Last month, the WSJ published an investigative report that suggested that hundreds of corporate insiders frequently had uncanny timing when it came to gifts of company stock.
The WSJ examined 14,000 donations of stock to private foundations by insiders – and found that 3x as many were made before price declines of 25% or more than were made prior to comparably-sized price increases. It quoted a professor as saying that the chance that this kind of timing could result from random luck is “extremely small.” If luck’s not involved, what’s behind the fortuitous timing of these gifts? This excerpt speculates that this may be a case of old wine in new bottles:
Good luck or coincidence is one explanation for many of the well-timed stock gifts. Academic researchers say another possible explanation for some, given the outsize number of such gifts, is that some donors might be guided by inside information or backdating their stock gifts. Legal experts don’t agree on whether donating based on nonpublic information would be unlawful. Backdating a gift could be tax fraud, tax lawyers said.
When I first read this story, I thought the use of inside information was a more plausible explanation than backdating. Even after the Supreme Court’s decision in Salman, it’s not at all clear that a stock gift can give rise to insider trading liability. What’s more, some insider trading policies don’t apply to gifts of stock, it’s certainly plausible that insiders might capitalize on non-public information when it comes to gifting stock.
On the other hand, I was pretty skeptical about the idea that people are backdating gifts. I’ve been involved with a number of gifting situations involving insiders over the years – and large gifts usually involve pretty extensive planning by wealthy, well-advised individuals. So, I guess I wasn’t surprised that research showed that their timing is generally pretty good. But Broc reminded me that this is the kind of thing people said about options backdating a decade ago as well, so I did a little digging.
The most interesting thing I found was this study by an NYU professor referenced in the WSJ report. That study reached similar conclusions about the timing of CEO stock gifts almost a decade ago. It concluded that legal use of inside information could be part of the story, but also flagged evidence that strongly suggested that some insiders were backdating gifts as well:
Tests used to infer the backdating of executive stock option awards yield results consistent with the backdating of CEOs’ family foundation stock gifts. For instance, I find that the apparent timing of certain subsamples of family foundation stock gifts improves as a function of the elapsed time between the purported gift date and the date on which the required stock gift disclosure is filed by the donor with the SEC. This association between reporting lags and favorable gift timing does not hold for CEOs’ stock gifts to other recipients. Stock gifts of all types, including family foundation gifts, are also timed more favorably if they are larger and if they occur in months other than December, when many tax-driven charitable contributions ordinarily take place.
Ahem… well, it looks like my skepticism may just turn out to have been naivete. This could get interesting. . .
Insider Loans: SEC Brings a Rare Enforcement Proceeding
Since we’re sort of taking a stroll down memory lane today, I thought it was appropriate to flag this recent blog from Steve Quinlivan about a recent enforcement proceeding involving violations of Sarbanes-Oxley’s prohibition on loans to insiders. Here’s an excerpt summarizing the proceeding:
According to the SEC in an order settling an enforcement action, Alan Shortall was CEO and Chairman of Unilife Corporation, a Nasdaq listed issuer. According to the SEC, Shortall arranged for Unilife to make personal payments on his behalf aggregating approximately $340,000 over four years. The advances were outstanding for five to 36 days. According to the SEC, this violated provisions of the Sarbanes-Oxley Act which prohibits public companies from making loans to directors and executive officers, as codified in Section 13(k) of the Exchange Act.
In addition, an unnamed director of Unilife was going default on loans secured by a pledge of Unilife shares. Shortall agreed to arrange for Unilife to cover the loans. As Shortall understood Unilife could not loan money to the director, Shortall told the Chief Accounting Officer the loan was for the benefit of an external consultant. The SEC also found these transactions violated Section 13(k) of the Exchange Act.
Our more veteran readers may remember how much angst Sarbanes-Oxley’s prohibitions on loans to insiders caused at the time of their enactment. Interestingly though, it hasn’t resulted in a lot of enforcement activity. There may be a few others, but I’m only aware of one other enforcement proceeding dealing with loans to insiders – and that was way back in 2005.
First backdating & now loans to insiders – I think it may be time to get a MySpace account…
Audit Reports: PCAOB Staff Updates Guidance
I recently blogged about the PCAOB Staff’s implementation guidance on the new audit report regime. Last week, the Staff issued updated guidance providing additional information on determining auditor tenure – see page 4 of the updated document. We’re posting memos on the new audit report standard & the implementation guidance in our “Audit Reports” Practice Area.
– John Jenkins