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Apple's insider trading policy... Deception of the employees.


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Presentation illustrates that companies are using insertions into their Insider Trading Policies to diminish the value of employee stock options. This provision is inserted into the Insider Trading Policy to intimidate the employee from managing his/her ESOs optimally. There has never been a case filed against a person selling calls or buying puts to reduce risk. Every case that was filed against employees for violation of Rule 10 b-5 which involved employee stock options was a result of using the strategy or early exercise, sell stock and diversify.

John Olagues

Published in: Business, Economy & Finance
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Apple's insider trading policy... Deception of the employees.

  1. 1. Understanding Insider Trading Policies not for dummies
  2. 2. .The use of Insider Trading Policies to diminish thevalue of employees equity compensation.In this presentation, I will explain why Apple Computer created an updatedInsider Trading Policy in January 2012, which adds a prohibition againstselling (writing) calls and buying puts, even when the trading of stock isallowed.The purpose of this prohibition is to deny the use of the only efficient methodof reducing risks in holding concentrated positions in employee stock options.That prohibition therefore allows only the use of the highly inefficient methodof reducing risk which is highly beneficial to the company and the WealthManagers. That method is called "early exercise, sell stock and diversify" andwhen used will eliminate the main purpose of the ESO grant, which is to alignthe interests of the shareholders with the employees.
  3. 3. .Before going further let me state some un-deniable facts:1. Apples Employee Stock Plan and the Grant Agreements with the companydo not prohibit selling covered calls or buying puts. Those agreements can notbe changed without approval from the grantee/ employee if the change maydiminish the value of the grants.2. The prohibition in any Insider Trading Policy of selling calls and buyingputs, when sales of stock are legal and allowed, has never and will neverprevent a violation of SEC Rule 10b-5 or Section 16 b or c of the 1934 Act.This is true because if selling stock is legal and allowed, it is impossible toviolate SEC Rule 10b-5 or Section 16 b or Section 16c of the 1934 Act bysales of calls or buys of puts.3. Selling covered calls and/or buying covered puts while holding employeestock options or holding stock of the company, while reducing the alignmentwith shareholders, will preserve the remaining alignment longer thanexercising the ESOs and selling the stock.
  4. 4. .4. The subsequent possible assignment of exercise notices to the employeewriter of covered calls, can be eliminated completely by permitted purchasesof such calls prior to exercise. If an exercise and assignment occurs, theassignment can not possibly cause a violation of SEC Rule 10b-5 or Section16 b or c of the 1934 Act. Exercises of puts or calls owned by an employeehas never and will never cause a violation of SEC Rule 10b-5 or of Section 16b or 16 c of the 1934 Act.5. Sales (writes) of covered calls and/or purchases of puts will reduce therisks of holding in-the-money employee stock options. It will avoid the need toforfeit the remaining "time value" back to the company and will delay thepayment of early taxes when early exercises are made. This will delay thereceipt of the forfeited "time value" by the company and delay the receipt ofthe much desired cash flows to the company in the form of tax credits andflows from the issuance and sales of new shares of company stock to theemployee.In fact, if the employee efficiently manages the employee stock options, theemployee stock options will never be exercised if the stock is below theexercise price immediately prior to expiration day. This will cause no forfeitureof "time value" and no flows to the company. It will also cause no AssetsUnder Management by the Wealth Managers.
  5. 5. .6. The sales of covered calls to reduce risk is less a bet against the stock of thecompany than early exercises of employee stock options followed by sales ofstock and diversifying the net after tax proceeds. In fact the early exercise, selland diversify strategy does not reduce market risk but essentially the earlyexerciser is betting that the company stock will under-perform the market.7. The idea that selling covered calls to reduce risk allows short termspeculation (or the appearance of short term speculation) on the companystock is non-sense. Exchange traded calls and puts have up to three years timeto expiration and cause less appearance of speculation than sales of stock.8. The officials of Apple Computer have the purpose to reduce the costs ofequity compensation by adding trading restrictions that have no other purposethan to reduce costs and add benefits to the company and assist their alliedWealth Managers.
  6. 6. .In the introduction to a paper by Todd Henderson of the University of Chicago LawSchool, called Insider Trading and CEO Pay, we find the two followingstatements:"First, the evidence suggests executives whose trading freedom is increasedexperience reductions in other forms of pay to offset the potential gains fromtrading. This result is consistent with (and the flipside of) a study by DarrenRoulstone, finding firms that restrict trading increase compensation to offset the lostopportunities from trading".and"Roulstones data and result does not differenciate between two reasons for whytrading freedom is valuable: the value of liquidity and the value of informationasymmetry."The conclusion can not be clearer that when companies restrict the trading freedomof employees holding company equity in the form of employee stock options,restricted stock and unrestricted stock, those restrictions decrease the value ofthose equity holdings.
  7. 7. .So what is the real answer as to why some companies prohibit selling calls andbuying puts by insertions into the Insider Trading Policies.The company officials either do not understand what they are doing or havemotives beyond what is expressed in their documents. My view is that they arebeing advised by attorneys and so called experts who are deliberatelymisrepresenting the reasons for the prohibitions.The officials and the attorneys know that the object of such prohibition is tobenefit the company and the Wealth Managers at the expense of theemployees, thereby lowering the costs of the equity compensation of thegrantee/employees and getting Assets Under Management for the WealthManagers.
  8. 8. .But the officials want to lower the equity compensation costs of the employeeswithout appearing to violate the contract that exists between thegrantee/employees and the company as outlined in the Stock Plan and theGrant Agreements. They also know that very few employees will challenge thisviolation of the contract because the violation has been obscured inside of theInsider Trading Policy and the employees fear that they will be retaliatedagainst if they do.But there is a way to correct Apples and others use of Insider Trading Policiesdesigned to diminish the value of equity compensation grants. I will explain theremedy if you call me.John Olagues504-875-4825