Corporate insiders’ well-timed share sales raise concerns
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Corporate executives have saved millions of dollars by selling large chunks of shares just before the stock began to underperform, according to new research that suggests company officials cash out when misfortune is just around the corner.
When company insiders have used pre-arranged stock trading schemes to quickly sell $50m or more in a single day, the company’s stock subsequently underperformed its peers by 3.19 per cent over the next month, and 5.75 per cent over the next six months, according to research conducted by Daniel Taylor, an accounting professor at the Wharton School and director of its forensic analytics lab.
The study examined corporate insiders who sold shares within 60 days of adopting a so-called 10b5-1 plan.
These plans allow executives, board members and other corporate insiders to sell shares within a pre-determined timeframe and price range. They are meant to act as a safe harbour from insider-trading violations by setting stock trades to occur passively. But critics say the plans can be timed to trigger stock sales when it is in executives’ best interest.
Taylor is part of a group of academics who say they have found red flags in corporate insider stock sales in recent months. Their research is gaining attention as the US Securities and Exchange Commission begins drafting a regulation to require more transparency in how corporate insiders trade.
In June, Gary Gensler, SEC chair, said he had asked agency staffers for a rule to “freshen up” 10b5-1 regulations that were finalised in 2000.
Corporate executives regularly handle sensitive, nonpublic information and are paid mostly in stock — a combination that “creates a real risk that executive trading could be influenced by inside information,” Caroline Crenshaw, SEC commissioner, said in an interview.
She applauded Gensler’s call for new 10b5-1 regulations, and has said previously that companies should have to disclose when a plan is adopted.
“The biggest piece of these 10b5-1 plans is confidence in the markets [and] knowing that this is a fair system and that executives are not just in it to make money for themselves,” she said.
The largest stock sales in Taylor’s sample, $50m or more, presaged the greatest share price underperformance in the months ahead.
With the 10b5-1 plan protection from insider-trading violations, “the SEC gave executives a shield, and they’ve used it as a sword,” Taylor said.
Concerns about the timing of executive stock sales were highlighted last year when Albert Bourla, Pfizer chief executive, cashed in shares on the same day that the company announced positive news about Covid-19 vaccines.
A surge in Pfizer’s share price led to a $5.6m payday for Bourla. The company said at the time that the stock sale stemmed from a pre-arranged 10b5-1 plan.
After the sale, a group of senators, including Elizabeth Warren, a Democrat from Massachusetts, called on the SEC to improve disclosure rules. “The misuse of 10b5-1 plans appears to be creating significant disadvantages for other investors,” Warren and two colleagues said in a letter to the SEC in February.
Research suggests that companies trigger stock sales for executives when they have good news to disclose and the share price rises.
Joshua Mitts, a law professor at Columbia University, published a paper last year that found that the number and dollar amount of shares sold as part of a 10b5-1 plan were higher when good news was disclosed. The healthcare sector had the greatest share volume selling when a company was disclosing good news, he said.
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