Activision Inc. (ATVI) upped their stock buyback program from 1 to 1.25 billion dollars worth of shares on August 5 as a part of their first quarter earnings report announcement. At the same time, the company’s CEO Robert Kotick was still busy selling stock, including recent sales disclosed late in the day to the SEC on Friday, August 14. Kotick has sold nearly 75 million worth of stock since the original buyback announcement. Director Brian Kelly, has been even more aggressive, selling 210 million dollars worth of stock. Other directors and officers have sold around 30 million more worth of stock in that same period. Altogether that’s around 315 million worth of stock being dumped while the company openly purchases 1.25 billion.
Is it legal?
Apparently so. SEC Rule 10b-18 written in 1938 was designed to limit manipulation of stocks by a company buyback. Mainly, it does not allow trading of more than a quarter of the average trading volume of the previous four weeks, and that is supposed to limit the impact of millions of shares being bought back.
But block trades are an exception to the rule. The theory is that block trade purchases are somehow not manipulative. And nowhere in the rules does it say that insiders cannot sell shares while the company is engaged in a stock buyback program.
But is that ethical?
Purchasing 25% of the average daily volume significantly decreases the supply of shares for sale, as do large block trades. When an insider is selling while their company is buying, it is clearly questionable, and it probably should be illegal.
Efficient market theory suggests that despite supply and demand, stock prices always go to what they are naturally worth. That means in March of this year, for example, several companies were worth half and in some cases one fifth of their present day value. The truth, however, was that demand for stocks went down as there was a rush for liquidity. Fundamentals were temporarily thrown out the window.
An aggressive stock buyback is no different in influencing supply and demand. The company is engaged in decreasing supply. In the case of Activision, had they not done so, the stock price would likely be lower. For executives to tiptoe out the back door while the company is buying back stock is manipulative and maybe even deceptive. For example, the company could be buying their stock on the same day and time that executives are selling stock.
It’s legal, remember.
Activision admitted last year to being engaged in rampant option backdating. This manipulation of buying back company stock while insiders sell their personal stake is just as unethical. It basically allows a CEO to use cash reserves to help fund a higher bid price for him to cash out a large personal stake. It is questionable at best and unprincipled at worst. Investors ought to demand immediate reform for the manipulative practice of company buybacks while insiders sell shares. In the very least, investors deserve more transparency about the details of the company buybacks. It is certainly not enough to just pretend buy backs do not influence the share price.
