Tuesday, November 14, 2006
A Deeper Look Into Stock Sales
November 14, 2006
Stock Sales made by company executives can be confusing for many to understand. The regulations regarding such transactions are very specific. Adding further confusion to the issue are the tax situations of each individual.
As many are aware there were some stock sales at Sirius on November 13th. What I will try to do is give an explanation as to why these sales took place.
The first item to note is that 3 of the 4 sales were virtually identical in nature. The fourth sale was by David Frear, and differs. In this piece I will use Scott Greenstein as an example (The Greenstein example is applicable to Meyer and Donnelly as well, altough the numbers differ slightly):
Scott Greenstein had options that were set to expire on December 31, 2006. Previously these options had an expiration date in 2013, but due changes filed earlier, the expiration dates were revised to December 31, 2006. SEC regulations dictate that the ORIGINAL expiration date be used in the top half of the form. The revised date is given in the foot note of the SEC document.
That being said, Mr. Greenstein had until December 31, 2006 to exercise the option to buy 1,350,000 shares of stock at a price of $3.14 per share. On cost basis alone, this represents $4,239,000. You then have to add to that the brokerage expenses and taxes associated with the transaction.
Mr. Geenstein sold enough stock to cover:
The cost of exercising the options
The cost of brokerage fees
The amount of tax liability.
Mr. Greenstein’s sale of 1,201,918 shares at $4.20 per share equates to $5,048,055. The tax due would be based on the delta between the $3.14 exercise price and the $4.20 market value. On 1,350,000 shares, the taxable gain was $1,431,000. Assuming that Federal taxes, New York City taxes, and New York State taxes are 50%, his tax due would be $715,500. Thus:
$4,239,000 + $715,500 = $4,954,500 now add brokerage commissions and fees of $93,555 and you arrive at the sale of 1,201,918 for $5,048,055.
What happens here is known as a paperless transaction. Mr. Greenstein can use a paperless transaction, or he could walk into Sirius with a check for $5,000,000. I do not know Mr. Greenstein, but having $5,000,000 liquid for such a transaction is not an available option for most, and thus, the paperless transaction is the most reasonable.
In the end, Mr. Greenstein netted 148,082 shares of Sirius stock with a market value of $621,944. He had a choice…….148,082 shares or nothing. What would you do? These sales have nothing to do with a negative sentiment on the company.
Now to discuss Mr. Frear. Mr. Frear sold outright 275,000 shares of Sirius stock at a price of $4.14. This transaction netted Mr. Frear $1,138,500. The reason for Mr. Frears sale could be anything, but it would appear doubtful that it has anything to do with how he feels Sirius will do. Mr. Frear, and the other executives from yesterday’s transactions all hold or have options on over 2,000,000 shares each.
Lastly we would like to look at the timing of the sale. Why now? As you may be aware, the buying and selling activity of executives is closely watched. There is a window of time where and executive may be privy to information that is material in nature, but is not yet available to the public. This company is coming up on the holidays, and although the expiration is December 31st, there will be significant information available to these executives in the weeks to come. The trading widow for these executives likely closes with the Thanksgiving weekend.
Insider transactions are an important factor with a publicly traded company. More important than the transaction itself is understanding why the transactions take place. Hopefully, if nothing else, this piece will get people to look a bit deeper into these types of transactions.
11/14/2006 11:50:00 AM
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