Key Take-Aways:
Directors, executives, and the people who advise them must anticipate what a purchase or sale of company stock is going to look like in hindsight and how it may become distorted.
Take a clear-eyed look at your insider trading clearance processes for potential gaps and weaknesses.
Don’t believe the memes!
Last week, I was asked about a meme that was posted on Facebook. The meme said that the CEOs of 14 specific companies were tipped off by top government officials to the spread of Covid-19 before the general public and then resigned from their CEO posts so that they could sell their company stock, thus jumping the gun before the massive market plummet that would start on February 19. No sources were listed. Here is the meme:
Facebook flagged this meme as potentially false information being spread on its news feed and asked the organization PolitiFact to fact-check it. That’s when the researcher for PolitiFact contacted me (as well as others well-known to us) for my take on the accuracy of the meme and about the subject matter area in general. His article appears on the PolitFact website here. I’m going to do a deeper dive and talk more about internal policies and external reporting for stock trades by insiders.
When I first read the meme, I didn't believe any of these CEOs resigned "so that" they could sell large amounts of stock ahead of the February 19 through March 23 market crash to avoid losses. It just didn’t seem plausible. Maybe there was one bad apple in that batch of 14, but definitely not high-profile CEOs like Bob Iger or Ginny Rometty. I hadn’t heard of this claim before.
Did You Do the Homework?
In general, I refrain from making claims like this one unless I know for sure that was the case or I can put together a timeline of events where you can draw plausible conclusions. For this one, you'd have to research each CEO case-by-case to see when they left the company and whether they sold unusual amounts of their own company's stock or the stock of other companies between then and February 19.
You'd also have to look at what the circumstances were for each CEO’s departure. Some may have been fired. Others may have been long planned. Some announced they are stepping down, but not really leaving the company for a while.
For example, Bob Iger is staying on as executive chairman of Disney's board, so he's not really going anywhere just yet. He'll still have the same trading restrictions and reporting requirements for Disney stock until he leaves the board in 2021. Disney announced this on February 25, after the market had started to crater.
IBM announced on January 30 that Ginny Rometty was going to step down after eight years as CEO of Big Blue. The end of January may have been too far out for anyone to know whether the Covid-19 virus would spread to the US. Even so, she was staying in the CEO role until April and will remain chairman of the board until the end of 2020. Like Iger, Rometty will still be subject to the same trading restrictions and reporting requirements as she was before.
Insider Trading Restrictions and Reporting Requirements
Generally speaking, board members and senior executives, including the CEO, are restricted from trading in their own company's stock by insider trading policies. These are internal policies that prohibit people in this group from transacting in company stock, except during designated "trading windows.” Insider trading windows typically open somewhere between immediately and 48 hours after the company's earnings release each quarter and stay open for approximately 15 to 30 days. The theory behind this is that all material information, including forecasts for the rest of the year, is out in the open once earnings are released, so everyone in the entire marketplace is making investment decisions on the same footing, at least for a short period of time.
The people in the “window group” may still be restricted from trading, even during those trading windows, if they know about confidential M&A activity or other material, non-public information that puts them at an advantage to the rest of the market. So, the insider trading policies will require them to pre-clear all their trades with designated in-house lawyers (which was me at one point in my career).
There are also public reporting requirements. Board members, CEOs, and certain other executives of public companies are required to report trades of their own company's stock by filing a Form 4 with the SEC within two business days of trading. These Form 4 reports tell the public when the person traded, how many shares, and at what prices.
If a CEO steps down from the CEO position, but remains as “executive chairman” of the board (more on that in my next blog post), or in some other top-level position, s/he still has all of the same restrictions and requirements as they did when they were in the CEO role. They still are subject to the company’s insider trading policies, have to get clearance from the legal department, and publicly report all trades on Form 4 within two business days. There is zero difference from the day before they gave up the CEO office to the day after.
So, How Could Anyone Get Away with This?
It’s actually possible that a CEO got clearance to trade, even though they knew more information about the probable spread of Covid-19 than the general public before the market crash. That’s because the lawyer in charge of clearance would have asked the CEO if s/he were in possession of any material, non-public information about the company, as opposed to about the world in general or specific current events like the Covid-19 pandemic. It's also possible a CEO who was no longer an employee or a board member was able to trade without having to go through the clearance process (not every company subjects employees to the insider trading policy post-termination) and didn’t report their trade on Form 4 because they only have to do so for “opposite way transactions” for up to six months after they leave. (That gets very technical.) And, unfortunately, sometimes the lawyers make the wrong call.
