Question

In late July 2017, senior management at Equifax, a U.S. credit-reporting company, discovered that hackers had stolen the personal data of more than 145 million U.S. customers, including names, birthdates, Social Cecurity numbers, and driver’s license information. In addition, the hackers stole credit card information for more than 200,000 Equifax customers. If that weren’t bad enough, reports soon surfaced that three top executives, including Equifax’s chief financial officer, sold close to $2 million in shares of company stock days after learning about the breach and more than a month before the company announced the data hack publicly. In a company statement, Equifax says the executives “had no knowledge that an intrusion had occurred at the time they sold their shares.” The day after the company’s announcement about the breach, Equifax’s stock dropped by double digits, and the Department of Justice opened a criminal investigation. Less than three weeks after the public announcement, Equifax announced its CEO, Richard Smith, would retire, taking a multimillion-dollar payout with him—even after shareholders lost more than $5 billion in stock value after the data breach was acknowledged.\

Ethical Dilemma: Is it legal for company executives to sell stock shares for financial gain when they know impending bad news will cause the stock price to plummet? Does this constitute insider trading?

nb s john

Answer 1

No, it is not legal for company executives to sell stock shares for financial gain when they know impending bad news will cause the stock price to plummet. Such an action will be regarded as a breach of fiduciary duty of these executives and hence will be illegal. In case the information with regards to the impending bad news is made public and then the company executives sell their stock then the actions of the company executives will be considered legal.

Yes, this will certainly constitute insider trading. This is because insider trading is that situation in which a person buys or sells stock based on information that is not available to the public. Here the CFO sold close to $2 million in shares of company stock days after learning about the breach. Information about this breach was not made public and Equifax’s CFO knew that if the information once the information is made public the share prices will plummet and drop sharply. He sold his shares to avoid losses and as he benefitted from the use of non-public information it will constitute insider trading.