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The founder and chairman and the lead independent director of
Green Mountain Coffee Roaster (GMCR) both were removed from their
leadership positions as a result of margin call sales of company
stock earlier this month that the company termed "inconsistent
with" the company's insider trading policy. According to
the company's press release, Mr. Robert P. Stiller was removed
as chairman and Mr. William D. Davis was removed as independent
lead director because they had margin call related stock sales
totaling 5.548 million shares. These forced sales were related to
margin loans, which were secured by pledges of Mr. Stiller's
and Mr. Davis' GMCR stock and were triggered by recent GMCR
stock price declines (the stock dropped almost 50% after the
company released quarterly results and lowered its fiscal year
forecast). The sales occurred at a time when the trading window in
GMCR stock was closed under the company's internal trading
policy. Also, it was discovered that Mr. Davis had pledged shares
after the internal trading policy had been amended to prohibit
pledges of company stock (existing pledges were grandfathered).
Margin loans and stock pledges by directors and officers raise
several issues to consider under federal securities laws:
Insider Trading. Pledges and
margining of securities may be viewed as sales under securities
laws; accordingly, stock should never be pledged or margined by
insiders when they are in possession of material, non-public
information. Similarly, if the insider fails to meet a margin call
or defaults on the underlying loan, such securities could be sold
at a time when the insider is aware of material, non-public
information and potentially result in an insider trading law
violation. Best practices suggest that an issuer's insider
trading policy prohibit the holding of the issuer's securities
in a margin account or the pledging of such securities as
collateral for a loan. Exceptions to this policy should rarely be
given and then only if the insider is able to provide evidence of
sufficient current and future financial ability to repay the loan
without resorting to the sale of the margined/pledged stock.
Section 16 Issues. Generally,
depositing stock in a margin account or a bona fide pledge to
secure a loan is not a "sale" for purposes of Section 16
of the Exchange Act and is not reportable.1 However, the
sale of stock as a result of a margin call or foreclosure is viewed
as a sale by the insider for Section 16 purposes and is reportable
within two business days on a Form 4 report. The insider also will
be liable for any profit under Section 16 if the sale is within six
months of a matchable purchase of the same class of
stock.2
Proxy and Registration Statement
Disclosures. Issuers must disclose in the stock
ownership table in any proxy statement and registration statement
they file the amount of shares that have been pledged (including in
margin accounts) by directors and executive
officers.3
Schedule 13D. If the insider is
required to file a Schedule 13D, pledges of securities are required
to be disclosed as well as "material" sales4
that result from any margin call or foreclosure. SEC Rule 13d-2(a)
provides that acquisitions or dispositions of 1% or more of the
outstanding class of securities will be deemed material, although
lesser amounts may be deemed material depending upon the facts and
circumstances.
Form 8-K Report. Under more extreme
circumstances, the sale of margined or pledged securities of an
insider could result in a change of control of the issuer,
requiring the filing of a Current Report on Form 8-K under Item
5.01.5
Footnotes
1. See Securities Exchange Act Release No.
34-18114, n. 64 (1981).
2. See Alloys Unlimited, Inc. v. Gilbert, 319 F.
Supp. 617 (S.D.N.Y. 1970).
3. Rule 403(b)(3) of Regulation S-K, 17 CFR
§229.403(b)(3).
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