It's easy to sympathize with the hypothetical executive who, after learning about some horrible PR calamity about to befall his company, reflexively dumps a bunch of shares. Anyone with knowledge that their primary store of wealth was about to take a massive hit would have that impulse.
Pushing against that impulse, presumably, is awareness of securities laws and inevitable public wrath. The odds of getting away with a big obvious insider sale in advance some major negative headline are pretty slim, especially when you consider the kinds of insider-tradingperps the SEC has set its sights on of late.
So the news that three Equifax executives sold shares in the days following the company's discovery of its 143 milllion customer hack is perfectly perplexing. Here are the details, courtesy of Bloomberg:
The credit-reporting service said earlier in a statement that it discovered the intrusion on July 29. Regulatory filings show that on Aug. 1, Chief Financial Officer John Gamble sold shares worth $946,374 and Joseph Loughran, president of U.S. information solutions, exercised options to dispose of stock worth $584,099. Rodolfo Ploder, president of workforce solutions, sold $250,458 of stock on Aug. 2. None of the filings lists the transactions as being part of 10b5-1 scheduled trading plans.
In case you need any reminding, news that your credit reporting giant exposed the sensitive personal data of essentially every American consumer is, without question, material non-public information. You can't trade on material non-public information.
That said, there are a couple different exculpatory arguments Equifax could float, and they've decided to try both of them:
The three “sold a small percentage of their Equifax shares,” Ines Gutzmer, a spokeswoman for the Atlanta-based company, said in an emailed statement. They “had no knowledge that an intrusion had occurred at the time.”
Translation: The executives didn't know, but even if they did their trades were really small! If you grant the latter point about them not knowing, then the point about the size of the trades wouldn't matter, so let's look at explanation number two: they didn't know. Here's Equifax's Thursday news release announcing the hack had taken place:
When did the company learn of this incident?
We learned of the incident on July 29, 2017, and acted immediately to stop the intrusion and conduct a forensic review.
The trades in question took place between three and four days later. During this time, Equifax would have us believe, these three senior managers were kept in the dark about the fact that hackers had undertaken what may be the largest-ever private security breach right under their noses. Moreover, we're to understand that even the chief financial officer remained unaware as the company “acted immediately” to right the ship.
That's a lot to swallow!
Let's take the other argument, that these are pretty small amounts we're talking about anyway. Here's Matt Levine elaborating on that point:
You could just about imagine them learning of the security breach, panicking, and selling everything -- except that they didn't sell everything. One sold about 4 percent of his stock holdings, another about 9 percent, another about 13 percent. Why do such comically obvious insider trading if you're only selling a small percentage of your stock?
I'm not sure how persuasive this would be to the SEC, but it is worth considering. How much stock is a lot to a corporate executive whose net worth rests chiefly on that stock?
There are all sorts of reasons one might not dump everything, even in the face of a certain plunge in the stock price. From one vantage point, the modest (ish) size of the inside trades is perfectly consistent with a rational (if ill-advised) exercise of self-interest pending a material event. Let's say they were already planning on cashing out some of their stock in the near- to medium-term – why not do so before shit goes south?
One reason it's difficult to intuit anything from insider trades is that executives buy and sell stock all the time for reasons unrelated to what's going on at the company. They might be freeing up cash to buy a third house or take advantage of a tax situation or whatever. If you look at thethreeexecutives' insider trading history, you see a few sales of comparable sizes occurring in the preceding months and years. For the most part, these sales didn't line up with material shocks to Equifax's stock.
Ploder, for instance, dumped 1,719 shares ($250,000) of his 43,648 shares ($6 million) in Equifax stock in August. His previous two sales were in November, 2016 (3,341 shares) and late August of that year (3,100 shares). Similarly, Loughran had made two sales in February of this year (a total of 6,604 shares), and a previous one in February 2016 (6,216 shares). He sold 4,000 last month.
All of this is consistent with the possibility that the executives in question decided to respond to the incoming public-image disaster not by making anomalously sized sales but by making anomalously timed sales. This behavior would be perfectly rational, if you ignore the near-certainty they'd be caught doing so.
At this point, who knows. Both hypotheticals seem unlikely. Either they did insider-trade and thought no one would notice, or Equifax simply forgot to tell its CFO that a hacker compromised more than a hundred million customer accounts. Either way, there's still more to the story.