exist in

the Company’s system of internal controls over its financial reporting.2

48. 49.In the 2010 Form 10-K, Defendants classified the Company’s violations of GAAP

and misstatements in GMCR’s prior financial statements as being associated with errors in the

accounting and reporting of:

(a) royalty income on intercompany 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;

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 of 2010, the 2010 Form 10-K added the Company’s fiscal 2006 financial statements to the list of GMCR’s previously issued misstated financials.


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(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. 50.As a result of the foregoing violations of GAAP, during the Class Period GMCR’s

reported net income for the thirty-nine 39 weeks ended June 26, 2010 were was overstated by

approximately 6.2%.

50. 51.Indeed, GMCR’s manipulation of product royalty income demonstrates

Defendants’ financial slight 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. 52.In its Form 10-K for the year ended September 26, 2009 (the “2009 Form 10-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

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.


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52. 53.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 10-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.

53. 54.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:”

5 While the 2007 Form 10-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.”

Mar 2010 Jun 2010

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

G re e n M o u nta in Co f fe e Ro a s te rs , I nc ,Y ea r o v e r Y e ar Ch a ng e in In v e nto ry

D u ring th e q ua rte rs en d


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54. 55.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:

Mar 2010 Jun 2010 Sep 2010

61.0%

62.0%

63.0%

64.0%

65.0%

66.0%

67.0%

68.0%

69.0%

G re e n M o u nta in Co f f e e Ro a s t e rs , I nc ,Y ea r o v e r Y e ar Ch a ng e in Sa le s

D u ring th e q ua rte rs en de d

55. 56.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 of K-Cups from

licensed roasters afforded Defendants a means of managing the Company’s earnings during the

Class Period.

56. 57.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%, of GMCR’s 2009 pre-tax income of $90.4 million, as reported in the

2009 Form 10-K, was derived from third-party royalty income.


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57. 58.Then, GMCR, as part of the Company’s financial restatement, revealed in the

2010 Form 10-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 Keurig for 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 of K-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 by Keurig.

58. 59.Although the quantitative materially 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 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.


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The SEC Inquiry

59. 60.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 staff’s inquiry.

60. 61.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 fiscal 2010 revenues.

61. 62.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.

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. 63.According to its web-sitewebsite, 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 web-

site website also indicates states that it became Keurig’s U.S. distributor in 2003.


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63. 64.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. 65.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

(Confidential Witness “CW” No. 1, or CW1), indicated that:. 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. CW1 noted that:

(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);

6 CW1 recalled that in 2003, the FDA gave GMCR until 2009 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.


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(b) (a)Prior to mid-2009, GMCR had made a significant investment in MBlock,

specifically to support its infrastructure. (In fact, (MBlock opened its third distribution center in

2009 and its fourth in 2010.););

(c) (b)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 GMCR Vice President of Operations Jonathan Wettstein and

Director of Operations Don 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 overproduce

products. Thereafter, CW1 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, described 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 2010, 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.);


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(d) (c)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) (d)CW1 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 of MBlock’s warehouses.

65. 66.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. 67.A former employee of MBlock from 2001 through early 2009 , who worked in

direct contact with MBlock’s owners in MBlock’s Chicago headquarters (“CW3”) indicated

“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. CW4 recalled that a physical inventory was taken

once a year and was an “all hands” project. Prior to mid-2009, GMCR represented 20% of

MBlock’s business. However, after a new nationwide contract was entered into, around July 2009,

GMCR’s business shot up quickly grew to approximately 75% of MBlock’s total business.

67. 68.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,” the above-noted former employee has CW1 stated that by no later than the first week

of May 2010, he/she was contacted by Company officers and managers and employees who ,

including Multi-Site Scheduling Manager Dan Redding (“Redding”), Global Transportation


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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 had been the

whistleblower in an 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. 69.Accordingly, Company employees contacted the confidential witness concerning

an SEC investigation five 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).

