A fascinating discussion has been raging in the academic and the not so academic communities as to whether SEC staff members have been making profits from stock sales by taking advantage of nonpublic information. An absolute no-no for agency staffers charged with enforcing insider trading violations.
The debate was triggered by a draft study authored by an accounting professor at Emory University Business School with the help of a doctoral student at Georgia State University. The study finds that over the years 2009-2011, SEC employees realized abnormal returns from securities sales ahead of a decline in stock prices. The authors suggest three explanations for these higher than normal returns: (i) luck; (ii) skill of the traders; and (iii) access to non-public information.
The authors claim to have found that at least some of these profits are information based, as staffers tended to sell in the run-up to six SEC enforcement actions. In addition, trades allegedly took place in the interim period between a corporate insider’s paper-based filing of the sale of restricted stock with the SEC (Form 144) and the online disclosure of such sale. The authors do acknowledge that their findings are subject to severe limitations based on the short time period covered by the study. They also report that the SEC has responded to the findings by stating that each of the scrutinized trades had been approved and that staff assigned to an enforcement action is required to sell stock he or she holds in the subject company.
Broc Romanek does a thorough job discrediting the study in this online post based on his knowledge of SEC internal policies as well as his understanding of the workings of the securities markets. Others are less charitable in their opinion concerning the righteousness of the SEC staff as evidenced in this angry blog by Professor Bainbridge emphasizing the hypocrisy of SEC enforcement actions. A more balanced analysis of the study’s findings may be found in The New York Times DealBook. It concludes that SEC staffer’s gains are likely more attributable to luck than anything else.
I find Broc’s strong arguments against the study pretty compelling. Nevertheless, this study and its findings present some serious food for thought.
The debate was triggered by a draft study authored by an accounting professor at Emory University Business School with the help of a doctoral student at Georgia State University. The study finds that over the years 2009-2011, SEC employees realized abnormal returns from securities sales ahead of a decline in stock prices. The authors suggest three explanations for these higher than normal returns: (i) luck; (ii) skill of the traders; and (iii) access to non-public information.
The authors claim to have found that at least some of these profits are information based, as staffers tended to sell in the run-up to six SEC enforcement actions. In addition, trades allegedly took place in the interim period between a corporate insider’s paper-based filing of the sale of restricted stock with the SEC (Form 144) and the online disclosure of such sale. The authors do acknowledge that their findings are subject to severe limitations based on the short time period covered by the study. They also report that the SEC has responded to the findings by stating that each of the scrutinized trades had been approved and that staff assigned to an enforcement action is required to sell stock he or she holds in the subject company.
Broc Romanek does a thorough job discrediting the study in this online post based on his knowledge of SEC internal policies as well as his understanding of the workings of the securities markets. Others are less charitable in their opinion concerning the righteousness of the SEC staff as evidenced in this angry blog by Professor Bainbridge emphasizing the hypocrisy of SEC enforcement actions. A more balanced analysis of the study’s findings may be found in The New York Times DealBook. It concludes that SEC staffer’s gains are likely more attributable to luck than anything else.
I find Broc’s strong arguments against the study pretty compelling. Nevertheless, this study and its findings present some serious food for thought.
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