Criticism for big insider trading report


The WSJ generated lots of news with its report on executive insider trading of the legal variety. The high level conclusion is that, from a statistical perspective, these traders fared better than would be expected.

"Among 20,237 executives who traded their own company's stock during the week before their companies made news, 1,418 executives recorded average stock gains of 10% (or avoided 10% losses) within a week after their trades. This was close to double the 786 who saw the stock they traded move against them that much. Most executives have a mix of trades, some that look good in retrospect and others that do not. The Journal also compared the trading of corporate executives who buy and sell their own companies' stock irregularly, dipping in and out, against executives who follow a consistent yearly pattern in their trading. It found that the former were much likelier to record quick gains. Looking at executives' trading in the week before their companies made news, the Journal found that one of every 33 who dipped in and out posted average returns of more than 20% (or avoided 20% downturns) in the following week. By contrast, only one in 117 executives who traded in an annual pattern did that well."

At a minimum, the report suggests, 10b5-1 plans are hard to track. The report did not go over well with all.

An esteemed Reuters columnist writes, that, "I'm not particularly impressed: it seems like much more of a fishing expedition than a wide-ranging scandal," adding that,  "More generally, the WSJ's methodology seems designed to produce exactly the results that it came up with…Firstly, stocks tend to take the stairs up and the elevator down: if there's a sharp move in a stock, it's much more likely to be a fall than a rise. Secondly, executives trading in their own stock are much more likely to be sellers than buyers. They get awarded stock as part of their compensation package: that's not trading. And once they're awarded it, they have every right to sell it — and selling it makes perfect sense, in terms of portfolio diversification if nothing else."

All in all, however, companies need to be more cognizant than ever than insider trades can be problematic. Disclosure is the key. No one is going to deny an executive the right to manage his or her finances, but there are ways to do all this without raising suspicion. This is a tricky issue for boards, but one they ought to confront.

For more:
- here's the column