All of the above relates to stock of the CEO's own company. When it comes to selling stock of other companies or mutual funds/ETFs, you really can't find that information in the public domain. They could have dumped a whole ton of stock of other companies, and none of us would ever know. If they are on the board of directors of another company, then they'd have trading restrictions and reporting requirements, but most CEOs sit on the board of one other public company at most.
And then there’s the question of whether the person was tipped off, as the meme claims “top government officials shared this info [about the imminent worldwide spread of the Covid-19 virus] with… captains of industry from many different sectors of the corporate class.” Of course, there’s not going to be anything in the public domain to prove that.
Context of CEO Successions
Context is always important, but there’s not much you have to go by in the case of CEO successions, except the official company announcements (which often use the familiar “to pursue other interests” boilerplate), statements attributed to unnamed sources who are supposedly in-the-know (and sometimes have ulterior motives), and pure speculation. (Interestingly, some have tried to develop a scoring system to determine whether a CEO was “pushed out.”)
The only time a public company is required by SEC regulations to explain the CEO’s departure is if s/he “resigned… [from] the board of directors because of a disagreement with the registrant, known to an executive officer of the registrant… on any matter relating to the registrant’s operations, policies or practices, or if [s/he] has been removed for cause from the board of directors….” In this type of situation, the company is required to disclose “a brief description of the circumstances representing the disagreement that the registrant believes caused, in whole or in part, the director’s resignation… or removal” within four business days of the event.
Homework Time!
Now, it’s time to get down to business. I’ll start with the easy cases and then get to the one I think is problematic.
Nestle. The meme’s reference to the CEO of Nestle appears to be about Fernando Mercé, former CEO of Nestle Waters North America who stepped down on February 21. Nestle Waters North America is not a public company; it’s a subsidiary of Nestle S.A., a Swiss public company that does not have securities listed on the NYSE or NASDAQ. From what I can tell, Mercé was not an executive of Nestle S.A. He didn’t even report to the CEO of Nestle S.A.
Conclusion: You got the wrong guy.
Volkswagen. In this case, we’re going back to a leadership change that happened in 2018, probably before the bats in Hubei province spewed out what would become the Covid-19 virus. And, recall what was going on at Volkswagen at the time. It’s safe to say that then-CEO Mattias Müller was a casualty of the VW diesel emission scandal.
Conclusion: Not even worth entertaining.
eBay. Devin Wenig, then the CEO of eBay, tweeted on September 25 that things were not working out between him and eBay’s board—pretty clear context. According to his Form 4 filings, Wenig last sold eBay stock on September 3, which is so far back that I cannot believe Wenig or anyone else saw the Covid-19 virus coming.
Conclusion: I’m not buying it.
Nissan. Hiroto Saikawa, former Nissan CEO, is another case of someone being fired, back in September, as a result of an ongoing scandal (remember all the stuff that went down with Carlos Goshn?) and before anyone knew COVID-19 would even be a thing.
Conclusion: Not at all plausible.
T-Mobile. T-Mobile announced on November 19 that John Legere will serve out his contractual term to be the T-Mobile’s CEO through April 30 and will then stay on the board of directors. Based on the press release, this internal succession has long been in the works. This looks exactly like a CEO succession should look. And it was announced back in November. According to his Form 4 filings, Legere never sold a single share of T-Mobile.
Conclusion: Nothing fishy going on here.
Hulu. Hulu CEO Randy Freer’s departure, announced on January 31, had been expected as a result Disney’s taking full control of Hulu back in May of 2019. Hulu was never a public company, and it looks like after the deal Freer didn’t rank high enough at Disney to be subject to the Form 4 filing requirement, so there’s no publicly available information on his trades.
Conclusion: Nothing to see here.
LinkedIn. LinkedIn has been a part of Microsoft and not a stand-alone public company for over three years now, so LinkedIn CEO Jeffrey Weiner really doesn’t belong on this list. Microsoft announced on February 5 that he would be stepping down as LinkedIn's CEO on June 1. There’s no sign of any trades at all by him of Microsoft stock in the Form 4 filings. Like Freer at Hulu, Weiner may not rank high enough at Microsoft to be subject to the reporting requirements. The last time Weiner sold stock of LinkedIn was on January 6, 2016.
Conclusion: Way off the mark.
Microsoft. This has to be referring to Bill Gates, who announced he was stepping down from Microsoft’s board on March 13. Gates hasn’t been CEO of Microsoft for 20 years, but that’ probably beside the point. The timing of his stepping off the boards of both Microsoft and Berkshire Hathaway actually made sense to me given the urgency of the Covid-19 pandemic and his dedication to the development of vaccines. We’re talking about someone who has been pouring money into the R&D of vaccines for years. Plus, he’s too famous, respected, and under the microscope to do something like this. According to his Form 4 filings, Gates last sold Microsoft stock on May 4, 2017.
