Subject: [NEXTEL-1] Insiders Cash Out, but Don't Quite Sell.html

From: [email-masked]
Date: Sun, 06 Apr 2003 04:55:53 -0400

This is like smoking but not inhaling........

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April 6, 2003

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Today's News Past Week Past 30 Days Past 90 Days Past Year Since 1996

Insiders Cash Out, but Don't Quite Sell
By ANDREW ROSS SORKIN

AST summer, B. J. McCombs, a co-founder and a director of Clear Channel Communications, the nation's largest radio broadcaster, cashed in more than half his stock in the company, pocketing about $260 million.

Clear Channel's annual proxy statement, which includes details of stock ownership by the company's management and directors, shows that he sold hardly any shares. In the most technical sense, the proxy statement, which was filed with the Securities and Exchange Commission, is accurate.

He did, however, use an increasingly favored — and legal — arrangement by corporate insiders to cash out or hedge their stock without having to officially sell it.

According to an obscure disclosure document often overlooked by investors, Mr. McCombs entered into a complex transaction called a "variable prepaid forward" with an unidentified bank. It pays him cash — about 80 cents on the dollar — for his shares, which he has pledged to sell to the bank over the next several years. Such transactions are like pawnshop deals for the fabulously wealthy.

As part of the deal, Mr. McCombs will be able to vote some of the "sold" shares as if he still owned them, and if the shares rise in value, he will profit from a certain percentage of the gain. He will have the even greater benefit of being able to defer the tax payments on the sale until the shares are sold officially.

Mr. McCombs is one of about 110 corporate insiders who disclosed last year that they had hedged their stock ownership.

Others include Craig O. McCaw, a director of Nextel Communications and one of its largest shareholders; Paul B. Fireman, the chief executive of Reebok International; and Paul G. Allen, the co-founder of Microsoft.

With the stock market slump more than three years old, corporate insiders appear to have taken to hedging their stock in greater numbers. Thomson Financial, which tracks the disclosures of hedging by corporate insiders, has counted an almost 50 percent increase in such disclosed arrangements in the last two years.

Anecdotal evidence suggests that many more insiders secretly make similar arrangements, which is illegal if not disclosed. "We only find so many of these things disclosed every year, so I have to think not all insiders are filing," said Lon Gerber, the director of research at Thomson. "Most people are not publicizing that they are dumping their shares."

The increase in the use of hedging techniques is raising questions about whether insiders should be allowed to hedge their stock ownership and, if so, how such transactions should be disclosed.

The University of Washington said in a recent study of hedging that "the ability to alter the link between managerial wealth and shareholder value is of particular concern if managers act on their information advantage and reduce the exposure of their ownership positions." The study also said there was evidence that insiders use such hedging techniques "when an outright sale of equity would be most likely to attract attention."

Corporate insiders' disclosures of hedging arrangements are rarely noticed by typical investors because of the obscurity of the way they are reported. The arrangements are detailed on part of an S.E.C. disclosure document known as Form 4, often written in highly technical language. For the most part, electronic services that compile insider trading data for financial Web sites and trading terminals do not include hedging transactions.

As a result, they have become a popular way for corporate insiders who sell to avoid sending a message to the market that might be interpreted as a lack of confidence in their companies.

Still, some highly public investors, like Philip F. Anschutz, the founder of Qwest Communications International, have issued news releases to explain to investors why they have entered into hedging transactions. And in some cases the transactions are structured so that the insiders still benefit when the stock rises. The market can view those transactions more favorably than outright sales by insiders.

UT according to the University of Washington study, some corporate insiders have hedged their stock when they knew the price might fall later. That could be construed as insider trading, which is illegal. The study, which did not identify any insiders by name, found "evidence that some insiders may use hedging transactions to lock in gains prior to downward revisions in market expectations about future firm performance."

While transactions like the one Mr. McCombs entered into have become more common, some insiders have tried to protect their stocks through complicated options known as "equity collars." But experts suggest that equity collars, which were popular during the dot-com boom, have fallen out of favor because insiders are now more inclined to take cash, given the uncertainty about the market's direction.

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