I read a recent online article which said that the CEO of a company sold a large amount of stock in the company shortly before a report was publicly issued which said the company’s profits were lowered than expected which in turn drove down the stock price. (I have intentionally left out the name of the CEO and the company because I do not want this to be a discussion of them.)
So what are the rules of insider trading and how does it affect situations like this? The CEO of a company is going to have inside information about how the company is doing just by doing their job. Are they allowed to act on this information by buying and selling shares of the company they manage? Or are they somehow supposed to pretend they don’t know how the company they are running is doing when it comes to managing their personal portfolio?
Insiders (and the CEO is definitely one) cannot trade based on “material nonpublic information”.
A trade would be allowed if the trade was part of a regular pattern of trading. For example a CEO nearing retirement might establish a program of trading 1000 shares in the first week of every month. If one of those trades occurred while he had inside information, that would be allowed.
There are periods around quarterly reporting dates and other times when insider trading is strictly forbidden. Conversely, there are “window periods” established by the Securities and Exchange Commission where the rules on insider trading are relaxed. In either case, any employee with access to insider information must clear a trade with the company’s CEO or Chief Financial Officer.
See Rule 10b5-1 (it’s in there somewhere) about executives creating schedules for buying or selling shares in the future. I know very little about this other than that it’s a thing.
ISTR that there are definitions and regulations concerning just who is an “insider” and who’s not. And if I remember right, it has to do with whether or not you can affect the stock price by virtue of your job function or not, instead of your access to information.
The idea is that they don’t want executives buying/selling shares right before or right after things that they do that’ll raise or lower the stock price, or worse, doing things to specifically benefit themselves.
I’m not sure how it would work if Joe Wrenchturner was taking a dump while Bill Executive and Pete Csuite discussed the upcoming corporate moves while at the urinal and washing their hands, and then Joe goes out and buys/sells a bunch of stock as a result of what he overheard.
Joe Wrenchturner would then become an insider for purposes of trading laws and would have violated insider trading laws.
There are people who are automatically considered insiders by virtue of their position but anybody with access to insider information is also an insider. This would include family members who don’t work for the company, for example. So if your spouse were to make trades or share information based on conversations you had at home, that’s a no-no.
So, most (well run) companies are careful about making sure discussions involving sensitive information are kept to the necessary personnel.
There was a case where a printer who learned the inside news during the printing of a prospectus (I think it was) who was convicted of inside trading. This was reversed by the Supreme Court, but there are still undecided issues I guess.
An insider can also point to some obvious need and make sure to document the process sufficiently, in advance, that there’s no question about the timing. E.g., we just had a new baby and we’ve decided that we need a bigger house with more bedrooms. You can see that my wife and I started discussing this about a year ago, when we found out that we were pregnant, in our text history; you can see, here, where we reached out to an architect; etc. and so we ended up selling shares at this time, to finance the new construction.
There was a case a while ago where someone was convicted of insider trading because he traded a particular stock just before important news was released. Investigators tracked it down to the fact he was an old college budy of one of the executives, and that exec tipped him off - deliberately. IIRC the executive also got convicted.
Martha Steward was charged with induisder trading because she had a phone call with a friend who was head of a pharmaceutical company, and then sold her stock a day before the stock plummeted. In fact because there was no proof what they discussed, she didn’t get convicted of insider trading. She did delete the phone log entry on her computer (and then reconsidered and typed it back in). The deletion earned her an obstruction of justice conviction.
It;s both. Obviously if an executive can affect the price by what they do with the company, there will be suspicion of insider trading if they make big sales just before a major executive action. It’s also information - if an executive is privy to specific information, they cannot be trading stocks (as mentioned above, outside of a regular pattern) when they likely know something that will affect stock price which the general public does not know, That same “non-public information” apples to anyone - family and friends, the printer of the annual report, etc.
I vaguely recall corporate rules where I worked explicitly forbidding people in managment positions (and even fairly junior management) from selling their company’s stock during specific windows, so many weeks before the quarterly numbers were announced. the same applied to major decsions - closing plants, layoffs, sales and mergers, big new project announcements - whatever affected stock prices significantly. No trading by people in the know. I’m not sure how much of that restriction was corporate and how much repeated SEC-type rules. Also, any big trades by top executives were usually made public so you could see who was buying or selling their company’s stock.
This actually happened recently, although it was a husband who traded based on his wife’s WFH conference calls that he overheard, not stuff she explicitly told him:
It’s a little amazing that some people are willing to risk their careers, fortunes and a prison sentence for a relatively small gain from insider trading.
I guess it seems strange to me. I can understand the concept of a law that forbids a corporate executive from passing on any information they receive as part of their job to another person. But the idea that a corporate executive is supposed to somehow pretend they themselves don’t have know the information they receive as part of their job seems bizarre.
How does it work in the real world? Does the SEC actually try to enforce universal compliance with these laws? Or do they accept that there will be some amount of violation and only step in when somebody gets too brazen?
But it’s not even that kind of money. The story linked upthread of the husband of a BP exec who used an overheard conversation to make trades earned “only” $1.8 million from it. Once caught, he had to give up the $1.8 million in gains, along with a fine of up to $250,000 and was sentenced to 24 months in prison. His wife lost her job and divorced him.
wasnt theyre a wealthy bartender in one of the more famous Wall Street watering holes who made serious money off of various things hed been told and overheard over the (multi -decaded) years