WSJ: Margin Call - The Most Exposed

WSJ: Margin Call – The Most Exposed

May 17 2012

By MAXWELL MURPHY

Margins have moved front and center.

Last week Green Mountain Coffee Roasters Inc. founder Robert Stiller got a $123 million margin call. Meeting it forced him to sell a large chunk of his stock and cost him his job as the company’s chairman.

Many large companies prohibit their executives or directors from pledging their shares as collateral for loans or sharply curtail the practice. But some companies continue to allow it, exposing shareholders to the risk that an insider might abruptly dump stock on the market to meet a lender’s demand for more collateral.

Steven Hall of compensation consulting firm Steven Hall & Partners says it is a “dangerous game” for executives to put company shares in margin accounts because margin calls might come while the executive is in possession of material nonpublic information, or during so-called blackout periods, which are company-imposed bans on trading, often before results are released, designed to prevent employee insider trading.

It is good policy, he said, for companies to prohibit executives from borrowing against their shares. It isn’t clear what legal responsibility an executive would bear for stock sales at inappropriate times that were out of the executive’s control.

“Leverage is a wonderful thing on the upside,” said Mr. Hall, “and pretty damned ugly on the downside.”

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