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