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Saturday, March 18, 2023

ProPublica IRS Files: Wealthy Executives Make Millions Trading Competitors’ Stock With Remarkable Timing

ProPublica, The IRS Files: Wealthy Executives Make Millions Trading Competitors’ Stock With Remarkable Timing:

ProPublica (2023)Never-before-seen IRS records show that CEOs are sometimes making multimillion-dollar bets on the stocks of direct competitors and partners — and doing so with exquisite timing.

On Feb. 21, 2018, August Troendle, an Ohio billionaire, made a remarkably well-timed stock trade. He sold $1.1 million worth of shares of Syneos Health the day before a management shake-up caused the company’s stock to plunge 16%. It was the largest one-day drop that year for Syneos’ share price.

The company was one Troendle knew well. He is the CEO of Medpace, one of Syneos’ chief competitors in a niche industry. Both Syneos and Medpace handle clinical trials for biopharma companies, and that year they had jointly launched a trade association for companies in the field.

The day after selling the Syneos shares in February 2018, Troendle bought again — at least $3.9 million worth. The value of his Syneos stake then rose 75% in the year that followed.

In February 2019, Troendle sold much of that position, netting $2.3 million in profit. Two days later, Syneos disclosed that the Securities and Exchange Commission was investigating its accounting practices. The news sent the company’s shares tumbling. Troendle’s sale avoided a 25% loss, the stock’s largest decline in such a short period during either that or the previous year. (Troendle declined to comment.)

The Medpace executive is among dozens of top executives who have traded shares of either competitors or other companies with close connections to their own. A Gulf of Mexico oil executive invested in one partner company the day before it announced good news about some of its wells. A paper-industry executive made a 37% return in less than a week by buying shares of a competitor just before it was acquired by another company. And a toy magnate traded hundreds of millions of dollars in stock and options of his main rival, conducting transactions on at least 295 days. He made an 11% return over a recent five-year period, even as the rival’s shares fell by 57%.

These transactions are captured in a vast IRS dataset of stock trades made by the country’s wealthiest people, part of a trove of tax data leaked to ProPublica. ProPublica analyzed millions of those trades, isolated those by corporate executives trading in companies related to their own, then identified transactions that were anomalous — either because of the size of the bets or because individuals were trading a particular stock for the first time or using high-risk, high-return options for the first time.

The records give no indication as to why executives made particular trades or what information they possessed; they may have simply been relying on years of broad industry knowledge to make astute bets at fortuitous moments. Still, the records show many instances where the executives bought and sold with exquisite timing.

Such trading records have never been publicly available. Even the SEC itself doesn’t have such a comprehensive database. The records provide an unprecedented glimpse into how the titans of American industry make themselves even wealthier in the stock market.

U.S. securities law bars “insider trading” — buying or selling stocks based on access to nonpublic information not available to other investors — under certain circumstances. Historically, insider trading prosecutions and SEC enforcement have both focused on corporate employees, and those close to them, trading in the stock of their own companies.

But executives at companies can also have extensive access to nonpublic information about rivals, partners or vendors through their business. Buying or selling stock based on that knowledge can run afoul of insider-trading law, according to experts. ProPublica described multiple trades, without mentioning names, to Robert Zink, a former chief of the Justice Department’s criminal fraud section, who responded that if he were still at the Justice Department, “of course we would look at it.” He added that the key to ProPublica’s findings is “the trading doesn’t appear to be a one- or two-time thing. It’s happening a lot.”

Harvey Pitt, former chair of the SEC, said it was unwise for corporate officials to bet on the fortunes of competing companies. ...

Insider trading is a simple concept and simultaneously difficult to prove, because it hinges on blurry definitions and court rulings that have favored defendants and weakened enforcement. Matters are even murkier when it comes to executives buying and selling shares of rivals and partners. This can be perfectly legal.

But even when legal, such trades can allow executives to win when their companies lose, according to securities experts. Executives are often handsomely compensated with their own company’s stock, which gives them a direct reward for maximizing profits and raising their company’s stock price. Owning shares of competitors' stock potentially gives them a reason to root for their rivals to succeed, said Alan Jagolinzer, a professor of financial accounting at the University of Cambridge’s business school.

And by making millions through trading on nonpublic information, executives could contribute to the perception that the stock market is rigged to benefit the privileged. Well-placed executives enjoy access to information within their industry that isn’t available to ordinary investors. The perception that industry insiders use that knowledge for personal gain could undermine the public’s confidence that the markets are fair.

Prior TaxProf Blog coverage:

https://taxprof.typepad.com/taxprof_blog/2023/03/propublica-irs-files-wealthy-executives-make-millions-trading-competitors-stock-with-remarkable-timi.html

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