Insider Trading: Latest Trends, Regulatory Insights, and Detection Strategies for 2024

1. Introduction to Insider Trading

• What is Insider Trading?

  • When public company insiders buy or sell stock in their own companies, they are required to make this information available to everyone by filing a form with the Securities and Exchange Commission (SEC). This filing is called a form 4 and I have provided a detailed instructions on how to read a form 4 in my article Deconstructing Form 4 Filings Filed By Company Insiders. I have expanded on this even more in my book The Event-Driven Edge in Investing by using annotated images for the various parts that comprise a form 4 filing.

• Who are Company Insiders?

  • The SEC defines anyone that is part of the company’s management team from the position of Vice President and above as an insider. The CEO, the CFO, COO, CTO, the General Counsel, the Chief People Office (as some heads of HR like to call themselves these days) and the Chief Medical Officer all have to file a form 4. If a company has a Controller, a Chief Accounting Officer and a Treasurer, they also have to file after an insider purchase and we like to pay particular attention to these roles. The VP of Marketing, the VP of Sales, and all other types of VPs including Executive VPs and Senior VPs have to file a form 4 as well. In addition anyone that serves on the company’s board of directors is considered an insider. Anyone that owns 10% or more of the company, even if they are not part of the management team or serve on the board of directors, has to file a form 4 with the SEC.

• What is an Insider Transaction?

  • At the simplest level any purchase or sale of stock is considered an insider transaction. This could be either common stock or preferred shares. If a company has multiple classes of shares, such as class A with voting power and class B without any voting power, any transaction in each of these classes of shares have to be reported, even if the insider is simply selling one class of shares to buy another one.
  • Insider transactions are not just limited to buying and selling. If an insider exercises options that is also considered an insider transaction. This extends to the exercise of restricted stock units (RSUs), automatic purchases through employee stock purchase plans (ESPP), automatic purchases through a dividend reinvestment plan, automatic sales of certain portion of exercised options or RSUs by the company to cover taxes and even if an insider gifts stock to their family, to a trust or a charity.

• Distinction Between Legal and Illegal Insider Trading

  • When an investor hears the words “insider trading”, the first thing that usually jumps to mind is that it is an illegal activity where someone who had insider knowledge or “material non-public information”, as the finance industry likes to refer to it. They act on that knowledge to either buy or sell stock and either profit or avoid losses before the general public becomes aware of that news.
  • The insider trading we like to focus on at InsideArbitrage is the legal kind where company insiders file a form 4 with the SEC after a transaction. The SEC makes these form 4s broadly available to everyone at the same time and we have been automatically collecting the electronic version of the form 4 directly from the SEC for well over a decade.

• Why it Matters

  • Over four decades of academic research has shown that by following in the footsteps of company insiders and buying the stocks that they are buying, you can outperform the market by 6% to 10.2% per year.
  • While this may not seem like much, $100,000 invested in the S&P 500 index on January 1, 2001 would have grown to $115,640 after a full decade, achieving an annualized rate of return of just 1.48%. However the same $100,000 growing at a 11.48% annualized rate would have nearly tripled to $296,462, a difference of $180,822 on a $100,000 investment.

• Relevance in 2024

  • With the instant dissemination of information over the last decade, the edge offered by this strategy may have dulled a little but it still unearths interesting companies to research that I might not come across otherwise.
  • Astute company insiders who can see that their company is either undervalued in the current market or is going to experience a period of growth in the coming months or years can provide a signal to investors with their insider trading activity long before revenue and earnings numbers confirm a positive trend.

2. Current Trends in Insider Trading (2024)

• Emerging Patterns

  • There was a time when form 4 filing were not filed electronically and an investor would have to go the SEC offices to physically rummage through them, often at a significant delay after the transaction. My first experience with insider transactions was when looking at Value Line reports at my local library during the weekend and the data was often delayed by a month. In the electronic age, insider trading data is available to us within minutes after it is filed with the SEC.
  • The strong signal from insider purchases has weakened because of both the broad dissemination of this data as well as the fact that some company insiders are now buying just to signal the market and not because they find their stock undervalued.
  • In this environment, it is useful to focus on specific company insiders (Chief Accounting Officer, Controller, General Counsel, etc.) and especially opportunistic purchases where an insider who has been at the company for a long time suddenly decides to make a purchase or sale.

