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Deconstructing Form 4 Filings Filed By Company Insiders

  • April 7, 2022

A question I frequently get from readers of our Insider Weekends series of articles is whether the insider purchases we are reporting are open market purchases. They are often concerned that the purchases might be insiders exercising options that were granted to them by the company or restricted stock units (RSUs) that have vested. Obviously the signal you receive from an insider exercising options is different from an insider putting their own money on the line to buy stock. In most cases, the insider probably already has significant exposure to the company through their employment, existing ownership of the stock and options/RSUs that are yet to vest. So why do insiders buy?

Insiders buy stock through open market purchases because,

  • they are required to buy a certain amount by the company (this is especially true for independent directors)
  • they think the stock is undervalued
  • they think that the business will improve in the near future
  • they want to “signal” the market

To determine whether an insider purchase is an open market purchase or something else, it helps to go to the source of the information and look at the actual form 4 filed with the SEC. Insiders are required to file a form 4 with the SEC within two business days of a transaction, whether it is a purchase, a sale or the exercising of derivatives like options and warrants. On our insider buying and insider selling pages, the date of the filing is directly linked to the actual form 4 filing for each transaction.

Given below is a screenshot of Rich Barton’s insider purchase of Netflix (NFLX) in 2012 that I annotated when teaching a class on event-driven strategies last year. You can see the actual form 4 from the SEC’s EDGAR database here. Rich Barton founded Expedia (EXPE) inside Microsoft and is also a cofounder of Glassdoor. He currently serves as the CEO of Zillow (Z), a company he cofounded in 2005 and has served on the Board of Directors of Netflix since 2002. We have written about Mr. Barton’s insider purchases and purchases by another Netflix director Jay Hoag multiple times over the years.

When you enlarge the screenshot below you can see that the “Table I – Non-Derivative Securities Acquired, Disposed of, or Beneficially Owned” section has a column called “3. Transaction Code”. The “Code” section of this column is the money shot. It tells you whether the transaction is a purchase (code P), a sale (code S), an options exercise (code M) or that the insider sold some of their stock after an options exercise for tax withholding purposes (code F).

Insider Form 4 Filing
Insider Form 4 Filing (click to enlarge)

Ideally you also want to see that column “4. Securities Acquired (A) or Disposed Of (D)” has an “A” when the transaction is a purchase (code P) and indicates “D” when the transaction is a sale (code S).

The other things to pay attention to include,

  • Whether the purchase was done directly or indirectly through a spouse, child or trust’s account.
  • The footnotes of the filing. They contain information about whether the insider is buying through a predefined trading plan called a 10b5-1 plan, among other things.
  • The class of stock that was acquired or sold. Sometimes insiders might be buying or selling preferred stock or in the case of Bill Ford’s recent purchase of class B Ford shares, buying the stock from a family member. Only Ford family members can own class B shares, as pointed out by an astute reader this week.

When putting together our Insider Weekends posts each week, we spend a significant amount of time cleaning the data by weeding out purchases by funds, removing option exercises, excluding transactions that were filed very late (sometimes years later) or where a mistake was made in the price of the stock.

With dozens of insiders filing purchases everyday, there are a shockingly large number of them that get it wrong. This is one of the reasons we often reiterate that insider transactions are an idea discovery tool for us and a starting point for further research. Hopefully this article provides you with additional tools as you analyze insider transaction for your investment process.

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