Zynga's plummeting stock price has brought the attention of lawyers, who have started an investigation into the recent stock dealings by the senior management of the gaming company. At issue is the sale of 43 million shares of stock by Zynga top brass, netting them $516m in profit. The sales were carried out a couple of months …
So, what are the rules here? I mean, as the CEO of my own company, I've kinda got an idea things are going south when the Euro is going through hell, the economy is tanking, etc etc - so am I insider trading if I unload stock?
How much do I have to know? I mean, it's one thing to sell a shitton of stock when you know that the FBI will raid your offices tomorrow, but if it's not kosher to sell your stock when you think things are looking tough, when CAN you sell it? Only when you know things will be better? That seems like an odd way to treat the guys who start a company...
Please be aware that I have no love lost for Zynga in particular; their name has become a kind of epithet in my mind. But that doesn't mean that every evil to befall them is justified, and I'm not seeing, "Our stock is going down and things aren't doing too well; they probably won't keep doing well in the near term either" as some kind of wildly evil, knuckles-cracking scheme to defraud investors.
I see your point, if a fool wants to buy your stock and invest in your dotcom business which has no tangible assets and does not produce anything and exists only on a whim then so be it and more fool them. Its up to them to take the risk?
If you have the knowledge that your business is in trouble, that you have this knowledge is one thing, that you fool other people into thinking everything is great is another. Then off loading your shares to unsuspecting buyers and making a lot of money knowing that there is a significant problem and that the shares you got rid of will be worthless is something completely different.
Maybe you should have issued a profit warning and then sold you shares?
...is illegal given the fact as CEO/high management/major shareholder you have access to non-disclosed/non-public information about the state of the company.
The case is about dealing of the shares of a public company too.
There are narrow windows of opportunity whereby senior managers can sell shares. Immediately after the results have been released is usually OK, Even then, if you have some insider knowledge that will materially affect the share price you are barred from dealing until that information is released.
A friend of mine was senior management at a small company traded on the stock exchange. He knew that the shares he held were going to tank, not because of insider knowledge, but because the whole sector was tanking. He was still barred from selling and had to watch the value of his shares drop to less than a third of their value.
"if a fool wants to buy your stock and invest in your dotcom business which has no tangible assets and does not produce anything and exists only on a whim then so be it"
To be fair to Zynga they do produce things. Utter crap to be sure, but it's still something.
Selling Part of a Company
You have three identities, the first, a person looking out to build their wealth through work and investments, second, one of many owners of your company, and three, an employee of your company's owners who hired you to manage their investment. If things are going south (let's assume it's due to the world and not your skill at management), it is your job as a manager to protect all the owners' investment and/or disclose to them that things are going bad, so they all have an equal opportunity to decide to bail out, hang on, or find bridging capitalization. If your company is publicly traded, there are laws regarding financial reporting so that any shareholder or potential investor may have the opportunity to look at the quality of an investment. If you, the manager, sees privileged information that will have a material effect on the stock price, then you are to issue a guidance so that investors have more salient information than the last quarterlies or the IPO prospectus.
If it's the whole sector is publicly tanking, then the public reporting of that is not privileged information, and selling stock based on that is not in and of itself insider trading. There is a grey zone, though. Let's say you are CEO of a bank and you just got a letter from a regulator saying you must mark to market bad assets. While all the banks of your type are getting those letters, and everyone will be getting a haircut, you can find out how bad the assets in your bank's portfolio are and make a guess if it's a trim or skinhead time. As ever, the best advice is one should consult one's attorney.
I can hear some asking what's the point of being a CEO if one has to constrain the ability to maximize wealth when it comes to stock ownership of the company he or she work for. Well, that's why you get the big bucks, right? Besides, look at the employee manual and check out the sections regarding punctuality, dress, moonlighting, confidentiality, and, if one is a code shop, the ownership over all the employee's ideas, including those formulated at home for something other than the project they are working on. One takes a job, gives up some liberty, and gets paid for doing things under others' direction to further their goals.
@David W. Its not a simple thing...