Conclusion: Far-fetched. No bad motive on timing.
Harley-Davidson. This reference in the meme is to Matthew Levatich former-CEO of Harley-Davidson. The company announced on February 28 that he had stepped down from his post. Based on the language of the press release and the fact that the stock price was halved during his stint, I’d say Levatich was fired. How can I draw that conclusion? The press release said an existing board member took over as acting CEO, the board hired a recruiter to search for the successor, and the board member said in a press release, “The Board and Matt mutually agreed that now is the time for new leadership at Harley-Davidson.” Based on that, I have a high degree of certainty that he was asked to resign. The press release goes on to say, “Levatich will assist with the transition through the end of March.” To me, that means he’d continue to be an employee during the month of March, but will likely not do any heavy lifting or be involved with major decisions since he was relieved of his duties as CEO and a board member. Levatich would likely still be subject to the company’s insider trading policy/restrictions and the SEC Form 4 filing requirements for opposite-way transactions. According to his Form 4 filings, Levatich last sold Harley stock on October 25, 2017.
Conclusion: This CEO was clearly fired, so there’s no way he was gaming this.
Walt Disney, Lockheed Martin, IBM, and MasterCard. For Bob Iger at Disney, Marillyn Hewson at Lockheed Martin, Ginny Rometty at IBM, and Ajay Banga at MasterCard, given these people are still either chair of the board, or both chair and CEO, they are all still subject to the same insider trading policies/restrictions and SEC Form 4 filing requirements, so nothing has changed on that front. In addition, some of these CEOs are so high-profile (Iger, Rometty) that it’d be pretty crazy for them to try this and think that nobody would immediately notice. Of course, there are CEOs out there who will dump their stock for huge profits even when the optics are horrible (like on the same day they decide to lay off large swaths of employees) because they think they’re entitled and they really don’t care what other people are going to think. But, based on what I’ve seen during their CEO tenures, I don’t believe Iger, Hewson, Rometty, or Banga are of that ilk.
According to their Form 4 filings, Iger last sold Disney stock on November 9, 2018. Rometty’s last IBM stock transaction activity was a buy on November 2, 2018, and her last sale was on February 5, 2016. Banga last sold MasterCard stock on May 1, 2019. He appears to have a pattern of selling some stock once a year, always at the beginning of May. (Some corporate executives do this very deliberately to show they’re not playing games.)
Hewson’s case may draw the attention of conspiracy theorists and others looking for dots to connect to Covid-19 related events. According to the Form 4 filing, Hewson sold $9.5 million of Lockheed stock on January 29. The White House announced the China travel ban on January 31. Too much of a coincidence? Not if you look at more of the context. Lockheed's earnings release was on January 29. Recall that’s when a trading window would commonly open. In addition to Hewson, the Form 4 filings tell us that five other Lockheed executives sold on that same day: the Controller, General Counsel, and EVPs of Aeronautics, Missiles/Fire Control, and Space Systems. All would have had to get prior clearance from legal. So, now this looks like pretty normal activity right after a beginning of the year earnings release. Additionally, the company’s announcement of the CEO succession wouldn’t come for another 45+ days. On March 16, announced that she’d give up the CEO role on June 15 to become executive chair of the board.
Conclusion: These folks are way too smart and sophisticated to do something like dump stock because of Covid-19. Moreover, they haven’t actually left their companies yet.
MGM Resorts
MGM announced on February 12 that Jim Murren planned to step down as chairman of the board and CEO, pending the appointment of his successor. William Hornbuckle took over as acting CEO on March 22. Murren continued to work at MGM in another senior role after Hornbuckle took over (more on that later), and continued to comply with the Form 4 filing requirements, at least through March 18, the date of his most recent one. According to his filings, Murren sold $22.5 million of MGM stock on February 20. Before that, the last time he sold was on September 8, 2017.
Of all of these cases, Murren's February 20 sale is the one that does raise a RED FLAG. Why? February 20 is the exact day before MGM stock (and the rest of the market) started its precipitous descent, so in hindsight the timing looks very bad (or makes him look like a genius). But, can we really say that in the days leading up to February 20, Murren knew what was about to happen to MGM’s stock price? It may depend on how much business MGM generates from customers in China both coming to Las Vegas and going to MGM properties within China. If it's a material portion, then you could make a good case. The China travel ban was announced on January 31 and went into effect on February 2, so by February 20, MGM would have already seen revenues from Chinese customers sliding downward, and they would have known their results were going to be way off for at least the first quarter. If their business didn't rely very much on China, then perhaps they didn't foresee what was to come in the US. But, apparently, they did, or at least they knew by February 20 that waters were going get very rough and it would be attributable to Covid-19 and China. In their February 12 earnings press release, they said:
MGM Resorts expects several headwinds in calendar year 2020, certain of which the Company believes are unpredictable within an appropriate range of accuracy. As a result of the increased volatility in our business due to coronavirus as well as the market-wide weakness in Far East baccarat in Las Vegas, MGM Resorts believes it is appropriate to withdraw its fiscal 2020 full year financial targets. Our Macau casinos are currently closed.
