Investing / Daytrading question regarding insider trading

[PennyTibz]

I am looking at the insider trading on this stock, IVI communications, ticker symbol IVCM.ob

http://finance.yahoo.com/q/it?s=IVCM.OB

It says that the CEO "disposed" of 13.7 million shares on Nov. 9th, 2005.

There was also a PR around this time that said this:

"IVI Communications, Inc. Retires 13.7 Million Shares Reducing Total Outstanding by Approximately 20%"

http://biz.yahoo.com/prnews/051109/law080.html?.v=30

Did the company first buy the shares from the CEO, and then cancel those shares? Isn't this illegal?

Or did the CEO just give away (throw away) his shares?

Basically, what I want to know, is what does it mean to "dispose" of shares, if you are an insider at a publicly traded company.

Does it mean to just "get rid of," or does it specifically mean to sell? Or to throw away?

Thanks for your help and advice.

 

[JS80]

Debit Treasury Stock
Credit Cash

Then you can retire the stock and reduce outstanding or keep it in treasury.

 

[glenn1]

Normally when you're talking about a shareholder sale subject to SEC reporting under Rule 144 (meaning they are deemed a "control person" in relation to the company have to register the sale in advance of or very shortly afterwards), "dispose" simply means sell.

In this case it sounds like the company bought back the shares so they are now part of the treasury stock. This could be bad ju-ju which should raise a red flag for you as an investor, or it could completely economically rational and and a reasonable deal for both sides of the transaction and you as a shareholder. Only you can make that call however.

 

[PennyTibz]

So basically, the CEO sold his shares, and collected the money, right?

The reason why this is so "tricky" and I believe illegal is this.

Around October, 2005, they CEO was buying shares. He'd buy 5000 here, 630,000 there, whatever. He was buying around 0.15, 0.20, etc. When the stock went up to 0.50, he was still buying (like 5000 shares at a time, you can check the records). Then, the company released a PR that read "IVI CEO continues to buy shares in open market":

http://biz.yahoo.com/prnews/051013/lath039.html?.v=30

They even brag about the price, about 56 cents a share (which is near the high that it ever traded at, and the near-high of the current trend).

But the CEO already owned like 20 million shares even before he started buying. Buy the time he was done buying in Oct., 2005, he had about 21 mil or 22 million shares.

Then the company released that PR about "IVI communication retires 13.7 million shares." Well, what (apparently) had REALLY happened was that all those shares that Nyhl Henson (the CEO) had purchased (which was around 1 million shares +/-) in those few months were ONLY to suck investors and traders into the company. Then, all of a sudden, they say they are "retiring" shares to make it sound good, to make the float smaller, so that the stock trades easier. What really happened was, the CEO sold about 1/2 (a little more than 1/2) of his shares for around 50 cents a share. That was 13.7 million shares...about $6 or $7 million. That's after he invested maybe, say $250k in buying those < 1 million shares for about 0.25 average price (or less).

Isn't this totally unethical, if not illegal? To use the company's funds to buy your shares for $6 million after you invest $250k? This is like propaganda...I own 21 mil shares of a stock (which, by the way, I'm sure was "handed" to him when he signed on a CEO), I buy 1 mil shares for $250k, then I sell 13.7 mil shares for $6+ million of personal gain. The company brags about reducing their # of shares...I can't believe this can happen in America.

This is just ridiculous, crazy...I'm going to pull my hair out.

 

[glenn1]

I'd be less concerned about him selling back the shares he bought on the open market than the shares he already owned, since the original 20MM were likely restricted shares.

Who knows, they could have a large option grant being exercised by another insider and needed the shares. The company could have bought the shares directly in the open market and the CEO could have just as easily sold the shares in the open market, so that's basically a wash. They company may have been engaging in a hedging strategy by agreeing to what amounts with a futures contract with the CEO. Having a willing seller cuts down on the transaction costs for both parties. Either way reducing the float that much should be a benefit to you as a shareholder. Like I said, only you can decide if this deal was aboveboard or shady.

 

[JS80]

Originally posted by: glenn1
I'd be less concerned about him selling back the shares he bought on the open market than the shares he already owned, since the original 20MM were likely restricted shares.

Who knows, they could have a large option grant being exercised by another insider and needed the shares. The company could have bought the shares directly in the open market and the CEO could have just as easily sold the shares in the open market, so that's basically a wash. They company may have been engaging in a hedging strategy by agreeing to what amounts with a futures contract with the CEO. Having a willing seller cuts down on the transaction costs for both parties. Either way reducing the float that much should be a benefit to you as a shareholder. Like I said, only you can decide if this deal was aboveboard or shady.

That is impossible because they retired the shares. That means those shares are no longer in existance.

As long as the company purchased the shares from the CEO at or below market value, it is not unethical. What's the difference of the company buying shares at the open market, then the CEO selling at the open market, and the company retiring the shares? In fact, as a company I would prefer to have the disposal than have all this open market transaction because all the buying and selling would cause unwarranted price fluctuations.