GMCR Improperly Recognizes Revenue on Product Shipments to MBlock

71. 70.CW1 indicated noted that GMCR improperly recognized revenue on 150 truck

loads of product coffee K-Cups that was were shipped to MBlock during the quarter ended

December 26, 2009. This former GMCR manager stated that he/she and other Company employees,

including the Company’s global transportation managerBurkhardt, 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


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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. 71.Specifically, CW1 indicated 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. In additionAt 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 not listed unable to find it on the Company’s

production forecast schedule and employees who worked under CW1 not only saw the trucks go out,

but visited MBlock and saw its warehouses filled to the rafters with K-Cups. CW1, who estimated

that the value the revenue recognized on the foregoing improperly recorded transaction to be

between $7.5 and $15 million dollars, indicated the following GMCR executives were aware of the

shipment:Vice President of Operations Jonathan Wettstein (who regularly provided updates to CEO

Blanford), SBCU President McCreary and Vice President of Finance Tina Bissonette.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 CW14, 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 of K-Cups could be worth more than $100,000, while shipments of bags of coffee could be worth even more.


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73. CW1 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. CW1 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. CW1, 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). CW1

prepared information for Wettstein prior to these meetings, including running queries for reports and

producing pivot tables. CW1 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.

CW1 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.


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75. CW1 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 as K-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. CW1 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 CW1’s complaint by stating that using that methodology

“best met our needs.” CW1 understood from Wettstein’s response that Holly and Wettstein were

knowingly manipulating inventory. CW1 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


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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 CW6 to book shipments to MBlock as a sale. In fact, CW6 did not know if MBlock

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 (approximately 10-12 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. CW1 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


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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 of the product to inventory, CW1 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 of these 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. 72.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 of

the 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. 73.Consequently, GMCR also violated its revenue recognition policy, as disclosed in

the 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.


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83. 74.CW1 also indicated 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.

75. In addition, a former regional sales director for Keurig between 2004 and the fall of

2010 (“CW5”), indicated that distributors were unhappy with certain sales made to them by MBlock

and that during a March 2010 sales conference call with regional directors, Keurig Vice Presidents

Chris Stevens, Dan Cignarella and Dave Manly denied sales to distributors had been made by

MBlock.

76.A former Vice President of Operations for GMCR during 2010 (“CW6”), stated that while

the accounting department in Vermont told CW6 to book shipments to MBlock as a sale, the SEC

questioned the existence of an arms-length relationship between GMCR and MBlock. In fact, CW6

did not know if MBlock ever owned the products shipped to it.

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 GMCR’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.


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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 of MBlock, the witnesses interviewed by Einhorn stated that:

• “[i]t was clear that Keurig and Green Mountain control MBlock”;

• “it felt like they worked for Keurig…I really never even had a boss while I was at MBlock”;

• “[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”;


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• “odd material movements” between GMCR and MBlock, “irregularities” that usually occurred around the time of MBlock’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.

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.


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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 in the quarter ended March 27, 2010. 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 10-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 10-Q report.

* * *


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According to Statement of Financial Reporting Standards No. 131 (SFAS 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, of those 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 10-Q report to $29.725 million for the same period in its Q3 2010 10-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.

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 Al 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 of 2011

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


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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 of 6 (“very aggressive”), indicat[ing]

it had higher accounting and governance risk than 94% of companies.”

Materially False and Misleading Statements Issued During the Class Period

98. 77.The Class Period begins on July 28, 2010. On that date, GMCR issued a press

release announcing its financial results for the fiscal 2010 third quarter, the thirteen 13 and thirty-

nine 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 fiscal 2009. The press

release also stated:

According to Generally Accepted Accounting Principles (“GAAP”), net income for the third quarter of fiscal 2010 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.


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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 of fiscal 2009.

• 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.

• 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 of fiscal 2010, 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.


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• 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 of fiscal 2009.

• 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 2010 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 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 coming 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 of between 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:


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99. 78.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:

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 of the quarter as we closed our acquisition of Diedrich 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 of fiscal 2009.


