Zynga faces legal probe over senior management share sales

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?

But

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?

insider trading

...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.

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.

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.

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.