This was not tricky nor illegal.

 

[glenn1]

That is impossible because they retired the shares. That means those shares are no longer in existance.

Sorry, that's wrong. Google "treasury shares" if you don't believe me. Once issued, shares can't be simply "be no longer in existence" unless the company cancels their equity series entirely through a bankruptcy or other means (and unless the company completely liquidates even then the stock isn't really cancelled, it's simply replaced with a new series of stock and the old becomes valueless and ceases to trade anymore). The company could have resold those shares on the open market the same day they bought them from the CEO if they had cared to, unless they were restricted in which case they would require more work to put back out into circulation.

 

[JS80]

Originally posted by: glenn1

That is impossible because they retired the shares. That means those shares are no longer in existance.

Sorry, that's wrong. Google "treasury shares" if you don't believe me. Once issued, shares can't be simply "be no longer in existence" unless the company cancels their equity series entirely through a bankruptcy or other means (and unless the company completely liquidates even then the stock isn't really cancelled, it's simply replaced with a new series of stock and the old becomes valueless and ceases to trade anymore). The company could have resold those shares on the open market the same day they bought them from the CEO if they had cared to, unless they were restricted in which case they would require more work to put back out into circulation.

I was an auditor and I am now an accountant so I have *some* experience and credibility when I say that when a company "retires" the shares, the company cancels the stock and is different than a company buying shares and keeping in their Treasury, with which they can give to option exercises or sell at market at a later time. However, both have the effect of lowering outstanding shares.

 

[JS80]

Didn't want to pwn you....

After buyback, the company can either retire the shares (however, retired shares are not listed as treasury stock on the company's financial statements) or hold the shares for later resale.

 

[glenn1]

I was an auditor and I am now an accountant so I have *some* experience and credibility when I say that when a company "retires" the shares, the company cancels the stock and is different than a company buying shares and keeping in their Treasury, with which they can give to option exercises or sell at market at a later time. However, both have the effect of lowering outstanding shares.

IMHO we're simply talking the difference in the point of view between an acounting and finance major. To me, simply removing Treasury Stock as a seperate line item on the financial statements doesn't really change anything other than simply making the paid-in-capital figure less transparent (and increasing the cost by necessitating a shelf offer next go around when the company wants to recapitalize). Unless you cost it on resale it doesn't generate a gain/loss so it's simply a bookkeeping entry. In this case it's simply so much of the float that it's being shown as retired since otherwise it would be too large a percentage of capitalization to be shown as Treasury stock.

 

[JS80]

Originally posted by: glenn1

I was an auditor and I am now an accountant so I have *some* experience and credibility when I say that when a company "retires" the shares, the company cancels the stock and is different than a company buying shares and keeping in their Treasury, with which they can give to option exercises or sell at market at a later time. However, both have the effect of lowering outstanding shares.

IMHO we're simply talking the difference in the point of view between an acounting and finance major. To me, simply removing Treasury Stock as a seperate line item on the financial statements doesn't really change anything other than simply making the paid-in-capital figure less transparent (and increasing the cost by necessitating a shelf offer next go around when the company wants to recapitalize). Unless you cost it on resale it doesn't generate a gain/loss so it's simply a bookkeeping entry. In this case it's simply so much of the float that it's being shown as retired since otherwise it would be too large a percentage of capitalization to be shown as Treasury stock.

Way to admit you're wrong :roll:. You said

"Once issued, shares can't be simply "be no longer in existence" unless the company cancels their equity series entirely through a bankruptcy or other means (and unless the company completely liquidates even then the stock isn't really cancelled, it's simply replaced with a new series of stock and the old becomes valueless and ceases to trade anymore)."

That statement is simply wrong. Like I said when shares are retired, the shares are no longer listed anywhere, not even in Treasury stock. So when the company announces that they are retiring shares they bought back, it's better than just announcing that they are buying back stock because they can issue it for stock option exercises.

 

[glenn1]

Way to admit you're wrong . You said

"Once issued, shares can't be simply "be no longer in existence" unless the company cancels their equity series entirely through a bankruptcy or other means (and unless the company completely liquidates even then the stock isn't really cancelled, it's simply replaced with a new series of stock and the old becomes valueless and ceases to trade anymore)."

That statement is simply wrong. Like I said when shares are retired, the shares are no longer listed anywhere, not even in Treasury stock. So when the company announces that they are retiring shares they bought back, it's better than just announcing that they are buying back stock because they can issue it for stock option exercises.

It's a point without a distinction since we're talking about a company with a $14MM capitalization so the "retirement" of shares ignores the capitalization opportunities available to undo the transaction almost instantly. They could reissue the entire amount they just bought back under Reg D or ULOR, or exotic means such as PIPES or convertable preferreds. My point stands that the company could retire the shares today and reissue them tomorrow. You're simply looking at things from a narrow accounting 101 viewpoint and applying rules for Phillip Morris to transactions for a microcap.

 

[Nerva]

it means start shorting that company's stock...