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* * *

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 of the 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:

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


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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 turn 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. 79.In response to the Company’s announcement and Defendants’ statements on the

conference call, the price of GMCR stock rose $2.69 per share on July 29, 2010, or more than 9%, to

close at $31.36 per share.

101. 80.On August 5, 2010, GMCR filed with the SEC its Form 10-Q for the thirteen 13

weeks ended June 26, 2010 (the “2010 Q3 Form 10-Q”), which was signed by Defendants Blanford

and Rathke . The 2010 Q3 Form 10-Q included GMCR’s financial statements for the thirteen 13 and

thirty-nine 39 weeks ended June 26, 2010, which were represented to have been presented in

conformity with GAAP. In this regard, the 2010 Q3 Form 10-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


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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 10-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 of the 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. 81.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 10-K:

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.

103. 82.Several former Company employees commented that the relationship between

GMCR’s two business divisions likely caused or contributed to the problem:


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(a) A former director of operations, employed by GMCR from late 2008 until

September 2010 (“CW7”), indicated that the two business divisions maintained separate accounting

departments;

(a) (b)A consultant who worked for GMCR in the summer of 2009 (“CW8”)

indicated noted that GMCR’s accounting system used Peoplesoft PeopleSoft software and Keurig’s

accounting system used Great Plains software;

(b) (c)A territory manager for GMCR from 2004 until late 2010 (“CW9”)

indicated stated that Keurig maintained its own accounting department and operated somewhat

separately from GMCR; and

(c) (d)An accounting manager who worked for both Diedrich (a roaster acquired

by GMCR ) and the Company, from 2005 through the end of 2010 (“CW10”) indicated , 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. CW10 commented that problems with

intercompany 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


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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


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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. 83.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 10-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


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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. 84.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 of GMCR 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.


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107. 85.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 1000 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:


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108. 86.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 of fiscal 2010, 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. 87.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 of LJVH 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 of C $915 million or

$890 million based on the exchange rate as of September 13, 2010. The press release also stated that


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GMCR intended to finance the acquisition, which was subject to regulatory approval and is 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)87. a $750 million five-year senior secured

revolving credit facility; (ii)87. a $250 million five-year senior secured term loan A facility; and (iii)

87. a $350 million six-year senior secured term loan B facility.

110. 88.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. 89.The statements referenced above in ¶¶77¶¶98-99, 78, 80, 83, 84 101 and 85 105-

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.


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The Truth Emerges

112. 90.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 of LJVH Holdings, Inc., or Van Houtte, a leading gourmet coffee brand in Canada in the home and office channels, and the marketing of the associated $1.35 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 staff’s inquiry.

113. 91.In response to these adverse disclosures about the Company’s accounting practices

and the SEC’s investigation of the Company’s revenue recognition practices, the price of GMCR

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.


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Post-Class Period Disclosures

114. 92.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 of 2010 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.

A $1.4 million overstatement of pre-tax income, cumulative over the restated 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.

A $1.0 million overstatement of pre-tax income, cumulative over the restated 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.


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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 of 2010.

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 of 2002, 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. 93.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 $373.1 million and net income of $27 million, or $0.20 per diluted

share.

116. 94.Also on December 9, 2010, GMCR filed the 2010 Form 10-K with the SEC, which

revealed that GMCR’s net income for the thirty-nine 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 of

the SEC’s inquiry:


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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 staff’s 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. 95.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 of the 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) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), as of September 25, 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


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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 of the 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.


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1. Financial statement consolidation process. 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.

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:


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• 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.


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119. 96.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. 97.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. 98.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.