• Impact of Recent Market Events

  • For a period of two weeks in March 2020, for the first time in more than a decade, we noticed that insiders were buying more stock than they were selling. Why was this important? Normally, we find that insiders sell almost 30 times as much stock as they purchase in any given week. If you find that a broad swath of insiders across industries are suddenly buying hand over fist, it is worth paying attention to and could signal a macro buying opportunity.
  • We also saw the insiders of specific industries, for example oil industry insiders in May 2020 and regional bank insiders in March 2023, step and buy significantly during those months and in ensuing months. Why these months in specific? The COVID pandemic shock caused WTI oil futures to dip into negative territory in May 2020 causing oil stock to collapse. Similarly the failure of Silicon Valley Bank in March 2023 caused a huge drop in regional bank stocks. The insiders of the survivors in these industries were buying at bargain basement prices and were proven right just a few short months later.

3. Comprehensive Regulatory Overview

• Key Regulations and Laws

  • Insiders have to file a form 4 with the SEC within two business days following a transaction whether it is an insider purchase, a sale, an options exercise or the gifting of stock.
  • If they make a mistake in any part of the filing, they can file an amended form 4 also known as a form 4/A. The amended form 4 has to list the date of the earliest transaction and the date of the initial form 4.
  • The SEC does not want insiders to engage in short-term trading and requires them to give back any profits from trades that happened within a six month period. This is called the “short-swing profit rule”. Section 16(b) of the Securities Exchange Act of 1934 states that if an insider of a public company buys and sells, or on the other hand sells and buys, stock of the company within a six-month period, they have to disgorge profits from these “matching” trades to the company. The rule is used to discourage insiders from using the information they possess to make short-term profits. Every once in a while, we come across insider transactions where the insider indicates that the transaction violates the Short-Swing Profit rule and that the insider is going to return any profits from the prior trade back to the company. We track these kinds of insiders in a custom screen we call the Flip Floppers.
  • If insiders want to purchase or sell stock outside of earnings related “quiet periods” or at a consistent interval, they can do so according to an established plan called the Rule 10b5-1 trading plan.
  • A new 10b5-1 plan can only be established during an “open trading window” and should include a written statement outlining the number of shares that would be traded, the price for the trades (or a formula to determine price) and the dates or frequencies when the trading is supposed to occur.
  • It used to be that insiders would game these kinds of plans by establishing them and then trading immediately or not trading for a long period of time. The written plan with approval from the company helps reduce the gaming of these plans and so does a new rule that requires a “cooling off period”, where an insider cannot trade for a period of time (usually 90 days) after establishing a 10b5-1 plan.

•  Recent Legislative Changes

  • Previously insiders revealed that they purchased or sold according to a 10b5-1 plan in the footnotes of the filing. Starting in April 2023, the SEC added to a new box to the form 4 filing that has to be checked “to indicate that a transaction was made pursuant to a contract, instruction or written plan for the purchase or sale of equity securities of the issuer that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c).”
  • The SEC adopted the Rule 10b5-1(c) in December 2022 and companies were required to start complying with this modification of the rule by April 2023. The last time the rule was modified was in August 2000 and that modification was also put in place to avoid gaming of these established trading plans.

4. Case Studies and Examples

• Notable Insider Trading Case Studies in 2024

  • Independent Director Jay Hoag, who has served on Zillow’s board since 2005 purchased $100 million worth of Zillow Class C (Z) shares during the span of a week in June 2024. The form 4 was filed on June 11th and the stock immediately jumped more than 13% the following day.

