SEC Commissioner Blasts Insiders For Quietly Selling Into Stock Buybacks, Demands Rule Review

When Trump launched his wave of Wall Street deregulation, many were convinced that the ensuing free-for-all would lead to an immediate surge in VaR, and a rapid return of pre-crisis conditions, with banks taking on massive amounts of risk fully expecting to be bailed out when things turned sour. And perhaps that will eventually happen but for now, in a surprising development, one regulator has had the nerve to point out something we have been criticizing all along, namely that corporate buybacks are simply a scheme to make shareholders and management exorbitantly rich on the back of creditors who buy corporate bonds to fund stock repurchases. And, in an added twist, corporate insiders are taking advantage of a peculiar quirk in price action to dump the bulk of their stock just as algos and humans (and, in the case of Apple and various other stocks, central banks) are buying.

Specifically, according to an analysis by SEC Commissioner Robert J. Jackson, Jr., company executives have been grossly busing the timing of buyback announcements and selling significantly more of their stock immediately after the news than they do beforehand. taking advantage of price bumps that often accompany share-repurchase announcements.

But what is most infuriating, is that this is perfectly legal, and as the WSJ reports in a speech on Monday, a pissed off Jackson — appointed by President Trump and sworn in this year to fill a Democratic seat at the SEC — may emerge as the most credible SEC employee in years when he urges fellow regulators to review securities laws that provide protection to insiders who capitalize on the timing of buyback announcements.

This is where it gets bizarre: while companies engaging in buybacks have certain constraints, such as following a blackout period, or only selling on a NBBO uptick, insiders who sell stock into buyout bounces aren’t trading illegally and Jackson isn’t accusing them of that. But these price surges can be especially beneficial to corporate executives holding large chunks of corporate stock looking for an uptick to unload shares. And since it is the executives that decide when to buy back stock and when to announce it, it seems that this is yet another way for corporate insiders (literally) to skew the market in their favor. Oh, and the other difference of course, is that when the company, retail investors, algos (and central banks) are buying, corporate insiders - those who know their company better than anyone - are selling.

Almost as if the market is being inefficient and not rewarding those with the best information.

To be sure, Jackson is not happy with the fact that corporate insiders are so grossly exempt from what is so clearly insider trading, that it needs to be exempt:

“The SEC gives an exemption from market-manipulation rules to companies doing a buyback,” Mr. Jackson said in an interview. “The SEC shouldn’t be making it easier for executives to use them to cash out.”

And yet that's precisely what the SEC has been doing for decades. Ironically, it is only a Trump-appointed commissioner who dares to blow the whistle.

Jackson, who is a former law professor, examined stock trades at 385 companies that announced buybacks in 2017 through this year’s first quarter.

He found two things:

  • First, the percentage of insiders selling shares more than doubled immediately following their companies’ buyback announcements as many of the stocks popped. Daily stock sales by the insiders rose from an average of $100,000 before the buyback announcements to $500,000 after them. The sellers received proceeds totaling $75 million more than had they sold before the announcement, the study concluded. At 32% of the companies, at least one insider sold in the first 10 days after the buyback announcement.
  • Second, the study found that in the days leading up to share repurchase announcements, the companies’ stocks underperformed the broader market by an average of 1.4%. During the 30 days after the announcement, the companies’ stocks outperformed the overall market by an average of 2.5%.

In other words, familiar with the pattern of spiking prices after buyback announcements, corporate insiders have been dumping away to far less sophisticated momentum chasers and algos, who are hoping that a buyback will ensure higher prices indefinitely. If only management teams did not disagree.

To be sure, Jackson is careful to note that his views are his own and don’t reflect those of the entire agency, although now that the cat is out of the bag, not only insider selling into buyback announcements but buybacks themselves may suddenly prove to be problematic, with the investing public suddenly weary of buying when the C-suite is liquidating.

Until then, however, it is a feast for insiders looking to sell into buybacks (which themselves organize). Indeed, as we reported last week, 2018 is shaping up as a blockbuster year for not only announced but executed buybacks which have grown increasingly popular among companies. So far this year, according to Birinyi, buyback announcements from all U.S. publicly traded companies totaled just over $500 billion, on pace to the first ever $1+ trillion total. For all of 2017, companies announced $685 billion in buybacks up from $670 billion in 2016. Meanwhile, as BofA calculated last week, actual spending on buybacks just hit an all time high in Q1.

