Insider Trading – Transparency for Lay Investors?
May 5, 2008
One of the most regular and (I suspect) well-founded complaints from investors is targeted at what is perceived to be a general lack of transparency on the part of public companies. This accusation is levelled at companies of all sizes, but rests almost universally at the feet of junior resource companies listed on the Canadian Venture Exchange. Whether or not this is fairly placed is not the subject of my concern today. Let’s assume, for the sake of time, that transparency is lacking. Let’s also assume that transparency is desirable. The question of the day, then, is what is being done to improve this transparency… and what more can be done?
To their credit, the Canadian Securities Administrators have created an online insider trade reporting environment. From their website:
SEDI™ is the System for Electronic Disclosure by Insiders located at www.sedi.ca ("SEDI").
Also from their website:
Why track insider trading?
The reporting of insider trading serves two important investing functions:
1. It provides transparency and information to the market about the trading activity of directors, senior officers or significant shareholders of reporting issuers.
2. It deters insider trading on confidential information, since insiders know that they will be required to disclose their trades.
The content of SEDI reports is rich in value. It’s disappointing that many lay investors don’t even know it exists. I recently witnessed a conversation in which a friend made a somewhat harsh comment about insiders dumping a particular stock. The other so-called ‘investor’ retorted something to the effect of, “You can’t say that! How could you possible know such a thing?” My friend replied, “Huh, have you never heard of SEDI?” Huh, indeed.
The SEDI process for information retrieval is a bit cumbersome, but what’s there is full to the brim. Perhaps a bit over the brim in some cases. When there are only five or six transactions in a report, it’s easily scanned and easily understood. No worries. As the number of transactions rises, however, the naked eye cannot so readily take it all in (sort of like finding 1.0 gpt Au by looking at drill core – one in a million). I have one such report in mind, from which I learned of an insider who had made something in the range of 250 buys and sells on the public market… in just the past six months! SEDI wouldn’t even give me a report for the twelve month period, instead advising that there was too much data involved, and that I should alter my query parameters. You can well imagine that this created a SEDI report more resembling a dump truck full of information being poured on to my desk. Making sense of it is no mean feat.
Well, let’s say you go to the trouble of importing this data into Excel, then reformat it so it can be reviewed and tabulated properly. Then you figure out how to separate the public market transactions from the private transactions, and you come up with some totals by category. Next you find out that the balances don’t match. After some digging and some more digging, and a couple of coffees later, you discover that some of those transactions don’t look the same as others. For some, there’s a small, lonely ‘O’ sitting on the left margin, while others have a small, lonely ‘A’. Okay, what’s it mean? It means that the filer (insider) made a mistake in the Original filing, and has replaced it with an Amended filing. Sounds fine, but the original filing still remains in the report. You have to watch for it so you don’t include it in the total. Now you have to separate the common shares from the warrants and the warrants from the options... then come up with totals for each. Fine. You’ve finally got a rough idea of what John Smith has been doing for the past six months.
With two hours (or more) invested so far, you now realize that there’s another half dozen insiders for this company. Joy upon joy! There goes the rest of the afternoon. Nah! Forget it. This is just not worth the time and trouble. There’s got to be a better way.
Cue the cavalry horn. There is a better way. I once had an engineer friend say to me, “whenever I find myself doing something on the computer a second time, I stop and try to find a way not to have to do it a third time.” Being the lazy person that I am, I took to those words and have adopted them for my own. Reducing masses of information for simple review and better decision making is what I do for a living. This is my joy.
In keeping with the primary purpose of my website (managing masses of information for improved decisions), we’ve developed a summary report generator for capturing those 250 buys and sells into just two lines:
John Smith (Director and Senior Officer)
- bought xxx shares in the public market at an average price of $x.xx for a total of $xxx,xxx.
- sold xxx shares in the public market at an average price of $x.xx for a total of $xxx,xxx.
What’s more, this report also includes the following:
- bought xxx shares privately at an average price of $x.xx for a total of $xxx,xxx.
- sold xxx shares privately at an average price of $x.xx for a total of $xxx,xxx.
- bought xxx shares in conjunction with a prospectus exemption (PP) at a price of $x.xx.
- was granted xxx options exercisable at a price of $x.xx with an expiry date of xx/xx/xxxx.
- exercised xxx options at a price of $x.xx.
- was granted xxx warrants exercisable at a price of $x.xx with an expiry date of xx/xx/xxxx.
- exercised xxx warrants at a price of $x.xx.
I won’t even begin to try to explain the agony that went into creating this procedure. Suffice to say, we’re still on speaking terms at the office. At the end of the agony, however, what we have is a thing of beauty. Well, perhaps I should leave that for you to judge.
There are no ‘robots’ or ‘spiders’ involved in generating this work. Each SEDI report still has to be produced manually, one by one, with the data saved to our system. Then the magic begins. My plan is to produce close to 1,000 such six-month summary reports and to publish them all on grahamanalytics.com, updated once per month. This represents a rolling report for each of the mineral mining and exploration companies listed on the Venture Exchange for whom insider trading has occurred in the previous six months. Readers will be able to scroll through the list of companies, clicking to open a summary report of insider trading. This will not replace SEDI, but I hope will add significant value to SEDI.
Here’s the thing. I’m waiting to hear from SEDI as to their position on this adventure. I’ve made two phone calls already and sent one email with a sample report, and am now in a holding pattern. It is my belief that the information I am working with is in the public domain. In essence, my reports are no different from one person telling another that John Smith has bought x shares and sold y shares in the past six months. I’m only functioning at a larger scale in this process. My objective is consistent with the originating purpose for SEDI, as excerpted earlier in this article. Transparency is my objective. Full disclosure by the truckload is not my idea of transparency. Simplification is my modus operandi.
At the same time, I felt it appropriate to make the ‘courtesy call’ just to advise SEDI of my hopes and to ask their blessing. Not sure that I need their blessing, but I’m a Canadian and we’re a courteous people (until you put a hockey stick in our hands, that is).
I have no plans to charge a fee for this service. This will be a free public service from me to you.
So… what do you think? Good idea or am I blowing smoke? Suggestions? All ideas are welcome.
Cheers,
Kevin Graham