The Timing of These Trades Is 'Exquisite.' And a Little Fishy?

Corporate execs appear to have a handy way to make a lot of money for themselves—buying and selling stocks of rival companies. ProPublica conducted a first-of-its kind analysis of such trades and discovered that lots of executives have an uncanny knack for making profitable trades with what it calls "exquisite" timing. For example, "a paper-industry executive made a 37% return in less than a week by buying shares of a competitor just before it was acquired by another company." The story also details the case of a pharma exec in Ohio who sold his shares in a rival one day before a management shakeup caused the stock price to plummet. He quickly rebought them at a low price and saw his stake rise 75% over the next year. Then he sold them days before word got out about a pending SEC investigation into his rival, thus avoiding a massive loss.

The examples abound, but is any of this illegal? That's where things get squishy, write Robert Faturechi and Ellis Simani. Insider-trading laws prohibit execs and staffers from trading in the stock of their own companies using information unavailable to other investors. If the execs in the ProPublica story made trades about other companies based on nonpublic information, that could also violate such laws. But making that case would be tricky. These execs, after all, are presumably experts in their field—"they may have simply been relying on years of broad industry knowledge to make astute bets at fortuitous moments." Still, one former DOJ official raised an eyebrow at the frequency ProPublica described: "The trading doesn’t appear to be a one- or two-time thing. It’s happening a lot." (Read the full story, which sees signs the SEC is beginning to take a closer look at this type of trading.)