Six months after Intel was informed about unprecedented vulnerabilities in its chips that could enable hackers to access user data, and which has since emerged as the most "staggering" bug to affect the global semiconductor industry, company CEO Brian Krzanich was quietly selling shares and exercising stock options worth a total of $39 million, netting him nearly $25 million, according to regulatory filings.
The trade, which took place on Nov. 29, has been called "a highly unusual move" that risked attracting regulatory scrutiny, according to lawyers and analysts who spoke to the WSJ. The timing of Krzanich’s sale “is really odd,” said Dan O’Connor, a Ropes & Gray attorney specializing in securities law. "The timing, the size, the unusual nature compared to prior sales—that’s going to get this a lot of scrutiny."
While the trade took place under an SEC rule that allows officers and directors to prearrange sales of specific numbers of shares at particular times, the experts note that the rule prohibits insiders from setting up such transactions while possessing undisclosed information that might affect the stock price.
Which is precisely what happened in this case.
To be sure, Intel pleads that it followed all the rules: an Intel spokesman said Krzanich’s divestiture was unrelated to the chip security issue and the sale was based on a prearranged trading program. However, in a clear violation of SEC rules, filings show that Krzanich established the divestiture plan about a month before the trade, on Oct. 30, long after Intel learned of the chip vulnerabilities in June.
The only potential saving grace here is if Krzanich did not know what was going on in his company for nearly half a year. For now, Intel hasn’t said when Mr. Krzanich was informed of the issue (and declined to provide further comment to the WSJ), although it is very much unlikely that the CEO had no idea what was taking place.
As the WSJ further notes, Krzanich’s trade stands out because it deviated from the CEO’s previous pattern of incremental sales of Intel stock, according to Ben Silverman, a researcher at InsiderScore LLC. In addition to exercising more than $28 million in options, the CEO sold nearly 50% of his unrestricted stock, reducing his unrestricted holding to 250,000 shares, the minimum set by Intel’s executive stock ownership guidelines according to the company’s most recent proxy statement. "That was an unusual move by a CEO", Silverman said.
"It’s not just that he sold stock knowing about the security issue," he said. "The size and selling behavior were unusual. Put those two elements together, and certainly on the surface it doesn’t look good."
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What happens next is that the SEC will likely get involved.
Silverman and other securities experts said they would expect U.S. regulators to examine Mr. Krzanich’s trade to see if it violated insider trading regulations, although such cases are difficult to win.
A spokesman for the SEC declined to comment.
One potential angle of defense is pleading ignorance about the impact this big would have on future sales. To wit: "for an insider trade to violate the rule, the information held by Mr. Krzanich about the security vulnerabilities in Intel chips at the time he made the trade would have to be deemed material to Intel’s business, the securities experts said. Intel said last week that it didn’t expect the issue to have any material impact on its business."
Of course, any claim that the biggest flaw in Intel history would have little impact is disingenuous at best (and criminal at worst), so maybe the company - and executive - will look to settle.
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Other securities specialists are skeptical and note that companies generally would want to be careful in communicating with investors about a CEO’s stock sale in such circumstances.
“At first glance, it’s a very unusual type of thing that shareholders and directors would want a fairly tight explanation about,” said David Larcker, a professor of securities law at Stanford University. “It may be fine, but it’s the kind of thing you’d want to really understand and be transparent with shareholders about.”
In other words, should INTC stock slide, activists will immediately emerge demanding Krzanich's scalp.
Some more details:
At the time of Mr. Krzanich’s sale, Intel was working with chip rivals and software partners to patch the security flaws, which were built into a variety of chips including virtually all Intel processors going back more than a decade. Intel was by far the company most affected by the problem, because it has dominant market share in chips used for servers and personal computers.
Intel had planned to announce the problem on Jan. 9, but it leaked earlier. Intel shares then dropped more than 5% combined on Wednesday and Thursday but edged up modestly on Friday.