Early-warning stock alert: Insiders who sell
(MoneyWatch) A new analysis of insider stock trades by the Wall Street Journal found "trades veering heavily toward selling rather than buying as bankruptcy filings drew nearer." In other words, as a company's financial position became more precarious in a run-up to failure, those who were in the know unloaded their shares.
It may be a coincidence, since insiders use the same financial information publicly available to all investors. But the concern is the trend could indicate that access to material nonpublic information may influence investors' decisions to sell off shares, which could be insider trading.
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Insider-trading investigations and prosecutions have been in the spotlight lately. The reason is simple: The Securities and Exchange Commission and the Department of Justice have made addressing this type of white-collar crime a priority.
Unlike prosecuting Wall Street executives for the various financial scandals and building cases that can be difficult to prove in court, insider trading is much more straightforward, and prosecution offers evidence to the public that officials are doing something to combat it.
In addition, officials have a fundamental interest in finding and punishing such behavior. People with inside knowledge -- information that is not publicly known and affects the company -- have a great advantage over others in trading stocks. Such practices could undermine public confidence in capital markets and make it more difficult for companies to raise the money they need.
Even a five-minute advantage in access to information can prove significant in this era of high-speed automated trading.
But executives may trade on information days, weeks or months before a company chooses to make it public, according to the Wall Street Journal analysis:
One day in September 2011, Wall Street analysts trundled into the spacious lobby at the Livonia, Mich., plant of a company called A123 Systems Inc. to view a slide presentation describing a rosy outlook for the maker of lithium batteries."They stood up in front of investors and painted a very bullish picture," said Andrea James, an analyst at Dougherty & Co., who took pictures of the lobby's two-story floor-to-ceiling window. "It looked like the lobby of a company that was making money hand over fist."
Thirteen months later, it filed for bankruptcy protection. But not before insiders unloaded a total of $2.5 million of its stock. The company said the sales conformed to its policy for insider transactions.
In the last three months before a bankruptcy filing, the Journal found that insider stock purchases dropped by 80 percent. Even if insiders don't know of a definite plan for bankruptcy, they can be privy to operational problems and financial reversals that are not made public but could persuade people to reduce their exposure.