Public Company Insiders Regularly Profit by Trading on Information Immediately Before Public Release
Data Analyzed by Columbia Law School Professor Robert Jackson Shows SEC Rules Inadvertently Invite Insider Trading
New York, September 15, 2015—Public-company insiders regularly profit by trading immediately before market-moving information is disclosed in 8-K forms filed with the U.S. Securities and Exchange Commission, first-of-its-kind research from Columbia Law School Professor Robert J. Jackson Jr. shows.
Companies are required to disclose significant events—including merger announcements, key customer or supplier agreements, and stock listing compliance violations—in 8-K forms within four business days of their occurrence. But Jackson’s research shows that insiders often trade on such information within that time period (what Jackson calls the “8-K trading gap”), before it has been made public, earning significant profits in the process.
“This paper raises concerns about insider trading in public companies,” said Jackson, co-director of the Ira M. Millstein Center for Global Markets and Corporate Ownership at Columbia Law School. “It shows that SEC rules leave open a significant opportunity for insiders to trade on corporate information.”
The paper, “The 8-K Trading Gap,” which Jackson released with Ira M. Millstein Center Postdoctoral Fellow Joshua Mitts and Harvard Law School’s Alma Cohen, does not consider whether insiders have engaged in illegal or improper conduct. Rather, the research shows that existing SEC rules may leave the door open for the very behaviors they try to protect against.
“Our findings suggest that Congress and the SEC should consider whether allowing firms to delay the announcement of material nonpublic information for four days creates trading opportunities that strain the already significant public resources dedicated to enforcing the rules that prohibit improper trading by insiders,” the paper states.
In fact, after reviewing the paper, which was featured in today’s Wall Street Journal, U.S. Representative Carolyn B. Maloney (D-NY) promised to prepare legislation to address the trading gap.
“The results of this study are very troubling,” Maloney said in a statement. “This kind of activity undermines the integrity of our markets, and both Congress and the SEC should work to stop it. I am preparing legislation to address this problem, and I urge the SEC to take action as well.”
Public companies who wish to avoid litigation over insider trading allegations may also want to consider expanding “blackout” periods that voluntarily prohibit trading to any information that will be disclosed in a later 8-K, the authors recommend.
Jackson and his co-researchers compared data from more than 15,000 Form 8-Ks to the trades made by insiders at public companies in the time before 8-Ks were due on the information, yielding a total universe of 42,820 trades in the 8-K gap between 2004 and 2014.
Jackson and Mitts revealed in previous research that the SEC had been giving certain investors an advantage in trading by providing them with early access to corporate documents, an advantage the agency has since taken steps to eliminate.