When Abbott Laboratories chief Miles White cashed out $32 million of stock and options in 2019, shareholders had reason to shrug it off. Online regulatory filings said the sales were part of a “previously adopted plan”—a sign they weren’t based on any current inside information.
It turns out, the disposals that Monday had been set up the previous Friday. To learn that detail, investors would have to track down the plan he filed with the Securities and Exchange Commission by traveling to the agency’s headquarters in Washington, clearing security and digging into a filing cabinet.
A growing body of academic research shows an arcane government program that’s supposed to help senior executives buy and sell shares properly and avoid unnecessary scrutiny is rife with well-timed transactions. As SEC Chair Gary Gensler put it last week, the agency’s loose rules have led to “real cracks” in its surveillance of potential insider trading.
It boils down to this: The SEC requires executives to set up trades in advance, ideally creating a “cooling-off period” so that any insider information they have can go stale before transactions are carried out.
But there’s no rule that executives must wait once plans are established, and some execute transactions within days or weeks. What’s more, short-term trading plans can be hard to scrutinize because they’re filed on paper, which the SEC has stored in ways that make it hard for the public and its own surveillance systems to access.
Academics, lawmakers and the SEC’s new chair, Gensler, are now calling for tougher rules to govern how executives across corporate America buy and sell their own companies’ stock.
Followed Rules
White was Abbott’s chief executive officer when he set up his plan to dispose of millions of dollars in stock and options on the next trading day, just two weeks before the end of the first quarter in 2019.
The health-care giant’s share price fell more than 7% in the month that followed—in part after Abbott announced quarterly results, beating estimates but refraining from raising a profit-per-share forecast for the year. A fresh debate on Capitol Hill over whether to embrace a single-payer insurance system also was pressuring shares at the time.
White has never been accused of wrongdoing. There’s no sign the SEC investigated. While no longer CEO, he remains chairman.
“We follow all SEC rules and regulations and have robust internal practices in place, including blackout periods,” said Scott Stoffel, an Abbott spokesperson speaking on behalf of White and the company. “This transaction involved options moving toward expiration.”
Stoffel noted that Abbott’s stock returned 11% from the date of the sale to the end of that year and eventually rose more than 50%. “Mr. White retains extensive holdings in the company,” the spokesperson said.
Regulatory filings detailing White’s compensation show how much time he had left to exercise his options: He had until February 2020 to cash in about half, and the following year for the rest.
Paper Filings
Gensler, speaking at an industry conference on June 7, said the SEC is looking to toughen the rules executives use to sell stock, possibly requiring a cooling-off period between when plans are adopted and when trades commence.
Another problem academics cite is the way the SEC handles certain filings. When top executives sell shares, the agency posts reports on the transactions online, often with a note on whether they were part of a prearranged plan. But those forms don’t specify when the plan was adopted. That key detail is noted separately on a Form 144, which executives typically submit by mail. Once the filings arrive at the SEC, they can be hard to track down.
Until last year’s pandemic, the agency’s longstanding practice was to keep the paper records in cabinets in its reading room. Behind the scenes, the data wasn’t added to the agency’s sophisticated surveillance systems, according to people familiar with the matter, who asked not to be named discussing internal monitoring software. Instead, the records were thrown out after 90 days.
Short-term plans for stock trades are surprisingly prevalent, hinting at a significant gap in the agency’s surveillance, according to research from Stanford University and the Wharton Business School. The academics there reviewed 20,000 plans filed on paper by corporate leaders. About 38% of the plans call for trades within the same quarter, before earnings results were announced. About 82% have cooling-off periods of fewer than six months. The transactions consistently avoid large losses and foreshadow future price declines, according to the study.
“This is a huge blind spot for the SEC,” said Dan Taylor, an accounting professor at the University of Pennsylvania’s Wharton who co-wrote a report on the group’s study this year. The changes Gensler is now weighing “are well-grounded in the data, and show the SEC is committed to evidence-based policy making.”