Inside the Heads of Insiders


New York – An interesting article in the Wall Street Journal today (republished in the Law Blog of the paper) discusses the SEC investigating several instances of insider trading, despite the existence of a 10b5-1 plan.

These plans were allowed in 2000 by the SEC because there were a number of court misinterpretations of insider trading rules. The 10b5-1 allows an executive to sell stocks via a broker at regular intervals. It is meant to allow the executive to hand off the selling so that there is no concern about the sales being related to inside information.

The problem is, the executive can start or stop a 10b5-1 arrangement at any time as well as setting the level of sales to be conducted. As a result, the SEC feels that there are at least a few blatant abuses of the usage of the 10b5-1. Case in point is former chief executive of Qwest, Joe Nacchio. In fact, both within and outside of 10b5-1 sales, Mr. Nacchio sold $101 million of Qwest stock from January 2001 to May 2001.

Insiders are, of course, allowed to buy or sell the shares of their own company, but only if they are not in “possession of material non-public information about the security”.  While insiders tend to sell as a matter of course, excessive, accelerated or abrupt changes in strategy are seen as a potential signal that there may be insider trading going on.

The insider trading analysts are a secretive lot by nature, many of whom seek to maintain a low distribution model. This model ensures clients that they are getting information that is not already “in the market”.

At integrity, we have a short list of research firms that follow the insiders, presented in no particular order:

  • 3D Advisors
  • Form4Oracle
  • Muzea Insider
  • The Washington Service, EZ-Insider
  • Vickers Stock Research

Additionally, the WSJ article refers to a recent paper by Stanford University business professor Alan Jagolinzer which examined 3,426 insiders’ trading patterns.

We include the link.


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