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Technology Stocks : CustomTracks Corporation (CUST)
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To: Rajiv who wrote (680)6/9/1999 1:51:00 PM
From: Roger A. Babb  Read Replies (2) of 2514
 
Rajiv, insider trading rules do in fact prevent an insider from changing the direction of his trading within six months of the last trade. The penalty for breaking the rule is that any profits from the trade must be refunded to the company. This rule is strictly enforced.

There is a shady area called "stock loans" that are used to circumvent these rules and also to hide the fact that an insider is selling. In my opinion, these are also illegal. Works like this:

Insider borrows against his shares, delivering the shares as security.

Loan shark SELLS the shares immediately.

Insider receives X% of selling price as his "loan" and writes the loan shark a "call" for his original shares that are now gone.

At end of term, insider can walk away with no recourse or he can repay the loan. Of course he would not repay the loan if the share price has fallen. But if the share price is up, the loan shark will exercise his call which means that he simply returns the loan payoff money. Either event simply means the loan is not repaid and rights to the shares are forfeited.

Net result of stock loan: the insider sold his shares and delayed reporting it until the end of the term of the loan. In my opinion, illegal and as a stock holder I would sue any insider I caught doing this trick!
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