Insider trading through corporate buybacks creates billions for executives.
Imagine (if you can) a much-hyped cryptocurrency startup. After a successful ICO, the company decides to burn some of its tokens, thereby limiting circulation and raising the price.
Suppose further that some executives decide to trade on the information, by dumping their tokens as the price spiked.
Last, and most improbably, imagine the Securities and Exchange Commission watching over the affair with folded arms, as if to say: “Well, that’s a real shame, too bad we can’t do anything about it. And, in fact, we created the rules that allow it.”
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This hypothetical might seem a tad unrealistic for the cryptocurrency world, where every ICO moves under a regulatory magnifying glass. But it’s perfectly acceptable in public corporations, where executives routinely take advantage of stock buybacks to cash in on their shares at a premium.
As [reported] public companies have bought back $178 billion of their own shares in the first quarter of this year, and $23.6 billion came from insider selling.
Unlike other forms of insider trading, buybacks are not covered by the securities laws that prevent corporate employees from trading on private information – ‘safe harbor’ laws provisions specifically allow it in this case. These exceptions need to change, according to SEC Commissioner Robert Jackson. Although the Dodd-Frank reforms have written provisions to keep investors in the loop about insider selling, those provisions have not been specified.
“It’s not just that the regulations haven’t been finalized. It’s that the problem itself keeps getting worse,” Jackson said in a speech to the left-wing Center for American Progress. “You see, the Trump tax bill has unleashed an unprecedented wave of buybacks, and I worry that lax SEC rules and corporate oversight are giving executives yet another chance to cash out at investor expense.”
SEC investigators determined that corporate insiders were twice as likely to sell shares in the eight days after a buyback announcement. The average daily sale volume during those days was about $500,000, five times greater than the normal volume.
However, as Jackson emphasized, there are no rules against selling during a buyback. “This trading is not necessarily illegal. But it is troubling, because it is yet another piece of evidence that executives are spending more time on short-term stock trading than long-term value creation.”
Coincidentally, phrases like ‘troubling but not necessarily illegal’ are the exact opposite of what Jackson’s colleagues have said about cryptocurrencies. SEC officials have praised blockchain as the future of financial technology, and at the same time criticized Ethereum and Ripple for not fitting to twentieth-century securities standards.
The address places stark contrast on the differing standards to which public companies and ICOs are held. While the SEC’s position has slightly thawed, the threat of regulatory action continues to darken skies over the crypto markets. Such threats are rarely aired except for the worst of public companies.
Jackson concluded by calling on his colleagues to establish a “comment period” for the SEC to review its regulations, and you can imagine how unlikely it is for regulators to invite “comments” on cryptos. Asked if he thought the SEC would actually tighten the rules on corporate buybacks, he answered, “Hope springs eternal, man.”
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Author: Andrew Ancheta