Of course, the above activity is what some may call a "victimless crime" - after all, everyone is on it, and everyone is making money (except for the shorts). In fact, none other than the president has blessed boosting buybacks with changes to the tax law that made buybacks more attractive for companies. Many investors welcome the deals because they often boost a stock’s price, yet even so some consider them a dubious use of corporate capital if they are made at high valuations or if the returns from buybacks don’t exceed an investment in the business.

But some other management team can worry about that - the current one is making out like bandits. Take the case of Bloomin' Brands. While Jackson’s study didn’t identify specific companies, in Bloomin's case the operator of casual-dining spots including Outback Steakhouse announced its earnings on Feb.22 and noted the existence of a new $150 million stock-repurchase program.

On that day and on Feb. 26, Chief Technology Officer Donagh Herlihy sold a combined 216,562 shares, generating roughly $1.4 million in net proceeds, regulatory filings show.

On March 2, six days after the news, Chief Legal Officer Joseph Kadow sold roughly 281,000 shares generating $5.07 million, according to the filings. Also that day, Chairman and Chief Executive Officer Elizabeth Smith sold 150,000 shares generating $2.5 million, filings indicate.

And the punchline: the sales were executed at prices that were, on average, 7% higher than the closing price the day before the buyback was announced. In lieu of a statement to the WSJ, a Bloomin’ Brands spokeswoman said that “we have had share buyback programs in place continually since December 2014 and in similar or larger amounts."

And that's precisely the problem: at issue is Rule 10b-18 of the Securities Exchange Act of 1934, which advises companies how to proceed with buyback timing and other mechanics, such as prices paid and volume restrictions. And the kicker: the Rule provides a “safe harbor” for officers or directors to trade in the shares during a repurchase without running afoul of antifraud provisions of the securities laws.

Jackson believes that executives who sell into buybacks are benefiting at the expense of shareholders. “If an executive believes a buyback is the right thing for the long term, they should put their money where their mouth is and keep their stockholdings,” he said, and he is absolutely right. However, with a market as broken as this one, in which stocks almost never go down, one is hard pressed to make even an ethical argument that insiders are taking advantage of Joe Sixpack. If anything, the stocks keep going higher, on the back of even more debt-funded buyback announcements (and central bank purchases, thank you SNB).

Jackson is scheduled to present his analysis Monday at the Center for American Progress, a left-leaning think tank in Washington. The study parallels his past academic work on corporate governance issues. He taught law at NYU and Columbia and was founding director of the Columbia Law School’s Data Lab, which used technology to study the reliability of company disclosures.

In the interview with the WSJ, Jackson said the SEC hasn’t looked at buyback rules for more than a decade. With the recent surge in such activity, he said, “it’s time to take another look at these rules.” Just don't make the look too close, because if there is anything that can finally end the stock market's decade-long party, is if something were to happen to the biggest buyer of stocks since the financial crisis:

... corporations themselves.

Comments

overbet TheSilentMajority Sun, 06/10/2018 - 15:52 Permalink

This is nonsense. They always focus on shit that doesnt matter or is no longer relevant that really should have been looked at years/decades ago. Justifying their existence without stopping anything at all. Putting on a show for your satisfaction that theyre going after those evil greedy executives. 

Anyone that has back tested buyback announcements will know they only move the stock if they are a very significant amount. In fact, many times companies will announce buybacks in conjunction with poorer earnings or other negative news to attempt to soften the blow. Same with dividend increases. But, dont take my word for it. Look at the data. No, no, no. I dont want to look at the data. It sounds bad so its bad because they told me it was and I am happy theyre doing something to stick it to the rich executives. 

Stock buyback announcements that move share price are either interpreted as an attempt to soften bad news and stock goes down or if its a very large amount relative to the float, it will make the stock price rise. Otherwise and most of them are a non-event.

In summary, evidence indicates that stock repurchase announcements are noisy indicators

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2343913

 

Evidence indicates that average long-run positive (negative) abnormal performance following stock repurchase (secondary offering) announcements, which used to be robust, disappears in recent years. Also, short-term reactions to such announcements are on average less pronounced in recent data.

https://www.researchgate.net/publication/228316030_The_Persistence_of_L…

 

 

In reply to by TheSilentMajority

snblitz Stuck on Zero Sun, 06/10/2018 - 23:25 Permalink

I own my own water rights.  water rights which pre-date the existence of the state of california.  One day they will announce I have to put water meters on my wells and report how much water I draw to "them".  "they" will charge me not only for the meters and the installation, but also the bureaucracy "they" create for me to report my "usage" to.

It is my water, the state has no title to it whatsoever.

Probably when it comes time to install the "meters" I will have to use "approved" installers too.  Then will come monthly inspections to make sure I am not "cheating".  How can I cheat?  It is my water.  All of it.

