* Arthur Levitt: outlaw personal loans against directors' stakes
* Experts see potential securities law, Sarbanes-Oxley violations
By Emily Flitter
NEW YORK, May 9 (Reuters) - A former top U.S. securities regulator said on Wednesday that public companies should bar top executives from borrowing against their equity stakes.
Arthur Levitt, a former chairman of the Securities and Exchange Commission, made his comment a day after Green Mountain Coffee Roasters stripped its chairman and lead director of their board titles for taking out loans against their company stock and also selling shares during a period they should not been doing so.
"The perception of management borrowing against their own holdings is so bad," said Levitt, now a senior adviser to Goldman Sachs and Carlyle Group. "I would encourage shareholders to push companies to implement such protections where they don't currently exist."
A margin call on loans taken out by founder and Chairman Robert Stiller and lead director William Davis led to a wave of forced selling in Green Mountain shares on Monday after the company released disappointing quarterly earnings.
The company revealed in a regulatory filing on Tuesday that the men had posted Green Mountain's shares as collateral for the loan.
Shares of Green Mountain were little changed on Wednesday.
"If the only way is regulation by stock exchanges or other bodies," said Levitt, who spoke to a group of Reuters editors and reporters. "I would certainly favor that."
In Green Mountain's case, the selling by Stiller and Davis would normally have been prohibited because the company's policy restricts trading by insiders during periods around earnings time.
But Stiller told Forbes in an interview on Tuesday that he had no other options because of the margin call.
A Green Mountain spokesman did not immediately respond to a request for comment.
The beleaguered coffee company Stiller started in 1981 has been the target of short-sellers and negative analysts' comments for over a year, with heavy criticism coming from the hedge fund manager David Einhorn.
Early this year Green Mountain's stock began to sink on news that Starbucks had plans to compete directly with its single-serving coffee machine business. It fallen 41 percent so far in 2012.
Forced selling by executives because of a margin call is not uncommon.
In recent years, directors at Boston Scientific and Williams-Sonoma have leveraged their stock holdings for cash and had to meet margin calls. But the Green Mountain directors' situation is unique because they were forced to sell during a blackout period.
Experts say Stiller and Davis could face regulatory scrutiny for potentially violating both securities and accounting laws.
Stewart Appelrouth, a forensic accountant and co-founder of Appelrouth Farah & Co. in Miami said Stiller's moves appear to violate provisions in the Sarbanes-Oxley Act.
"There is a prohibition against insider trading and there are certain blackout dates but there are some exceptions. He doesn't meet any of the exceptions," he said.
"You can say I had to sell the stock because I had to cover my margin. However, he owns other securities," Appelrouth said, adding that Stiller could have sold his sizeable Krispy Kreme stake, a move did make on Monday.
"The biggest problem, I believe was a communications problem because had there been communications inside the company, you told the board, you asked, you let them know, you have internal policy, but I have a problem because I have a margin call. Had there been communication, there would not be a problem now."
In fact, Green Mountain had already tried to outlaw the practice its directors used to raise cash. It grandfathered in the loans for which Stiller and Davis had pledged company shares as collateral while instituting a policy prohibiting new loans at the beginning of this year. But in Davis' case, a new internal policy went unheeded. He took out more loans using his shares as collateral.
"If you violate an internal policy you can have problems with the law because you violated company policy," said Kip Weissman, a partner at Luse Gorman in Washington and a former lawyer in the Securities & Exchange Commission's enforcement division.
Weissman said Stiller may also have strayed from the letter of the law in the method he used to disclose the loans, which appeared in the company's proxy statements but not in Stiller's personal insider fillings.
The allure of leveraging company stock for cash is strong. David Feldman, a partner at Richardson & Patel in New York, explained that many company founders who take their companies public see liquidity as a reward.
"There are so many investors I've worked with who have said you know what, the investors are so mad at me for selling the stock but my wife wanted to buy a new house," Feldman said. "It's often just personal reasons that they sell."