Tuesday, July 14, 2009

The SEC's Graffam Moment

"The recent insider-trading charges against former Countrywide Financial Corp. Chief Executive Angelo Mozilo show how prearranged stock trading plans, commonly thought to limit the misuse of inside information, might instead signal an intent to game the system. ... However, research from Stanford University accounting professor Alan Jagolinzer suggests that prearranged trades are actually more likely to predict future stock-price movements than other insider transactions. ... Academics have established that insider transactions correlate with future stock performance. But, as Prof. Jagolinzer says, the effect is even more pronounced with transactions made under 10b5-1 plans. The legal protections afforded by the trading plans could spur some insiders to be more aggressive with their trades, he theorizes. He said insiders may be willing to push the boundaries of trading rules based on 'the perception of reduced legal risk. ... For example, while insiders can't embark on a trading plan while in possession of inside information, they are able to cancel such plans based on inside information. The SEC's guidance is that if there is no trade, there is by definition no illegal trade", my emphasis, David Reynolds at the WSJ, 24 June 2009, link: http://online.wsj.com/article/SB124580361150344795.html.

Is the SEC this stupid it failed to realize this would result? I saw this coming when these plans were first inaugurated. As Yves Smith would ask, is this a "feature, not a bug"? The SEC lacks an "opportunity cost" concept. To hold a stock is to not sell it. This is another SEC "Graffam Moment".

1 comment:

Anonymous said...

"...prearranged trades are actually more likely to predict future stock-price movements than other insider transactions..."

Sure... why would an insider sell unless they thought the stock was over-valued... especially someone like Mozilo who was taking 100s of millions...

I guess being prearranged gives a veneer of legitimacy? And responsibility by the executive? And the "disclosure" sanitizes the intent?