Execs often show good timing with stock-sales plans - USA Today, May 28, 2008

Newly released academic research shows that
executives who voluntarily give the most detail about prearranged plans
to sell stock — including how many shares and a general time frame for
the transactions — are the ones who have had the best timing with their
stock sales.

Regulators allow executives to pre-plan sales of
their companies' stock in order to avoid conflict of interest when they
sell. Companies aren't required to reveal such plans. But when they do,
a new study shows, it might be a good idea to pay attention.

Executives who have revealed the most in advance
about such plans have ended up with the best-timed sales, according to
research from Todd Henderson of University of Chicago Law School, Alan
Jagolinzer of Stanford Graduate School of Business and Karl Muller of
Penn State. The study found that as a group these executives, by
cashing out, avoided a more than 12% loss in their companies' stocks
relative to the broader market in the six months following their sales.

The research examined thousands of sales
disclosed from 2001 to 2006. Executives who didn't tell investors about
their pre-arranged stock sales on average didn't see their company's
stock underperform afterward; as a group their companies' stocks
continued do as well as the broader market the six months following
their sales, the study found.

Insiders at companies are permitted to sell
stock, but only if they don't trade based on knowledge of material and
non-public information. Since 2000 the Securities and Exchange
Commission has allowed companies to create selling plans that provide a
legal umbrella under which executives can diversify their holdings
regardless of what kind of news their companies happen to release
around the time of pre-planned sales. The SEC leaves it up to companies
what to tell about such plans to shareholders.

Companies that offer specific details actually
bolster their legal defense in case their executives' sales are called
into question, the University of Chicago's Henderson says. He says the
programs allow executives to plan stock sales ahead of negative
developments they suspect may occur but that may not happen for months.
Also, he says, the plans provide a kind of free insurance against a
falling stock price because executives can terminate plans without
selling if the bad news doesn't come.

The SEC has never filed insider-trading charges
against an executives who sold stock as part of one of these plans,
says John Heine, spokesman at the SEC. Courts also routinely throw out
illegal insider-trading cases brought by investors when the executives
have selling plans in place, Henderson says. The assumption is
disclosure solves all the problems of conflicts of interest, he says,
"but here is the dark side of disclosure."

The report's authors declined to provide
specific companies where they thought pre-planned sales by executives
had suspiciously good timing.

Certainly, many executives who fully spell out
their selling plans aren't trying to give themselves a legal shield to
unload stock at opportune times, says Carr Bettis, chairman of Gradient
Analytics, which has done its own study on the issue. Many executives
enter the plans as a forthright way to diversify their holdings in the
spirit of why the rule was created, he says.

But the rule gives executives an easy way to win
protection from probing regulators and investors, Bettis says, adding
that plans that are "transparent on their face may be used
aggressively."

And that's why regulators and courts shouldn't
be so quick to give executives a pass when plans are in place and
spelled out in specific terms, Henderson says. "You need to know more
about the plan … before you can say affirmatively whether or not there
was informed trading," he says.