Big trouble at Green Mountain Coffee Roasters, the Vermont company that’s been growing by leaps and bounds due to its popular single-cup coffeemakers (and the non-biodegradable K-cups they consume). Last week, GMCR stock took a tumble after it badly missed expectations for second-quarter profits. That, in turn, led to the latest bad news: Founder and Board Chairman Bob Stiller and lead director William Davis were removed from the Board of Directors after they were forced to sell big chunks of company stock during a time when such sales are prohibited by company rules designed to prevent illegal insider trading.

Well, ain’t that a sentence and a half. This is a complicated story, but it seems to indicate a real lack of judgment on Stiller’s part. And it’s one more black mark for a company that’s got more than enough on its plate already.

Stiller and Davis (especially Stiller) sold huge chunks of stock last week — five and a half million shares. They were forced to sell because they’d taken out big loans with their GMCR stock as collateral. The terms of the loans require stock sales if the stock price falls far enough fast enough. Which it did last week. More info on the practice from Bloomberg Business Week:

In general, executives take out loans backed by their stock as a way of obtaining funds without actually selling their shares. Loans are preferable to selling shares, which generate taxable capital gains and can look bad to investors.

If the shares decline in value, lenders will issue a margin call in which the executives must either pay down the loans or provide more collateral. If they fail to do so, the banks seek to recover their loans by selling some of the stock pledged as collateral in the open market.

Seems a bit iffy to me — taking out loans on company stock to avoid taxes — but apparently standard operating practice for top execs at successful companies. I’m going to focus on Stiller from here on, because he was by far the biggest borrower and the biggest seller. Before last week’s forced sale, he had put 12.5 million of his GMCR shares into margin accounts. Today, he still owns 8.3 million shares — and all but 1.9 million are in margin accounts.

In short, he borrowed huge amounts of money by pledging the lion’s share of his company stock. This worked fine as long as GMCR’s share price continued to soar, but spelled instant trouble if GMCR suffered reverses. And the forced stock sales would come at the worst possible time — when GMCR had just suffered a major reversal.

Is it just me, or was this a really, really stupid thing to do?

To me it looks like a fundamental violation of the first rule of personal finance: Never gamble with money you can’t afford to lose. And Stiller’s position was tenuous enough that he was also forced to unload eight million shares in Krispy Kreme to raise some emergency cash.  

In explaining his extensive borrowing, Stiller noted that he is officially retired and that his stock portfolio is his main source of income. Asked by the Associated Press about reports that he has lived a lavish lifestyle, he said…

“Maybe I shouldn’t do these things, but I’ve worked all my life building this company and it’s been successful,” said Stiller, 68. “I want to enjoy it. Whether it’s living lavishly, I think that’s all relative.”

Yes, it’s all relative. I’ll note here that while Stiller doesn’t draw a salary from GMCR, he did receive $175,296 last year in compensation for his duties as Chairman of the Board. That’s enough, by itself, to put Stiller in America’s top six percent for household income. But hardly enough to maintain an admittedly indulgent lifestyle.

And a huge comedown for a guy who was on the Forbes 400 list of American billionaires as recently as last September. Forbes estimated his fortune at $1.3 billion, mostly in GMCR stock. And more than 80% of that stock, as we now know, had been used as collateral in personal loans. This sounds less like something a savvy CEO would do, and more like the spending binge of a Lotto winner.

In response to Stiller and Davis’ exposed positions, GMCR revised its internal rules late last year, and no longer allows top executives or Directors to borrow against their company stock. (Stiller and Davis’ arrangements were grandfathered in.) Clearly, someone at GMCR saw potential trouble in their founder’s finances, and moved to prevent future recurrences.

Which is cold comfort for a company that’s heading into a very challenging time. It’s enjoyed a lovely period of rapid, almost uncontrolled growth thanks to its stranglehold on a popular market niche. But you can only sell so many of those K-cup machines, and GMCR’s patents will expire in September. They have high hopes for some new products, but the sharks are circling. And if there’s one thing harder than coming up with one hit, it’s creating an even better sequel. Just ask RIM, or Kajagoogoo, or Michael Cimino.