* 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 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
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
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
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
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
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
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
A lawyer for Dunlap did not respond to a request for a
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
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
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."