Remember back in the days when insider selling was illegal? Well not anymore. Today we see big corporate hot shots selling off large amounts of stock just before the bad news hits Wall Street and somehow, they are getting away with it. Is there any accountability anymore? What happened to regulation and/or regulatory control? Isn't Congress supposed to enforce laws to regulate such behavior? How come it seems Congress just isn't working anymore? Or perhaps they are just capitulating to the pressure of these big corporations.
Inside trading is a felony under federal law, yet the privileged and well-positioned take advantage of secret information to profit at the expense of ordinary investors. Billions of inside trading is going by corporated executives and they are getting away with it. Why is this? Perhaps it is because these corporate executives are in a perfect postion to use secret information to trade in their company's stock. In the 20's, Congress prohibited fraud by corporated executives, but what about now? Well now we have the SEC and corporate executives got them to issue a new rule. This rule allows executives with stock options to exercise the option, immediately sell the stock and keep the profit. The SEC rule created the "stock option flip-trade." Executives can now bail out at the first smell of bad news inside the company. They could exercise options, instantly sell the stock and pocket the profits, without putting up a penny or taking any market risk. The abuse is obvious. Corporate executives, with the benefit of sophisticated management information systems that provide instantaneous undates on internal trends, know precisely when to trade. So as soon they see performance short-falls are coming, they can flip trade, put stock sale plans in place or increase the shares they are selling. Several Enron fraudsters, including Mr. Lay and Mr. Skilling used this "safe harbor" to sell off huge chunks of their Enron stock-option stock, pocketing hundreds of millions of dollars. Despite Congress' stringent prohibitions against quick-flip stock trades or stock sales based on secret information, both have become the order of the day.
Recently, SEC Enforcement Director, Linda Thomsen, admitted to "seeing deliberate, calculated misconduct", "rampant" insider trading. She also voiced suspicion that executive stock sale plans were being abused. The financial world is littered with abuses. Such suspicions include Yahoo when it encountered long delays in launching its new internet ad placement technology. When the delay was finally revealed, Yahoo's stock collapsed from $44 to $22, inflicting $25 billion in loses on Yahoo's shareholders. While the top executives at Yahoo were struggling with these undisclosed problems, they unloaded 33 million shares of their Yahoo stock for more than a billion dollars. The CEO and CFO each sold 80 to 90% of their shares.
Dell comuter disclosed serious product quality and customer service problems and restated years of prior financial reports to eliminate millions in profits. Dell stock fell from $42 to $19, inflicting $30 billion in losses on shareholders. Yet before this came out, Dell executives unloaded 98 million shares of stock for $3.3 billion. Dell's CEO and CFO, both ousted due to the scandal, sold 98% of their stock. Eight other executives sold more than 90 % of theirs. Most were "quick flip" stock option sales.
Remember Countrywide that was plastered all over the news with the subprime mess? Well, when it's lax lending practices and dubious accounting became public, its stock collapsed from $45 to $20, costing shareholders $13 billion. Yet Countrywide's insiders had unloaded 21 million shares for $765 million before the bad news. More quick-flip stock option sales. The CEO, Angelo Mozilo sold millions of shares pocketing $232 million while he monkeyed with his stock-sale plan to increase his sales before the stock collapsed.
At Forest Laboratories, a drug manafacturer, the CEO sold off 3.8 million shares, all stock-option shares, for $221 milllion before studies linking its main drug to increased adolescent suicide came out. Then the stock collapsed from $78 to $36, costing shareholders $15 billion.
At home builder Toll Brothers, top insiders unloaded 14 million shares for $612 million, before revealing slowing demand and a decline in orders that caused that stock to plummet from $56 to $33, costing shareholders $3.5 billion.
And finally there is AOL TIme Warner, where the corporate insiders sold more than 22 million shares for more than $750 million, as they put together and watched fall apart, the worst merger of the century causing hugh losses and a stock drop from $59 to $9, inflicting $150 billion in losses on shareholders.
If someone robs a convenience store, his crime may earn his 10 years in prision, yet corporate insiders regularly use secret information to profit by millions and millions with impunity, even though insider trading is a felony and their misconduct harms hundreds of thousands of investors, including pension funds charged with investing the life savings of millions of Americans. The punishment doesn't fit the crime because there is no punishment. The SEC's mandate is to protect investors and police fraud in our securities market. So why is this happening and what is the SEC doing about it? Despite the SEC Enforcement DIrector's complaints about insider selling, the SEC is doing little about the current epidemic.
In each of the above examples of insider bailouts, institutional investors brought securities class-action suits. But they all suffer from problems due to the SEC's protective insider-trading rules. As a result, corporate insiders virtually never pay up any of their insider trading proceeds when such suits are settled. This kind of stock profiteering by corporate insiders UNDERMINES investor confidence in the markets and the federal agency that is supposed to protect them. If investors lose confidence, they invest less and economic growth and prosperity are impaired. Rather than engage in empty rhetoric about insider trading, the SEC should step up its enforcement efforts and police the markets like Congress intended it to.
Remember the movie "Wall Street" with Michael Douglas and Charlie Sheen? Michael Douglas played the character Gordon Gekko and in the movie Mr. Gekko said, "Greed is good". Well, no it is not!!!!!! When greed is unrestrained, it's yields terrible and disasterous results.