In a Form 8-K filing that same day, they said:
[W]e expect the impact [of continuing quarantines and travel bans by China, the United States, and other countries] could have a material effect on MGM China’s results of operations for the first quarter of 2020 and potentially thereafter. Although the outbreak has been largely concentrated in China, to the extent that the virus impacts the willingness or ability of customers to travel to the Company’s properties in the United States (due to travel restrictions, or otherwise), the Company’s domestic results of operations could also be negatively impacted. The extent to which the coronavirus impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and any additional actions taken to contain it from spreading.
If they said all that on February 12, then with another week of data, Murren’s trade on February 20 looks ill-advised (to put it lightly). Another "bad fact" for Murren is that he was the only MGM executive or director who sold on or around February 20. Actually, nobody else had sold since November 15, 2019, and the next time anyone would sell was March 30.
If someone (the SEC?) were to go after Murren based on the February 20 sale, he would likely put up the defense that he received clearance from the legal team (I’m assuming he did), but lawyers sometimes get it wrong, and they are not always privy to all the information they need to make the right call. No internal clearance process is ever going to be air-tight. But, if Murren ran it by the lawyers first, he does have some cover. Nevertheless, just because he asked legal to clear it doesn't mean he’s an angel (more on that below). If he didn't go through the legal team, then he's looking like one of the bad guys.
There’s also some more context to consider. From February 12 until the end of the year (what MGM is calling a “transition period”), Murren will continue to be employed by the company as a senior advisor, compensated with an annual base salary of $2 million; a fixed bonus of $4 million at the end of the year; and an RSU award with an aggregate grant date fair market value of $7 million. He’s got severance pay of $12 million coming his way, plus some undisclosed amount of cash to pay for two years of “certain insurance coverages.” That’s not all. MGM has signed him for a gig in 2021 to provide them with “consulting services as may be reasonably requested by the Board of Directors in its sole discretion” where he’ll be “entitled to a monthly consulting fee of $575,000.”
Want even more context? Contrast the announcements about Murren with the company’s March 23 announcement that it will make a “crisis and disaster relief pledge” of $1 million into an employee emergency grant fund to “offer additional support to employees impacted by the [Covid-19] crisis and who may be experiencing hardships.” What exactly is this fund into which they will be injecting one million dollars?
The MGM Resorts Emergency Relief Fund provides employees and their immediate families with short-term relief in making payments or to meet obligations during unexpected hardships and emergencies. MGM Resorts’ $1 million pledge will provide expanded coverage for the fund to assist those impacted by the coronavirus, including: full-time employees, on-call employees and those facing layoff, separation or furlough.
The timing of Murren’s February 20 sale appears suspicious when the resorts/gaming industry was clearly going to get walloped by quarantines, social distancing, and travel restrictions. There’s nothing to suggest that Murren was tipped off by government officials of what was to come, but he knew enough from MGM’s own projections for the year that it might be a good time to bail. And, he knew his February 20 trade and exit package would be all over the local news.
Conclusion: I’m guessing Murren is in that group of corporate executives who really don’t care what other people think about how much money they have and how they got it.
I’ve gone on for pretty long, so I’ll just end with these take-aways:
Directors, executives, and the people who advise them must anticipate what a purchase or sale of company stock is going to look like in hindsight and how it may become distorted. Think of the worst case scenario. Nobody likes to do this, but for people in the public company executive stratosphere, this kind of scrutiny and cynicism comes with the territory, be it fair or unfair.
Take a clear-eyed look at your insider trading clearance processes for potential gaps and weaknesses. Are you asking the right questions when insiders ask to trade? Do you have a standard list? How are you asking those questions? Are they too open-ended? Are there “catch all” questions? How are you ensuring the lawyers who are responsible for making the right calls will be in the position to make the right calls? Are there others internally with whom the lawyers should be conferring to make sure all bases are covered?
Don’t believe the memes! Just because they look formal and have an air of “truthiness” to them, you can’t assume anyone did the work to ensure accuracy. They may even be part of disinformation campaigns. If you see a meme about your company that is untrue, report it.