July 28, 2020

Tales From the Swamp: Stimulus Money Fuels Insider Trading?

According to a recent study, there’s a pretty good chance that all of the stimulus money currently sloshing around may stimulate some good old fashioned insider trading among the politically well-connected – at least that’s what the experience of the last time Washington fired its cash bazooka suggests. This Stanford article says that the study looked at trading by politically-connected insiders at TARP fund recipients during the 2008 financial crisis.

That program bailed out a lot of financial institutions, but it wasn’t a model of transparency & key details of the program were never publicly disclosed. This excerpt from the article says that insiders used that lack of transparency to their advantage:

This gave corporate insiders advance knowledge of the likely scope of government intervention and its impact on their institution. Larcker’s study finds evidence that many seemed to trade on the basis of this private information to earn higher returns than public shareholders. Prior to massive government stimulus, political connections had far less influence on trading decisions, the study shows. But in the nine months after TARP’s inception, transactions by politically connected insiders were correctly predicting future stock performance.

Federal law requires executives to disclosure equity stakes in their own firm through regulatory filings that investors pore over for clues about potential share price swings. The researchers’ analysis shows that trades were ramped up 30 days prior to TARP announcements. During allocation of government funds, insiders made 3,058 trades averaging $105,987 and yielding $22,251 in average market-adjusted profits ($68 million overall), significantly outperforming their unconnected counterparts.

One of the authors of the study suggests that the key to preventing abuses with the current stimulus spending lies in increased transparency – which he suggests the bipartisan insider trading legislation that the House passed last year would provide – and a longer cooling off period longer between a job in government and an executive position in the private sector, and vice versa. If I were you, I wouldn’t hold my breath on either of those recommendations being adopted.

Regal, But Not Quite Princely: Leo Strine’s Titles are a Mouthful

Over on, Stephen Bainbridge notes that former Del. Chief Justice Leo Strine is currently sporting a mouthful of titles. Take a deep breath everybody, because Leo Strine is:

Michael L. Wachter Distinguished Fellow in Law and Policy at the University of Pennsylvania Carey Law School; Ira M. Millstein Distinguished Senior Fellow at the Millstein Center at Columbia Law School; Senior Fellow, Harvard Program on Corporate Governance; Henry Crown Fellow, Aspen Institute; Of Counsel, Wachtell Lipton Rosen & Katz; former Chief Justice and Chancellor of the State of Delaware.

Prof. Bainbridge points out that, with his 60 word moniker, Strine easily outpaces Queen Elizabeth II, whose full title comes in at a paltry 33 words (which at least gives her something in common with the Rolling Rock beer label). But I’ve got some bad news for the former Chief Justice & the Queen – her husband Prince Philip crushes them both. Ready? Here we go:

His Royal Highness The Prince Philip, Duke of Edinburgh, Earl of Merioneth, Baron Greenwich, Royal Knight of the Most Noble Order of the Garter, Extra Knight of the Most Ancient and Most Noble Order of the Thistle, Member of the Order of Merit, Grand Master and First and Principal Knight Grand Cross of the Most Excellent Order of the British Empire, Knight of the Order of Australia, Additional Member of the Order of New Zealand, Extra Companion of the Queen’s Service Order, Royal Chief of the Order of Logohu, Extraordinary Companion of the Order of Canada, Extraordinary Commander of the Order of Military Merit, Lord of Her Majesty’s Most Honourable Privy Council, Privy Councillor of the Queen’s Privy Council for Canada, Personal Aide-de-Camp to Her Majesty, Lord High Admiral of the United Kingdom.

That’s a grueling 133 words, for those of you playing along at home. Prince Philip’s heritage may be Greek, but those titles would guarantee him a warm welcome from the crew of The H.M.S. Pinafore. The former Chief Justice’s titles may fall short of those of His Royal Highness, but his penchant for Gilbert & Sullivan-inspired judicial robes likely would make him a welcome guest on the Pinafore as well.

Audit Committees: Meetings & Processes in a Pandemic

The most recent edition of Deloitte’s “Audit Committee Brief” discusses priorities for the current quarter & future periods. I thought the discussion of how audit committees have adjusted their meetings and other committee processes in light of the limitations imposed by the Covid-19 pandemic was particularly interesting. Here’s an excerpt on prioritization of agenda items and meeting materials:

Many audit committee chairs have been reassessing the way their time is spent in meetings. Regardless of how the meeting structure has changed, prioritizing the agenda has been key for the committee’s effectiveness. Audit committee chairs should consider taking a step back to reevaluate what’s top priority. Simply following a previously created annual calendar or last quarter’s agenda may not allow the committee to focus on the right topics. Some audit committee chairs have pushed topics that aren’t top priority to later in the year or to consent agendas to allow more time for some of these critical discussions.

Many committees have reviewed meeting materials when considering ways to enhance effectiveness. Some companies are sharing more memos or narratives with pre-read materials; these provide committee members a bigger picture view and allow the members to come better prepared with questions. It can also provide a way to stay informed in between meetings. Some committees are providing more written questions to management before meetings. This doesn’t mean that questions are limited to those provided in advance, but it may help management come more prepared to discuss what’s important to the audit committee and allow for more robust discussions.

The publication also addresses topics such as financial reporting, forecasting, risk oversight, compliance and other challenges facing audit committees in the current environment.

John Jenkins