Making Insider Trading Legal

I’m still digging out from what I missed while on vacation, but this obscure speech from SEC Commissioner Paul Atkins last week could not go unreported on. Jesse Eisinger rightly calls out this absurdity by a man who’s job is ostensibly protecting investors:

"SEC Commissioner Paul Atkins gave a bizarre speech yesterday, defending the practice of "spring-loading" stock options, or issuing options ahead of good news.

At a corporate governance forum in Washington, Mr. Atkins said, "It is cheaper to pay a person with well-timed options than with cash," adding that spring-loading is OK because no one is harmed. "It benefits shareholders because fewer stock options are granted."

Yeah? Doesn’t he have to provide some evidence for this contention? Is there one real-life example where insiders were granted fewer options than they otherwise would have been because they knew the stock price would rise quickly afterwards?

The absurdity of his argument is exposed by the fact that companies have not made clear and timely disclosure of their spring-loaded grants. If there is no problem with spring-loading, then what were they hiding?

Damon Silvers, associate general counsel at the American Federation of Labor and Congress of Industrial Organizations in Washington, whose members hold more than $400 billion of union-sponsored pension funds, had a devastating rebuttal, as quoted in a Bloomberg article yesterday: "It’s also true that if you let your employees steal from the cash register, you don’t have to pay them that much."

It has long been a fringe, extremist, free-marketer view that insider trading should be legal, and Atkins seems to be parroting it. Is this who investors really want as an SEC commissioner?

You can learn more about Commissioner Paul S. Atkins at the SEC site.   

Nice to know the men in charge of regulating the Securities industry are hacks or fools — neither an appetizing choice.

UPDATE: July 11, 2006 4:00pm

Jeff Matthews is similarly incensed: SEC COMMISH TO BIGS: “HELP YOURSELF

"But before we get into cases, let’s stop calling them “spring-loaded” option
grants, because that makes it sound as if the economic payoff for the insiders
is simply a bit more leveraged to a rise in the stock price than the payoff for
other shareholders when the company announces the expected good news.

what has happened is the insiders have given themselves a larger slice of the
shareholder’s pie when they know the value of that pie is about to increase. So
let’s call them “front-running” option grants, because that is exactly what they

On its face, the ability of management to grant themselves
front-running option grants violates the very SEC regulations Mr. Atkins has
been sworn to enforce. After all, Reg FD requires an even playing field for
investors: no tips to Wall Street’s Finest; no wink-wink, nudge-nudge to Fido;
no nothing to the big hedge funds prior to disclosure of market-moving news,
good or bad."

And the WSJ continues its recent habit of burying killer columns on Saturday: Can Companies Issue, Options, Then Good News?

: :>

Spring-Loaded Questions
July 7, 2006 3:16 p.m.

Can Companies Issue Options, Then Good News?
SEC Is Divided on Practice Known as ‘Spring Loading;’ Critics See ‘Insider Trading’
July 8, 2006; Page A1

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