Corporate insiders regularly and deliberately delay reporting stock trades to the Securities and Exchange Commission and the public, helping them to increase profits, a Wall Street stockbroker contends in a report scheduled for publication in March.
Jonathan Bentley, a broker for corporate insider clients at Smith Barney Harris Upham & Co. Inc., said he found that in three out of four companies, insiders who bought or sold stock over a one-year period failed to meet the SEC deadline for reporting trades.
"Certain patterns emerged that imply that many disclosure violations are significant and may be deliberate," Bentley said.
Corporate insiders must report to the SEC both sales and purchases in the stock of their companies by the 10th of the month following a trade. The problem, which Bentley found generally affected large trades more often than small ones, is more prominent with sales than with purchases.
SEC Chairman David S. Ruder has expressed concern about late filings by corporate insiders, but SEC spokeswoman Mary McCue, when asked about the Bentley study, said only that the SEC was aware of it.
Corporate insiders, such as company executives, directors and major stockholders, often "want to get out before the public comes in and drives the price of the stock down," Bentley said in a telephone interview last week from his Clearwater, Fla., office.
He said the deliberate delays in filings may be intended to "hold open the window of profitability."
Bentley reviewed 100,000 insider transactions from August 1986 to July 1987 that were provided through the Invest/Net monitoring service of corporate insider filings with the SEC.
Of the 6,907 companies that reported insider transactions, 5,366 -- or more than 75 percent -- had "disclosure violations of some degree," Bentley said.
In addition, $8 billion of the $26 billion worth of stock trades analyzed were not reported until beyond the deadline.
Other conclusions of the study: Delays in disclosure span months, rather than days. More than 2,500 companies -- more than one-third of those monitored -- reported trades a month or more beyond the deadline. Of the $8 billion worth of late disclosures, more than $5 billion -- or 60 percent -- were filed two months or more after the trades occurred. The problem is not, as Bentley said some companies contend, primarily a result of careless vice presidents and outside directors. The incidence of violations by presidents and board chairmen was as frequent as for the others. The fact that there were more violations in selling than in buying implies that bad corporate news is not filtering out as quickly as good news. During the period of the study, company presidents and board chairmen bought $1.3 billion worth of stock. Of that amount, more than $200 million, or 16 percent, were filed late. Over the same period, the officers sold $2.2 billion worth of company stock, with sales of $750 million, and 35 percent was withheld from disclosure until after the deadline.
Bentley found that the size of a majority of these trades, three-quarters of which exceeded $500,000, point to late disclosures apparently being filed deliberately.
"When you do a half-million-dollar trade, you don't file late out of carelessness," Bentley said.
Bentley hopes his study attracts enough attention in Congress to bring about changes in legislation introduced by Sen. William Proxmire (D-Wis.) that would promote prompt disclosure.
While Bentley supports a provision of the bill that would promote prompt disclosure, he opposes proposed penalties for late filers. The Senate legislation would impose a penalty of 3 percent of the market value of the trade for each day the company insider delays filing.