Several CEOs of major corporations have been dumping shares of their own company stock as the plunging share price triggers real or imagined margin calls. This over leverage by sophisticated corporate insiders should trigger investor concern on how they are managing the finances of the company's they run. (To begin with the basics, read Delving Into Insider Investments.)
Let's have a look at some of the latest sellers.
Chesapeake Chief Selloff
Last week Aubrey K. McClendon, the CEO of Chesapeake Energy Corporation (NYSE:CHK), disclosed that he was forced to sell almost his entire holdings of company stock due to a margin call from lenders. The stock sale took three days to complete. "These involuntary and unexpected sales were precipitated by the extraordinary circumstances of the worldwide financial crisis," McClendon said in a company press release. "In no way do these sales reflect my view of the company's financial position or my view of Chesapeake's future performance potential.
The margin call was most likely triggered by the dramatic fall in the price of Chesapeake Energy, which hit a high of $74 earlier in the year. It now trades in the $20 range. McClendon held 33 million shares as of the end of September 2008. Some of this was purchased fairly recently, as he told Forbes Magazine in February 2008 that he held 29 million shares. A look at recent purchases shows buys as high as $57 per share.
Redstone dumping Viacom/CBS stock
Also last week, National Amusements (which is controlled by board chairman Sumner Redstone), said that a subsidiary plans to sell off about $400 million worth of stock in Viacom (NYSE:VIA) and CBS Broadcasting (NYSE:CBS). Redstone has effective control over both these companies through ownership of classes of stock with super voting rights. National Amusements indicated that it would sell only shares of non-voting stock. Reports in the media said the funds would be used to pay down debt by the private company.
Both Viacom and CBS Broadcasting lowered guidance last week due to deteriorating advertising revenue. CBS Broadcasting also wrote down the value of its media holdings by $14 billion. Both stocks are near their 52-week lows.
At Liberty to Disclose
John C. Malone, the chairman of Liberty Media Interactive (Nasdaq:LINTA), sold 4.5 million shares of Liberty Capital Series A (Nasdaq:LCAPA) stock that he owned to the company at $11 per share on October 7. The stock closed at $6.64 just three days later. There was no mention in the filing about the reason for the sale, but in a proxy statement filed by the company in April 2008, it was disclosed that Malone had pledged more than 5 million shares in three different Liberty Media companies as collateral for a line of credit. (To learn more, read Pay Attention To The Proxy Statement.)
The sudden sales of large blocks of stock by company CEOs can depress the price of the stock even more than usual during the deteriorating economic environment we are in. While this can create buying opportunities for investors, it raises questions as to whether they are as careless in running the company finances as well.
For the other side of the story, read Insider Selling Isn't Always A Bad Sign.