A Vital Investing Lesson from the World's (Other) Dumbest CEO
Another one bites the dust.
For weeks, Chesapeake Energy (CHK) CEO Aubrey McClendon has hogged the spotlight of investor ire and newspaper criticism, thanks to his self-interested and shady purchases of ownership stakes in his own company's oil wells. Considering that this is the same man who, in 2008, made leveraged bets on the stock, and was forced to liquidate most of his Chesapeake shares when hit with margin calls from his broker, you'd think this would cement McClendon's reputation as the dumbest CEO in the world.
Not so. Turns out, there's a new villain in town, and his name is Robert Stiller, (now ex-) chairman and founder of Green Mountain Coffee Roasters (GMCR).
Here We Go Again
Just as with McClendon and Chesapeake four years ago, Stiller's downfall owed to a combination of factors: Heavy purchases of his own company's stock on margin, a subsequent decline in the stock's value, and a resulting margin call by the bankers that made it necessary for Stiller to sell his shares to cover his debts.
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On Monday, these margin calls forced Stiller to liquidate 5 million shares of Green Mountain -- about $123 million worth of stock. This cost Stiller nearly half his 10% stake in the company. And on Tuesday, it also cost him his job.
You see, like most companies, Green Mountain has a policy forbidding stock sales except within certain predetermined periods, timed to comply with SEC regulations against insider trading. When Stiller's losses triggered a margin call, and the sale of stock to cover it outside of the usual trading window, he fell afoul of these rules. For this infraction, Green Mountain's board took away Stiller's chairmanship, although he will remain on the board.
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What's It Mean to Me?
If you're a Green Mountain Coffee shareholder, you already know what these events mean. Your stock's down roughly 50% over the past week.
But what if you avoided Green Mountain?
In that case, take the opportunity to learn from these CEOs' mistakes. Neither McClendon nor Stiller ever intended to face a margin call. They made leveraged bets on their companies, bets they thought would pay off -- and since they controlled the companies, who would know better than them?
Answer: Not you. Don't trade on margin. It might not cost you your job, but it can still cost you big.
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Motley Fool contributor Rich Smith holds no position in any company mentioned. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters and Chesapeake Energy. Other Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters.
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