SEC Needs to Quit Taking Executives' Word on Stock Sales
Intel Corp. CEO Brian Krzanich relied on a tried-but-true Wall Street excuse when it was revealed that he sold a large chunk of stock about a month before the chipmaker disclosed a security flaw but months after it was aware of the issue. The sale was planned all along, the company said, so it couldn't under any circumstances be insider trading.
The timing and explanation of the stock sale will most likely draw scrutiny from the Securities and Exchange Commission. At the very least it creates a perception problem. But the bigger problem for investors and the market is that the SEC still permits executives to use the device.
Krzanich sold the stock -- about 644,135 in options and an additional 245,743 shares he previously owned for a profit of nearly $25 million -- on Nov. 29. Intel discovered the security problem, which affects rivals' chips as well but seems to be a bigger issue for Intel, months before. It's clear Krzanich knew about the problem much earlier than November, which makes the stock sales problematic. Intel shares dropped 5 percent when news leaked about the security issue last week.
An Intel spokesperson has said repeatedly that Krzanich's stock sale was part of a 10b5-1 pre-arranged stock sale plan and therefore can't be considered insider trading. Critics have long complained that executives abuse 10b5-1 plans, and Krzanich's case is particularly unusual. The Intel CEO waited until late October to set up the plan, well after he appears to have known about the security problem. What's more, the CEO sold his shares exactly 30 days after the plan was set up, the earliest date possible, and the size of the stake raised some eyebrows. Krzanich and Intel declined to comment for this column.
The SEC created the 10b5-1 plan safe harbor in 2000, and a number of studies since have hinted at abuse. In late 2012 the Wall Street Journal conducted an investigation that highlighted some particularly well-timed stock trades. At the time, I wrote that while the stock sales are set in advance, executives still know when they will take place and therefore have the ability to plan the disclosure of news both good and bad around their trading dates. It's not insider trading, but it invites suspicion. The SEC said it was looking into issues with the plans at the time, but more than five years later no changes have been made.
The consensus, shared by even some of the plan's critics, is that investors are better off with the 10b5-1 rule than without it. Critics contend that many of the problems could be solved by lengthening the time between when the plans are set up, or changed, and when stock sales can take place, perhaps from a month to six. Equity compensation is still the preferred way to reward executives and encourage performance. And executives have to be allowed to sell their shares from time to time.
But I'm not sure we are actually better off. The fact that the 10b5-1 plans can give executives cover might encourage more insider trading, not less. And the statute has rarely been used to stop abuse. In the 18 years since the rule has been on the books, only two executives have ever been accused of breaking the rules -- Ken Lay of Enron and Angelo Mozilo of Countrywide, both of whom had greater troubles than whether they ran afoul of 10b5-1 rules.
I have a dog and I have two daughters, 8 and 11. The youngest isn't old enough to claim the dog ate her homework, and the oldest hasn't seemed to have an interest in doing so yet. But I have told them in advance that the lame excuse, and ones like it, won't fool anyone. It's time for the SEC to tell top executives the same.
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Daniel Niemi at email@example.com