ProPublica has produced some fantastic investigative journalism recently, including exposing ties between US Supreme Court Justice Clarence Thomas and billionaire Harlan Crow, which even saw Crow buying Thomas’ mother’s house. In the finance space, this ProPublica story caught our eye: CEOs of large American companies seem to be doing very well trading the stock of their biggest rivals.
Our first thought was that it seems wrong for CEOs to own shares in their biggest competitors. You don’t want the CEO of the company you own making millions if they lose a contract to their biggest rival. But this reporting for ProPublica shows some CEOs take it a step further. They are trading in and out of their competitors’ shares with remarkable timing.
There is the medical executive who made $2.3 million as a shareholder of their biggest rival and sold two days before that rival disclosed they were under investigation by the Securities and Exchange Commission. Or the oil executive that invested in a partner company one day before it announced good drilling results. Or a paper-industry executive that made 37% in less that a week by buying a competitor just before it announced an acquisition.
While these examples may feel like textbook cases of insider trading, ProPublica steps through the challenges of winning an insider trading case especially when an executive is trading the stock of a rival.
After reading this we’re going to propose something that shouldn’t be too controversial – CEOs of public companies should be banned from owning stock in their competitors outside of managed funds, indexes or ETFs. Even if it isn’t a rule, we’re surprised the Boards of these companies continue to allow it.
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