Geoff,
** OT **
Your arguments do not persuade me because they view gains in the aggregate and fail to take into account components. Insider activity based on substantial changes in a firm create zero sum games, which inflict very real economic pain on players on the losing side of the game.
One of the problems with insider activity has to do with the mixed signals that often occur. For example, last summer OXHP reported outstanding earnings, but the stock dropped from around $89 to $76. It subsequently transpired that insiders knew the company was in real trouble and were selling stock while at the same time painting a rosy picture to investors. Within a few months the stock plunged to below $20 as the truth emerged. Selling shareholders may have been spared some pain during this hiatus, but it is very difficult to justify the loss inflicted on new shareholders who bought just before the drop.
The problem with many economic arguments is they view aggregate effect rather than subsets, and that was the case with OXHP. I had a substantial position with a good profit last summer. I was one of the fortunate shareholders who correctly read the tea leaves and got out. The person who bought my shares was not so fortunate. So the lack of a level playing field worked to my advantage in this case.
But this also raises the ethical question of insiders who are the employees of shareholders profiting from information to which shareholders are not privy. Assuming that this kind of information creates a zero sum game, and insiders win doesn't that imply losers on the other side?
How, for example, were small shareholders prevented from buying overpriced stocks in the case of Cendant? In light of the comments made by auditors it appears that CUC's problems were the result of widespread, systemic fraud, and that this fraud is at least three years old (judging by the period for which financial results will need to be restated).
In the case of HBOC knowledge was mistakenly disseminated by investment bankers to large players. People on this thread were mystified for several days following the stock's initial plunge, but the big players knew exactly what was going on. This hardly speaks to an efficient market. The fact that the information was incorrect is irrelevant. What is relevant is that there is a zero-sum game at the moment when critical intelligence is known by one party and unknown by the other.
Now this brings me back to the issue of management incentives. It is common for smaller, cash-strapped companies to pay for a significant amount of compensation in the form of stock options. This compensation plan has also become widely adopted by large, well-capitalized companies. The problem is that these options are routinely exercised and the stock immediately sold. This defeats one of the main reasons for justifying these plans. If it were in my power I believe that these plans should contain a provision whereby the stock could not be disposed of for a lengthy period of time. Perhaps this would really put management on the same side as shareholders. Undoubtedly there are all sorts of cogent arguments against this idea, but I find myself becoming increasing cynical when it comes to top management.
TTFN,
CTC |