    When I looked at the form 4 filing, I was curious to see if Mr. Hoag had purchased the class A voting shares that actually trade at a discount to the class C nonvoting shares ($46.55 for class A vs. $48 for class C) but was surprised to see that he chose to purchase the class C shares instead.Looking at the average volume of both classes of shares and the size of his purchase, it becomes evident why he decided to buy class C shares. Daily trading volume for class C shares is often 10 times higher than class A shares and if he wanted to execute the purchase rapidly without moving the price up very much, class C shares make sense.

    Reviewing the company’s Q1 2024 results and shareholder letter, you can start to piece together why Mr. Hoag appeared bullish on Zillow’s future prospects. Overall Q1 revenue was up 13% to $529 million and all three of the company’s segments was were up last quarter. Zillow expects this growth to continue the rest of this year.This was probably not the only reason Mr. Hoag was buying shares. A few weeks after her purchase, the company announced that they were appointing a new CEO and the stock shot up in response to this announcement. Less than four months after his purchases, the stock was already up more than 50% from his purchase price.

  • When we see an insider who appears to have such deep knowledge of an industry purchase shares, it’s often a signal we pay closer attention to. James Flores, the CEO of offshore oil production company Sable Offshore Corp. (SOC) purchased $1.37 million worth of shares according to a form 4 filed in May 2024. Mr. Flores had served as Chairman and CEO of the company since September 2021, and had spent over four decades in the oil and gas industry.

    Sable Offshore Corporation’s (SOC) history begins with the oil and gas giant ExxonMobil (XON), which discovered, and over the course of 14 years, consolidated more than a dozen offshore federal oil leases spanning over 76,000 acres into a streamlined production unit known as the Santa Ynez Unit (SYU). Operations shut down in June 2015, following a leak in May 2015 from a pipeline operated by Plains All American Pipeline (PAA) that transported produced oil from ExxonMobil’s SYU, Venoco’s Platform Holly, and Freeport MacMoRan’s (FCX) Point Arguello Platforms.

    A number of safety measures were taken and in 2020, Plains entered into a Consent Decree that allows for a potential restart of the pipelines. Sable acquired all of the SYU assets and pipelines in 2022 and there was tremendous upside and potential for development and production of oil and natural gas at these facilities, though it was entirely contingent on SYU reopening. This reopening depended on multiple approvals but the most important one was related to zoning and installation regulations and was under the jurisdiction of Santa Barbara County.

    Just a few weeks after this purchase, which incidentally was filed in error, the company received the approval from Santa Barbara in early September 2024 and the stock appreciated more than 39% in a single day. What was especially interesting is that just days before this approval, we saw an insider purchase of Sable by Pilgrim Global, a 10% owner of the company. Pilgrim Global was the first insider purchase of Sable since the James Flores purchase in May.

• Lessons Learned

  • After reviewing insider purchases for well over a decade we have identified that it is important to pay attention to insider purchases by independent directors of a company, especially if the director has served on the board of directors for several years and this is their first purchase on the open market.
  • Insider buying by CEOs of companies in a cyclical industries, such as oil & gas, can provide a good signal, especially if the CEO has several decades of experience in that industry.
  • Pay attention to opportunistic purchases, defined as one-off purchases, which are not part of a 10b5-1 plan and are from insiders who don’t consistently keep buying company stock.

5. How can InsideArbitrage help?

InsideArbitrage does not tell you what to buy or sell but generates ideas for further research. We do so through,

• a post called Insider Weekends that you can receive by email every weekend that shows the top 5 insider purchases and sales from the prior week and includes a brief writeup about one key purchase or sale
• lists of all insider purchases and sales that are updated every few minutes
• the ability to search for insider transactions for a specific company or by a specific insider
• the ability to set up alerts that notify you by email about insider transactions that meet criteria specified by you
• InsideArbitrage Premium members also receive access to a group of custom screens we have created including the Flip Floppers screen mentioned above as well as our Double Dipper screen that identifies companies with insider buying where the company is also buying back its own stock.

Check out the wealth of information and tools we provide in our Plus and Premium plans.