Chapter 9 - Executive Equity Ownbership Flashcards
What is pledging?
An executive might also pledge shares as collateral for a loan, the proceeds of which are used to purchase additional assets.
What is the research regarding hedging and insider trading?
There are mixed results with some stating that heeding is used to opportunistically time trades while others state that they do not use hedging to opportunistically time the trades.
What are 3 advantages of pledging?
What is one disadvantage?
- Allows for diversification without lessening equity stake
- Might be tax advantageous
- Low interest on the loan
Changes incentive structure imposed on management
What is an insider?
What is legal insider trading?
What is illegal insider trading?
Any individual - Executive, director, employee, or advisor who has access to material information about the company that has not been released to the public.
Insiders may only trade when they are not in possession of material nonpublic information
Trading on the basis of material non public information is illegal.
What is the purpose of blackout window?
When do these occur?
What is the median length of a blackout?
Does the blackout window really work?
To prevent executives from violating insider trading laws, companies designate a blackout window in which insiders are restricted from making trades.
They occur when material information (earnings, new products, or acquisitions) are not yet released to the public
50 calendar days
No, evidence suggests that insiders tilt have an information advantage in making trades.
When do insider purchases happen
When do insider sales happen
Which insider has the greatest trading advantage?
Purchases - Precedes periods of market outperformance
Sales - Precedes periods of market underperformance
The CEO and chairman have the greatest trading advantage
Describe the recent trends of financial scandals and insider trading?
Who is an insider?
Many recent financial scandals involve violations of securities law and sales of stock by insiders. The stock was typically apart of the equity compensation.
The person who is connected with the company, who could have the unpublished price sensitive information or receive the information from somebody in the company.
Who does the insider trading law relate to?
Is tipping illegal?
Applies to anyone who knows material non public information at the time of the trade or tip. It applies to stock of customers, suppliers, and merger partners.
Yes, tipping is illegal even if the tipper does not do the trading
What are the two factors that make you an insider trader or an insider?
What percentage of cases involve tipping?
- You are aware of material confidential information about a public company (whether your company or another company)
- You trade on that information, or tip others who trade on it, before the information is released publicly and is absorbed by the market
Tipping is 50% of the cases, and in 50% of those cases the tippers do not even trade.
What are the four forms of insider trading? Describe
- Members of organization - Corporate officers, directors, employees of publicly traded companies are in key positions to access information that would not otherwise be available to the general public.
- Friends and family - Corporate employees often share information with their own circles that is not shared with stock market and the general public
- Government officials - Officials at different government agencies can gain access to confidential information through the execution of their duties. They may conduct insider trading with this information
- Professionals/Consultants - Bankers, lawyers, paralegals, and brokers, are a few of the consultants who have access to confidential documents of their corporate clients.
What is price sensitive information?
What are 5 examples of price sensitive information?
Information which relates directly or indirectly to a company and which if published is likely to materiality affect the price of securities for the company, better or worse.
- Mergers / divestitures
- Accounting problems and other bad news
- Declaration of dividends, splits, repurchases, and issuance
- Major expansion plans, and product developments
- Changes in policies, plans, or operations.
When does information become public?
- 4 Parts
- You must allow time for dissemination
- Generally considered two business days, but the internet and cable news can make it 2 mins
- Blackout periods and pre-clearance of trades are standard procedures
- Vary by level
What is the 4 purposes of insider trading regulations
- Provide fairness
- Assure market integrity
- Protect property
- Reduce the cost of capital
According to Robert Khuzami, SEC enforcement director why does insider trading regulations exist?
Insider trading corrodes investor confidence. It undermines the integrity of the markets by tilting, unacceptably, the playing field in favour of those whose greed drives them to betray the duties and confidence they owe others
What are 3 examples of insider trading?
- The CEO of a company divulges important information about the acquisition of his company to a friend who owns substantial shareholding in the company. The friend acts upon the information and sells all his shares before the information is made public.
- A government employee acts upon his knowledge about a new regulation to be passed which will benefit a sugar exporting firm and buys its shares before the regulation becomes public knowledge
- A high level employee overhears some conversation about a merger and understands its market impact and consequently buys the shares of the company in his father’s account.
Should an individual trade on information received through tipping, according to Jeffery Haas a professor for securities law, what does he say?
What does Nancy Grunberg, a former assistant director of SEC enforcement say
If the information is not from a company insider you are probably stupid if you just listen and trade on it, you do not have a duty to find out where it came from.
The SEC would want to know, unless it was a piece of paper that fell out of the sky, whether you asked about the source of the information before acting on it.
According to David M Brodsky, head of the securities litigation, what did he state?
The mere fact that insiders are selling, even heavily, isn’t necessarily material, or market moving information. However it turns out that the sales truly are unique, that the founders had never sold shares before, you may be courting trouble.
What are 3 enforcement strategies by the SEC enforcement of insider trading laws?
- Disgorge the ill gotten gains
- Pay monetary penalties up to 3 times the gains
- Barred from serving as a director or officer from a public company.
What are the 4 enforcements performed by the Department of Justice for insider trading?
- 20 years of imprisonment
- Fines up to 5 Million for individuals
- Fines up to 25 million for corporations
- Additional prosecutions may result from fraud related charges that often accompany insider trading violations.
What has been the recent trends with the US Attorney and SEC?
What are two reasons that the US Attorney and the SEC have worked more closely together?
In the last 10 years there have been closer cooperation between the two groups especially
if there are false statements, obstruction of justice, etc are present
- When was the first trading prosecution?
- What happened?
- What was the sanction?
- What did the broken find the next day? How did he view this?
What does this story highlight?
- The 1960 administrative proceedings in the Cady Roberts Case
- SEC found that the
broker sold stock in several customer discretionary accounts on the basis of inside information that an NYSE listed company was about to cut its dividend - Sanction was the SEC fined the broker $3000 and suspended him for 20 business days from the brokerage industry
-A long line of prospective customers lined up in front of his office, it was good investment
- There have been significant changes in the insider trading laws.
- What is the historical problem with insider trading prosecutions?
- What is the key
issue - What is the nature of the evidence. What is the vague line concept?
- What typically happens with the jury?
- They are not easy cases
- The key issue is whether the defendant knowingly traded on inside information rather than on independent investment decisions
- Little to not documentary evidence, only circumstantial evidence. There is a vague line between good hard digging for information and illegal inside information.
- The jury is often skeptical if it was a real crime and the penalties imposed by judges usually reflect the same attitude.
What is the New Galleon Investigative Model?
- Cooperation between
- Usage of
- How did they conduct the covert investigation - The Three Ways?
- The result?
- Aggressively pro active investigation
- Cooperation between the SEC and US Attorneys
- Use of wiretaps by US Attorney working with the FBI
- Media accounts, continued over 2 years
- Used evidence of bad acts to coerce individuals to act as informants
- Informants wore concealed wires to record conversations with others
- A domino effect of successive indictments and additional cooperating witnesses leading to 22 indictments
What is the new SEC cooperation policy
- Traditionally
- When did the Enforcement Division get revamped?
- What were the three reasons that the SEC cooperation policy was important?
Traditionally has not rewarded cooperation
Revamped in the Madoff Debacle, the SEC revamped the enforcement division under the leadership of ex-us attorneys.
- Could result in a rush to corporate characteristic of many criminal prosecutions
- May result in companies self reporting
- First one usually gets the greatest leniency
