WSJ Article on Executive Stock Sales Following Guidance

By Cydney Posner

This article from The Wall Street Journal, "Executives Hit Sweet Spot on Stock Sales,"  , finds a pattern of sales by corporate executives after giving favorable guidance, followed -- after the sales -- by negative news: "A Wall Street Journal examination of earnings-guidance data compiled by research firm Earnings Whispers identified 1,468 cases since 2005 in which public companies issued so-called upward guidance—saying results looked better than expected—then followed with downward guidance within 120 days. Securities and Exchange Commission filings show that in 755 of those cases, corporate insiders sold in the window between the up and down, an advantageous time to sell."

While it can appear that the executives gave favorable guidance to boost the stock price and profit personally, "there is no way to tell from the data whether sellers knew about impending bad news before selling, and it is perfectly permissible for insiders to sell stock after upward guidance. In the 1,468 guidance-change cases, about 9% more insiders sold in the favorable window than in the year-earlier period. Executives often buy and sell stock around the same time each year. Among the 2,389 corporate officers who sold between swings in guidance, about 74% would have collected less money had they waited to sell until after guidance was lowered, according to the Journal analysis. The stocks declined in value by an average of 10.8% between the sales and the day after the guidance was lowered."

According to the article, some market experts say "any trading by senior executives around the time of good or bad news is potentially problematic" because theoretically, at least, the message can be manipulated. In one example described in the article, the SEC charged the CEO with providing false or misleading information to shareholders: the stock went up about 800% between January and August after the company disclosed a new agreement to supply equipment to a large company. The SEC alleges that the CEO had learned in July that the customer was planning to reduce its order the following quarter. According to the SEC, the CEO complained to fellow executives about the potential for missing the quarter and then persuaded the customer to place an order it did not need, in exchange for a deep discount. As a result, the company's third-quarter earnings guidance remained unchanged, and the CEO sold millions of dollars worth of shares in a secondary stock offering that same day. Three months later, the CEO disclosed that the "contract had been a ‘one-off' deal," and the stock sank the next day. The CEO's lawyer countered that the secondary offering was planned well before the CEO heard the bad news and that the CEO expected the customer to boost its order.

In other similar examples described in the article, the executives had entered into 10b5-1 plans that provided for automatic sales during the periods in question, and the executives claimed that the sales were consistent with historical patterns; however, the article contends that during the problematic periods, the executives either put in place new plans, amended their plans or otherwise sold more shares during the problematic periods than during the entire previous year. Many of the cases discussed in the article are now in litigation.

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