Executive Short-Sellers?

"For investors in Switch & Data Facilities, a telecom services startup, 2008 was a wild year. From a low of 8.60 in mid-March, shares more than doubled, to 18.17 three months later. ... One shareholder avoided much of that drop [to 4.21]: the CEO. On June 19, the day the stock peaked, [Keith] Olsen contracted with an investment bank to hedge 150,000 shares-- a quarter of his stock in the company--against losses if the price fell below 18. ... Olsen, who disclosed his hedging in public filings, declined to comment for this story. ... But the way hedging is done by CEOs, directors and other senior executives may deprice investors of clues about impending problems at companies. ... 'There is no question that these transactions should be a red flag for investors,' says Carr Bettis, the co-founder of forensic accounting firm Gradient Analytics and co-author of a recent study on hedging. ... Some 107 instances of hedging were reported to the [SEC] in 2009, up from a decade low of 48 in 2007, according to Bettis, and regulators are beginning to scrutinze these transactions. ... 'We wanted to make sure they couldn't undercut the links we created between compensation and long-term performance,' says [Kenneth] Feinberg. If executives at the companies could hedge their stock, he adds, 'they wouldn't have to worry about how [the stock does.' ... In a case pending before US tax court in Washington, the IRS is arguing that [Philip] Anschutz's deals were effectively stock sales rather than hedges, as is seeking $143.6 million in capital gains taxes. ... If the IRS wins its case, these hedgers could face big tax bills earlier than expected. Anschutz disputes the IRS's argument and would not comment for this story. ... Because he still technically owns the shares, the IRS doesn't consider a hedge a sale so long as the bank doesn't short the executive's own shares. So the executive need not pay capital gains taxes until the hedge expires. Meanwhile, he can still vote the shares and collect dividends. ... The hedge business helps the banks cement ties with top executives, which comes in handy when a bank is pitching other services. And the banks reap rich fees. ... Roughly 11% of the companies where an executive used a collar had to restate financials within two years of the hedge transaction: comparable companies where no hedging occurred had half as many restatements, Bettis says. ... 'The poor performance following hedging suggests a number of these trades are potentially based on privileged information,' argues Bettis. The trades 'appear to be tied to events that were known or could reasonably have been anticipated by the executives,' he adds", Jane Sasseen at Businessweek, 8 March 2010, link:

http://www.businessweek.com/magazine/content/10_10/b4169044647894.htm.

The SEC should ban this practice. Period. The SEC wants to limit short-sellers actions, but permits this. Amazing. The IRS should win its case against Anschutz.