Tags: insider | stock | sales

Report: Insiders Sell Shares, Then Prices Drop

Tuesday, 09 Jun 2009 12:26 PM

By Dan Weil

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A new study confirms the view that complicated programs for executives to sell shares in their companies generally come into play just before the stock price slips.

Gradient Analytics produced the study, which was obtained by The Wall Street Journal.

The arrangements for executives to sell their shares "appear to be used opportunistically, because they are followed on average by a share decline and unusual levels of negative corporate events," Carr Bettis, co-author of the Gradient report, told The Journal.

The sales strategy consists of prepaid variable forward contracts. Executives generally establish the program with securities firms.

The way the contracts work is that the executive agrees to give the brokerage a set amount of shares at a date several years down the road in exchange for cash at the outset.

The cash often amounts to 75 percent to 90 percent of the stock’s price when the deal is struck.

If the share price drops during the contract, the securities firm takes the hit. If the stock price gains, the executive receives a slice of the profit.

So it’s a win-win for executives.

Researchers say they don’t have strong evidence that executives arrange such deals when they have confidential negative information. But it does sound a bit suspicious.

Bloomberg reported in late April that insiders and executive were selling stocks at the fastest rate since the bear stock market began. They were taking advantage of the stock market’s sharp rise from its March lows.

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