When you're an officer of a publicly traded company, you have a fiduciary responsibility to your shareholders.
Its illegal to trade on insider information, so much that they've created something called 'Rule FD'
Essentially once you know something, you have to let everyone know at the same time.
If the company is having trouble, then there's a fiduciary responsibility to alert all of the shareholders at the same time.
In terms of the insider trading, there could be a reasonable explanation like that they selling as part of a portfolio diversification, or that they are now able to exercise restricted shares.
Its not a simple thing. The point is that there are legal reasons why someone would sell the shares even though there's an appearance of guilty behavior.
To answer your other question... when someone owns more than 5% of a company which trades publicly, they are required to file papers with the SEC (US companies) and they have to follow rules and regulation on how they sell or purchase shares. (They have to report any and all transactions concerning that specific company's stock.)
Frankly, IMHO anyone who invests in an over hyped company selling at a high multiple to earnings... well they will soon be parting with their hard earned cash. The only ones who get rich off of these high flying IPO'd stocks are the early VC investors who get cashed out early and their lawyers and money men who brokered the deals.
> If it's the whole sector is publicly tanking, then the public reporting of that is not privileged information, and selling stock based on that is not in and of itself insider trading.
Unfortunately for my friend, this all occurred just a few weeks before the end of year figures were due to be reported. Once they started gathering the figures for the accountants for the report, they are not allowed to trade.
Nothing says that they cannot sell shares but they have to do it the right way. For instance you know the results are going to be bad before they are released and you sell shares before the results are released. Senior Management is also required to disclose WHEN they plan to sell shares and file the appropriate paperwork. You have CxO's everywhere that do this. Maybe they plan on selling some stock every quarter and they file the paperwork well in advance that for every quarter over the next 18 months they will sell X number of shares; they even list the exact days they will sell. The SEC has no problems with this, even if they are on days that results get published. The reason is, it was known well in advance and no insider information could have been used unless the company was hiding informations for awhile. That would be a different violation though.
The Old Reasonableness Test?
As far as I understood if you know no more than the market which is being affected by factors in common knowledge and the prospects are that a company will ride the cycle down now, but up again once the economy or market turn there is little questionable aspect to anyone selling.
However if you sell words and you have just heard that say Apple have just patented the use of letters to make words and then decide to sell up before the market knows you might well be guilty of insider selling. If you sold words and heard that some large market was about to ban education, e.g. the Taliban are about to take over the USA and this would be or should be common knowledge due to wide spread press reporting, then a sale of your stock should be relatively safe. The purchaser would be buying in full knowledge and in the belief that they could achieve something better than you. However, if they were buying in the knowledge that the rumour about the daft Apple patent idea or the Taliban action was false and maliciously designed to damage your company’s stock position; then they might face action for market manipulation.
Likewise if you know that your company accounts are suffering due to factors apparently specific to your product offering and then decide to sell, e.g. your product was crap, you might find the case of insider dealing hard to defend. The risk would increase if you are close to or in any privileged position, e.g. sales director, finance director, etc.
Note for the flamers the examples are fatuous but only slightly so both in order to highlight the difference between the two cases and to hopefully avoid appearing to cast doubt on any likely or current case. Disclaimer, I am not a lawyer and do not have any insider details of Apple's or any other future patenting or law making steps!
Re: The Old Reasonableness Test?
It is a little bit more complex than that (isn't it always?)
The general rule is that if the information was publicly available then it is okay to trade. In your Apple patent example, you might find out about the patents existence because it comes across your desk but if the patent is publicly available from the patent office then it isn't insider trading. Your trades, of course, would have to be because of the patent's existence and not because of the imminent multi-billion dollar lawsuit notice that was stapled to back of the patent.
"The timing of these insider sales two months before is suspect"
Looks to me that t' Management are getting their brass out before everything goes titsup.
People are Zynga doing something dishonest.... say it isn't so....
See http://latimesblogs.latimes.com/entertainmentnewsbuzz/2012/03/zynga-400-million-secondary-stock-offering.html from March - it wasn't just a simple stock sale by execs.