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How Managers Can Skirt Insider Trading Rules (besides the whole options backdating thing, of course)

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December 14, 2006 – Comments (1)

Good on Businesweek for doing a lot to publish the work of Stanford assistant professor Alan Jaolinzer, who's study of more than 100,000 10b5-1 trades concludes that they beat the market by 6% over 6 months, implying that the trades are in fact capitalizing on insider knowledge. That's exactly what they're not supposed to enable managers to do, and removing this problem was the SEC's goal in creating these plans.

Of course, allowing executives to set-up prescribed trading plans sounded like a good idea at the time, until it became common for execs to run multiple plans, start and stop them at will, or accelerate the selling. This is exactly why I sold former Hidden Gem FARO -- because it looked to me like the CEO had acelerated his selling precisely to get out before the effects of his bad management (or was it the too-high expectations he continually pumped into us naive investors) sent the stock sliding from $30 to $15 over the course of a year.

I've never trusted these plans, because this kind of fortune simply looked to good to be true. Now it sounds like the numbers may prove it is.

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1 Comments – Post Your Own

#1) On December 14, 2006 at 9:21 AM, metoo105 (28.73) wrote:

Great post. Thanks.

It's amazing how the folks at the SEC never bothered to think to themselves: now what would I do if I were a slimeball manager trying to trade on inside information, which could have prevented this whole mess at the gates ten years ago.

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