The Tribune’s study of insider transactions found many examples of sales shortly before earnings warnings.
In discussing the trades, companies say they are perfectly legitimate. Indeed, no enforcement actions have been brought in connection with any of them.
But, in most cases, the insiders’ timing was fortuitous. Some examples:
Clorox Co.
In late May through mid-June, seven executives of the California-based consumer products giant–including Gerald Johnston, who was president and later became chief executive, and then-Chief Financial Officer Karen Rose—-exercised options and sold shares worth nearly $6.9 million. For most, it has been their only reported sale this year.
Six days after the last sale, on June 18, Clorox startled investors. Citing the effects of unusually wet spring weather on auto products and seasonal products, especially charcoal, the company said in a regular update that quarterly earnings would be 67 to 68 cents a share, just below the analyst consensus of 69 cents.
Shares fell 6.5 percent that day, and they did not close above the previous close for three months. The insiders saved more than $333,000 by selling when they did.
For several areas of the East Coast, in particular, this spring was among their rainiest ever, but Clorox spokesman Dan Staublin said the financial effects weren’t felt until late in the quarter, when reorders slowed.
He said he did not know what information the executives had when they sold, but he said that the sales came during an approved trading window and that insiders must receive approval from top officials before conducting trades.
Christopher & Banks Corp.
In mid- to late October, two directors and four executives, including CEO William Prange, sold more than $6.3 million worth of shares in the Minnesota-based clothier.
The sales were all at $29 a share or above; most came Oct. 14, the day the stock had its all-time high close.
On Nov. 6, the company said October sales slowed after the first week of the month and warned quarterly earnings would likely miss the consensus analyst estimate by more than 16 percent.
Shares fell nearly 10 percent in the next two sessions and have not regained their preannouncement level. They saved nearly $850,000 by not selling at the closing price after the announcement.
Executives have been frequent sellers this year. Director Larry Barenbaum–one of the October sellers–and Controller Michael Lyftogt sold shares Jan. 30-31. On Feb. 6, the firm warned results would be below estimates, and shares fell more than 12 percent over two sessions.
Company executives did not respond to interview requests.
Zoran Corp.
From July 28-31, CEO Levy Gerzberg, Chief Operating Officer Camillo Martino and Senior Vice President Isaac Shenberg sold $5.2 million worth of stock in the California-based digital communications products firm.
On Aug. 11, as Zoran announced the closing of its acquisition of Oak Technology, it reported that Oak’s results would subtract 10 to 12 cents a share from the 31 to 33 cents in third-quarter pro forma profits it estimated July 24.
Shares fell 4.4 percent in a day, ending more than 12 percent below their sale prices. The three saved more than $682,000 by selling when they did.
Chief Financial Officer Karl Schneider noted that when the deal was announced in May, officials had warned Oak results would dilute earnings in the short term, but how much depended on when the deal closed.
When it announced second-quarter results July 24, Zoran said the deal, once completed, “will substantially affect the company’s operating results” but didn’t provide an estimate in its announcement or subsequent conference call.
Schneider said in presentations after the deal was first announced that Zoran had told investors the Oak acquisition would dilute results 5 to 10 cents a share in the fourth quarter.
The stock’s reaction after the Aug. 11 announcement, he said, came because “there were people who didn’t listen.”
The executives’ sales came in a window between the earnings announcement and a blackout period imposed before the deal closed, he said.
“I don’t think there’s anything abnormal done by any of the insiders,” he said.
Since early September, Zoran shares have traded well below the executives’ sale price. When the company reported third-quarter results in October, it guided fourth-quarter estimates well below analyst estimates. Shares fell 16 percent in a day.
Strategic Diagnostics Inc.
Co-founder Richard Birkmeyer was fired as CEO of the Delaware-based maker of food-safety and water-quality test kits on May 20, though he stayed on the board until July 7.
From his firing through May 29, he sold 309,000 shares of stock, worth more than $1.26 million.
On June 3, the company said earnings “may be slightly below” analyst estimates; shares fell 7.7 percent by the close on June 4, although that was still above the price for some of his sales. They briefly bounced back to preannouncement levels, but slid back and haven’t closed above it since mid-June.
Birkmeyer noted he had nearly 2 million shares of company stock before the first sale and was seeking to diversify. “All my net worth was tied up in that stock,” he said.
He said he was “divorced” from daily operations at the time of the sales, didn’t know what prompted the warning and would not have sold had he known it was coming.
When the firm reported results in late July, they came in at the original estimates.
“They were playing very conservatively after I left,” Birkmeyer said. “The point to really focus on … is that particular quarter was made, so there was no negative news.”
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How the Tribune’s study was done
Using records from Bloomberg News, the Tribune assembled a list of 1,369 U.S. corporate earnings preannouncements from Jan. 1 through Sept. 30. These covered guidance that was both higher and lower than expectations and included both operating earnings and announcements of one-time items that would affect results.
Because companies frequently have stock-sale blackout periods before quarterly earnings releases, guidance disclosed with those results was excluded.
A list of nearly 2,700 sales and purchases leading up to the news by directors and high-ranking executives–insiders who must report trades to federal regulators–was compiled from Thomson Financial data.
To be included, transactions must have occurred within three months of the announcement–half the period in which regulators restrict combination buying and selling in “short swing” trades, based in part on the idea insiders may be able to accurately predict price movements over that period.
To eliminate insignificant purchases and sales, those of fewer than 100 shares were excluded. Transactions by outside investors owning 10 percent or more of a company’s stock, who also must report as insiders, were eliminated.
Detailed analysis, including stock price changes immediately after preannouncements and from purchase and sale prices, was performed on transactions within a month of the disclosure to assess the effectiveness of insiders’ timing of their trades.
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COMING MONDAY: Stock exchanges, regulators combine high technology with old-fashioned detective work to catch insider-trading scofflaws.