 

[kush]

glenn, you are getting pwned by js80, and saying lots of big words that just don't go together real well nor are they relevant to the issue. take notes.

 

[FoBoT]

nerd fight!!

its a penny stock, so who cares?

 

[kush]

and OP, why are you playing around with a penny pink sheet stock, stay away, don't be a dumbass unless its for education.

 

[PennyTibz]

Why do you care if it's about a penny stock?

Someone I know owns this stock, and invested a lot of money. And back then, it wasn't a penny stock. It was privately held.

Do you even know where penny stocks come from? They aren't born that way...they become that way through bad management. One of those "bad managers" happens to be one of the people I mentioned here.

So please just answer the questions!

And Glenn1, JS80 - thank you both for you input.

Mainly....I was wondering if it's ethical/legal for a CEO to buy shares, have the company pump the stock, and then have the CEO sell his shares to the company. The CEO controls the company....so basically, whatever the company is saying is the same thing that the CEO is saying.

When the CEO goes out and buy shares, then the company pumps the stock, then the CEO sells all the shares he bought + $6 million more worth of shares, it seems like a scam to me, and I thought that to be unethical (maybe even illegal...you know "Pump 'N Dump"). It seems to me...that if it's not unethical or illegal in peoples' eye, then this is a darn good way for someone to make some money.

Go become a CEO of a penny stock company, publically traded. Issue yourself a bunch of shares. Then buy about 5% of the # of shares that you already own (buy on the open market). Be sure to buy it at the highest price! Then issue a PR that you just did so. Then go sell your shares to the company that you control (since you are the CEO, mind you). Keep in mind that the company...although it's in the "control" of the CEO, was at first funded by private investors who are now totally screwed, because the CEO who runs the company is abusing his powers by using company funds to pay himself for his "self-issued" shares.

Do you understand what I mean? Am I the only one that sees the point here?

 

[FoBoT]

call the SEC and tell on him

 

[PennyTibz]

Basically, case in point and to finallize...what just happened is this:

1) The CEO just made +/- $6 million profit

2) The company's funds were used for the CEO to make that profit, since the company (that the CEO controls) paid the CEO for his shares.

3) The company is now in financial trouble because that may have been all the money they had! The $14 mil. market cap is small for a company paying $6 million cash for the CEOs shares.

4) The private investors who funded the company are in a tough spot. What can they do now?

5) The company (probably at the command of the CEO who runs it) sucked-in MORE investors in the open market by bragging about the CEO buying shares on the open market at the highest price. Now, the stock trades at about 1/3 the price that it did back when the company bought the shares from the CEO. They paid about 50-60 cents...it's now at 20 cents.

And none of this is wrong? Jeez, what is this world coming to?

 

[JS80]

Originally posted by: glenn1

Way to admit you're wrong . You said

"Once issued, shares can't be simply "be no longer in existence" unless the company cancels their equity series entirely through a bankruptcy or other means (and unless the company completely liquidates even then the stock isn't really cancelled, it's simply replaced with a new series of stock and the old becomes valueless and ceases to trade anymore)."

That statement is simply wrong. Like I said when shares are retired, the shares are no longer listed anywhere, not even in Treasury stock. So when the company announces that they are retiring shares they bought back, it's better than just announcing that they are buying back stock because they can issue it for stock option exercises.

It's a point without a distinction since we're talking about a company with a $14MM capitalization so the "retirement" of shares ignores the capitalization opportunities available to undo the transaction almost instantly. They could reissue the entire amount they just bought back under Reg D or ULOR, or exotic means such as PIPES or convertable preferreds. My point stands that the company could retire the shares today and reissue them tomorrow. You're simply looking at things from a narrow accounting 101 viewpoint and applying rules for Phillip Morris to transactions for a microcap.

The company can raise funds without buying back stock and retiring them anyways so I don't see the point of your last post. They certainly could not reissue the stock that they just retired. However they can issue NEW STOCK if the Board of Directors approved of it. Just because I'm an accountant doesn't mean I don't know my finance :roll: I did do an internship at an equity shop while in college.

 

[kush]

Originally posted by: PennyTibz
Basically, case in point and to finallize...what just happened is this:

1) The CEO just made +/- $6 million profit

2) The company's funds were used for the CEO to make that profit, since the company (that the CEO controls) paid the CEO for his shares.

3) The company is now in financial trouble because that may have been all the money they had! The $14 mil. market cap is small for a company paying $6 million cash for the CEOs shares.

4) The private investors who funded the company are in a tough spot. What can they do now?

5) The company (probably at the command of the CEO who runs it) sucked-in MORE investors in the open market by bragging about the CEO buying shares on the open market at the highest price. Now, the stock trades at about 1/3 the price that it did back when the company bought the shares from the CEO. They paid about 50-60 cents...it's now at 20 cents.

And none of this is wrong? Jeez, what is this world coming to?

Caveat emptor. a 60 cent stock is just as big a pile as a 20 cent stock. funky s*** happens when stuff is down there