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Additional Scienter Allegations

122. 99.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. 100.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. 101.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. 102.In addition, the alleged improprieties noted herein enabled certain Company

insiders, namely McCreary and Stacy, the Presidents of GMCR’s two business segments, to exercise

and sell large amounts of their GMCR shares in August 2010. For example, McCreary, who realized


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a gain of more than a $6.3 million, sold 200,000 shares on August 18, 2010, leaving him with 97,488

shares of GMCR 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 09/21/10 625 $37.00 $23,125 11/05/10 10,000 $35.00 $350,000 50,000 $1,640,500

Total: 250,000 $8,256,500

126. 103.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. 104.Even worse, in October 2010, Stacy amended her Form 4s for the August and

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


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per share and simultaneously sold them at $55.54 per share. Stacey sold her stock at $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, 2010, 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 10b5-1 trading plan on August 13, 2010. A Rule 10b5-1 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 10b5-1 trading plan. However, her sale of 30,000 shares on August 13 was not pursuant to a 10b5-1 trading plan. According to Stacy's amended SEC filings, her 10b5-1 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 10b5-1 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 10b5-1 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.


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Loss Causation/Economic Loss

130. 105.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 of GMCR common stock fell precipitously as the prior artificial inflation came out. As a result

of their purchases of GMCR common stock during the Class Period, Plaintiffs and the other Class

members suffered economic loss, i.e., damages, under the federal securities laws.

131. 106.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. 107.On September 28, 2010, GMCR filed a Form 8-K with the SEC, which disclosed

that: (i)107. the Company’s management discovered an immaterial accounting error; and (ii)107. 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.

133. 108.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.


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134. 109.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 of GMCR common stock when Defendants’

prior misrepresentations and other fraudulent conduct were revealed.

Applicability of Presumption of Reliance: Fraud on the Market Doctrine

135. 110.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

their respective brokerage firms. Each of these reports was publicly available and entered the public

marketplace.


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136. 111.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 of GMCR 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. 112.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 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder

Against All Defendants

138. 113.Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein.

139. 114.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


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in order to make the statements made, in light of the circumstances under which they were made, not

misleading.

140. 115.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 of business which

operated as a fraud and deceit upon the purchasers of the Company’s common stock during the Class

Period.

141. 116.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. 117.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 of GMCR

common stock during the Class Period.

COUNT II

Violation of Section 20(a) of the Exchange Act Against the Individual Defendants

143. 118.Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein.

144. 119.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 of GMCR, and their ownership of GMCR common stock, the Individual

Defendants had the power and authority to cause GMCR to engage in the wrongful conduct


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complained of herein. By reason of such conduct, the Individual Defendants are liable pursuant to

Section 20(a) of the Exchange Act.

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 of Plaintiffs 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: February 18, 2011March___, 2012

ROBBINS GELLER RUDMAN & DOWD LLP SAMUEL H. RUDMAN DAVID A. ROSENFELD EDWARD Y. KROUB

DAVID A. ROSENFELD

58 South Service Road, Suite 200 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax)


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GLANCY BINKOW & GOLDBERG LLP LIONEL Z. GLANCY MICHAEL GOLDBERGROBERT VCOBY M. PRONGAY1801 Avenue of the Stars, Suite 311TURNER 1925 Century Park East Suite 2100 Los Angeles, CA 90067 Telephone: 310/201-9150 310/201-9160 (fax)

GLANCY BINKOW & GOLDBERG LLP ROBIN BRONZAFT HOWALD 30 Broad Street, #1401 New York, NY 10004 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)

LAW OFFICE OF BRIAN HEHIRBRIAN HEHIR239 South Union StreetBurlington, VT 05401Telephone: 802/862-2006802/862-2301 (fax)

Co-Liaison Counsel for Plaintiffs

CERTIFICATE OF SERVICE I hereby certify that on February 18, 2011, a copy of the foregoing was submitted for filing with the Clerk of the Court and served by mail on all counsel of record. DATED: February 18, 2011 ROBBINS GELLER RUDMAN & DOWD

LLPDAVID A. ROSENFELD

DAVID A. ROSENFELD

58 South Service Road, Suite 200Melville, NY 11747Telephone: 631/367-7100631/367-1173 (fax)


Documents

2012 03-27 Horowitz vs Green Mountain Coffee Roasters - Proposed Second Consolidated Amended Class Action Complaint (Marked Copy)