Then all these people I report my usage to will get extravagant pensions and I will have to pay for those too.

In reply to by Stuck on Zero

Nuclear Winter TheSilentMajority Sun, 06/10/2018 - 22:38 Permalink

Oh, the buybacks have been going on since 2010 and the start of zero interest rates and Quantitative Sleazing. Glad they (were forced to) woke up and is saying something now...

Keep the insider trading and look the other way SEC, like you did with the Experian hack execs who sold the week of the data breach, but withheld that from the public, gov, and investors for 4 months.

In reply to by TheSilentMajority

Catullus Sun, 06/10/2018 - 15:43 Permalink

When is an executive supposed to sell? You can’t sell during the blackout period. You can’t sell with material knowledge. Now you can’t sell after major announcements that are made public? And when does an executive get the same rights as every other shareholder? Great stock buyback, why can’t the shareholder/executive participate? 

...benefiting at the expense of shareholders. “If an executive believes a buyback is the right thing for the long term, they should put their money where their mouth is and keep their stockholdings,...

Thats outright bullshit. You can buyback shares AND believe the secondary market is overvaluing the equity AND it be the best thing for the company. And if the other shareholders don’t believe that they vote the buyback down

 

 

snblitz Catullus Sun, 06/10/2018 - 23:32 Permalink

When I sold my restricted stock, all I had to do was announce it 90 days ahead time.

Yes there was a time you could sell restricted stock ahead of time.

No idea if that process still exists, but in the past it worked that way.

There was some form I filed with the government.

 

In reply to by Catullus

Rainman Sun, 06/10/2018 - 15:45 Permalink

Maybe just me, but my totalitarian tin foil gets cracklin' when congresscritters and corp insiders get a pass on insider trading. 

CHX13 Sun, 06/10/2018 - 15:47 Permalink

But that's what the buybacks are for. So the insiders can unload near the top. That is the ESSENCE of stock buy-backs (other than making the P/E-ratios on company stats look better than they are, of course). PHeeee...

artvandalai Sun, 06/10/2018 - 16:06 Permalink

I guess this isn't insider trading but it might as well be. It's nothing more than making an investment decision to hold until after the announcement.

So insiders and congressmen can still trade all they want using insider information.

 

PigMan Sun, 06/10/2018 - 16:27 Permalink

heard in board meetings across the country:

 

"..so here's the plan. The company will do a buy back so we can unload this piece of shit, and we'll sell it in a dark pool, that way we can unload in bulk and not affect the price that we just pumped up because nobody sees it."

 

"All those in agreement, say I"

MARDUKTA Sun, 06/10/2018 - 16:34 Permalink

'Greed' is the cancer in capitalism. 

Not much one can do when cheating is ok throughout society, sports drugs, 2-tongued political hacks, grades-for-sex at all universities, etcetc.

buzzsaw99 Sun, 06/10/2018 - 16:43 Permalink

it has been a long fucking wait but i am perfectly positioned bitchez.  what should have happened ten years ago will happen.

You hear that Mr. Anderson? That is the sound of inevitability. [/agent smith]

slightlyskeptical Sun, 06/10/2018 - 16:47 Permalink

Ban all publicly traded company stock buybacks. Reverse split if you want less shares. 

Pay excess cash out in normal dividends. or INVEST IT IN GROWTH...guess they don't see much growth ahead. only price inflation brought about by designed scarcity. 

The article states that companies (being exempt), are allowed to manipulate the markets to buy back shares. What the fuck kind of law is that. Or insider congressional abuse. Don't see Trump speaking out on that do you?

the Dood Sun, 06/10/2018 - 18:12 Permalink

Funding buybacks with debt would be the most ludicrous shamster move on the street, dotcom bubble 2.0, but how do you know when they are doing that? 

fbazzrea Sun, 06/10/2018 - 18:37 Permalink

this is really big... Trump's appointee has just exposed the ludicrous SEC as subservient to Wall Street banksters.

party's over. time to overhaul securities regulation and enforcement!!!

Let it Go Sun, 06/10/2018 - 19:09 Permalink

A slew of stories and articles have hit the news recently about how companies buying back their own stock are driving the market higher. The new recently passed tax law which lowers corporate taxes and encourages repatriation of cash that has been stored overseas is feeding fuel into the share buyback frenzy.
To be perfectly clear, buybacks are a tool corporate boards and CEOs use to manipulate the prices of their own shares higher. This means insiders can get out or hedge their positions before reality sets in and prices fall back to earth.The article below delves into why this will create problems.

 http://Stock Buybacks Are Driving Market-its.html