“Obviously, it’s just not a good thing when CEOs start selling their stocks, but I’m not sure how to read it. If a stock has climbed and then leveled out, it’s probably just some profit taking? When I hear that it happens to a stock (in this case, Salesforce (CRM) and Motricity (MOTR)), I don’t want to hit the alarm button and sell right away (maybe I should?), but I do think it’s a message that the stock probably isn’t going to move anytime soon and that I should start looking at an exit strategy. What do you guys think?”
The above was just one response that I came across when I researched the question “what does it really mean when a CEO starts selling their shares?”
Generally speaking the feelings range from the belief that something is amiss, otherwise why would an insider let alone the CEO sell his shares in his own company, and a feeling of uneasiness that is placated by the uncertain assertion that they should have the same right to sell shares as anyone else. Either way, it is hardly viewed as an endorsement of the company’s prospects for the future.
According to Bloomberg View columnist Matt Levine, the fact that executives of public companies “tend to get a lot of inside information about their companies in the course of their day,” makes it difficult for them to sell their stock legally. To get around this legal conundrum, company insiders can set-up what is known as 10b5-1 plans.
A 10b5-1 plan as Levine explains it, is an automated plan that insiders such as executives “put in place when they don’t have inside information, and that sell stock in the future according to fixed instructions”. For example, an executive might enter into a contract that stipulates that he will “sell 10,000 shares on the first day of every month for the next two years, as long as the stock price is above $55.” Basically it is a timed sale of shares in the future which purportedly prevents executives such as CEOs from capitalizing on inside information. Seems foolproof . . . at least it should be.
In his February 2014 article Biotech CEO Sure Knows When to Sell His Stock, Levine cautioned that there are still opportunities for the system to be gamed. Specifically executives making disclosure decisions based on their trading plan.
For example, Levine talks about the possibility of an executive holding back on the disclosure of good news until they are just about to sell under their 10b5-1 plan, or holding back on bad news until just after their shares have sold.
Now you may be wondering why I would even take an interest in this topic, let alone write a post about it.
Well here’s the thing. In tracking the stock activity of companies in the procurement world, we were alerted to the fact that SciQuest CEO Stephen J. Wiehe sold 10,000 shares worth $152,000 on August 15th, 2014, and another 10,000 shares valued at $166,000 on September 15th, 2014.
Beyond perhaps suggesting that Wiehe has entered into a contract under a 10b5-1 plan, is there a bigger question to consider here?
Putting aside for a moment the fact that SciQuest now has a “$19.50 price target on the stock, down previously from $24.00,” as well as the analyst mumbo jumbo about hold ratings and buy ratings, I can’t help but wonder if there is something more to this story.
After all, in my more recent coverage of SciQuest, I have talked about their cancelled contracts with both Oregon and Colorado, press releases in which existing contracts were heralded as being new wins, and most recently industry rumors that Duke University as well as other higher education institutions are contemplating a move away from the SciQuest solution. Let’s just say the company is not on a particularly good roll.
Given these developments, finding out that the CEO of the company has sold shares in two consecutive months can’t help but raise a red flag.
Even if there is nothing more behind it than bad timing, it nonetheless reflects a questionable management decision* at the highest level in the company. This alone does not bode well in terms of how SciQuest is being run overall.
* Editor’s Note: based on the U.S. Supreme Court’s holding in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), the SEC has taken the position that cancelling a planned trade does not constitute insider trading. Therefore, if a CEO knows that a trade may raise potential questions regarding his company’s future performance, he or she can cancel a pre-scheduled trade.