In news bulletins this morning, Thomson Financial Network published a list of insider trading information for Avanex Corp. (Nasdaq: AVNX), Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7), Brocade Communications Systems Inc. (Nasdaq: BRCD), Cisco Systems Inc. (Nasdaq: CSCO), New Focus Inc. (Nasdaq: NUFO), ONI Systems Inc. (Nasdaq: ONIS), and Sycamore Networks Inc. (Nasdaq: SCMR).
And in several instances, the results were jolting:
- A senior VP at Cisco, Michelangelo Volpi, who also serves as the company's chief strategy officer, filed a form May 11 with the U.S. Securities and Exchange Commission to sell 797,312 shares of stock valued at $14.9 million.
- Three top Brocade executives are looking to sell a combined 770,000 shares for nearly $38 million: The proposed transactions include a request dated May 22 to sell 300,000 shares valued at about $13.9 million by the family trust of CEO Greg Reyes; a request on May 29 for a proposed sale of 220,000 shares valued at $10.9 million by VP of engineering and cofounder Paul Bonderson and his wife Sandra; and a May 22 request for the proposed sale of 250,000 shares at $13 million by president/COO Michael Byrd and his wife Elizabeth.
- In several requests late in May, New Focus investors U.S. Venture Partners proposed selling 687,832 shares valued at $8.8 million. Also, chairman of the board Milton Chang filed to sell 400,000 shares valued at $5.8 million, on May 21.
Ordinarily, there's nothing out of line about executive stock sales. By law, companies are required to restrict insider trading to specific windows of opportunity. Often, this accounts for a slew of executive transactions at once.
It's also not uncommon for executives to try and keep the sales down when business is off. "Folk know that it's very sensitive to sell lots of shares when business is not doing well. They try to avoid that," says David Jackson, optical components and systems analyst at Morgan Stanley. What seems notable about the above transactions, therefore, is their size, given the present market downturn. Also, it seems significant that more than one key investor is issuing a request for a large transaction. That tends to argue against the chance that one investor's personal financial requirements could be the cause for the cashout -- right?
Wrong, says Brocade. "There's nothing out of the ordinary here. Executives sell stock based on windows of time permitted by law," says a company spokesperson. "We don't have anything to say about it. It's a nonissue."
Cisco and New Focus did not return requests for comment at press time.
Unfortunately, analysts say that whatever the reason for a big stock sale -- and it may not be related to the company's financial condition -- it can lead to a syndrome of further selling.
"It impacts the company on three levels," says Mark Langley of Epoch Partners. First, he says, there's the perception that executives have a key reason for selling so much stock. Second, good-sized trades affect the stock price. And third, investors take the sale requests, rightly or wrongly, as a signal that something's up at the company.
"There's the sense that there must be some news, some event, that made them think this was a good time to sell their shares," he says.
New Focus, Langley says, has been suffering from the big-sale syndrome ever since the requests cited above were filed with the SEC two or three weeks ago. Now, instead of trading at 5.9 times the expected revenues, which is Epoch's barometer for competing optical subsystem companies, New Focus is trading at four times projected revenues, according to Langley.
But experts stress that suppositions about insider trades are just that. Indeed, in the absence of explanations, it is possible that big trades do not have to do with the company specifically at all, but are instead indicators of caution about the market itself.
"Tech stocks have undergone a correction of 50 to 80 percent in some cases. Investors are afraid to grab the falling knife," Langley says. The result is a kind of "run on the bank" mentality.
"There are a million reasons to sell, and only one to buy," he says.
- Mary Jander, Senior Editor, Light Reading