Since Silicon Valley Bank collapsed on March 10, news outlets and federal legislators have brought attention to former president and CEO Gregory Becker’s sale of $3.6 million in company stock two weeks before the bank failed.
While Becker collected $3.6 million, the figure doesn’t represent his profit. Becker exercised an option to purchase the stocks he sold. A filing with the U.S. Securities and Exchange Commission shows Becker bought the stocks for $1.3 million on Feb. 27, then sold them for $3.6 million the same day.
When the other side of the ledger is accounted for, Becker pocketed $2.3 million before taxes, as columnist Brett Arends of MarketWatch wrote on March 11. Accuracy matters. Keep reading to learn more about covering insider trading reports.
What is an insider trading report?
The filing in question is called a Form 4, known as an insider trading report. Insiders must file a Form 4 when they buy or sell company shares.
The Securities and Exchange Commission defines insiders as certain executives, such as officers or directors, plus anyone who owns more than 10% of a publicly traded firm or anyone with access to information because of a relationship with a company insider.
Despite its name, the existence of an insider trading report does not indicate illegal insider trading happened. It simply indicates that an insider traded shares — and doing so is not necessarily illegal.
Form 4 filings are publicly available through the Securities and Exchange Commission’s Electronic Data Gathering, Analysis, and Retrieval system — EDGAR. Enter “SVB Financial Group” and the Form 4 from Becker that has received news attention appears as an “insider trading report” filed March 1.
In the interest of helping reporters and the public understand how to read a Form 4, we reached out to Robert Davidson, who heads the accounting and information systems department at Virginia Tech and has conducted extensive research on insider trading, financial reporting fraud and company risk management. Davidson helped us walk through Becker’s recent Form 4 as a case study. Use the annotated filing below to familiarize yourself with the Form 4s available through EDGAR.
When is insider trading illegal?
Insider trading prosecutions rely on what Securities and Exchange Commission regulators call “material nonpublic information.”
Simply put, information that would matter to investors and is not available to the public.
For example, the Securities and Exchange Commission in July 2022 accused a former FBI trainee of secretly viewing documents from a romantic partner, an attorney for a law firm representing the pharmaceutical firm Merck. The documents showed Merck was set to acquire another pharmaceutical company. The former FBI trainee told a friend about the impending deal, which had not been publicly announced, with the friend profiting $1.3 million in allegedly illegal trades using the inside information.
Conversely, a trade by an insider using information that is public would still constitute an insider trade, but it would not be illegal. It is generally an uphill climb for prosecutors to obtain a conviction on an allegedly illegal insider trade committed by a company officer, such as a chief executive, Davidson says.
Company officers almost always have inside information that the public does not know about, he notes.
“The difficulty for the SEC, or a judge, is in, ‘Is this private information you had the reason you made this trade?’” Davidson says. “There are a lot of other reasons an executive may make a trade. So simply trading while you possess the information is not illegal. If you were to trade because of it, it is.”
Insider trading cases are usually easier to prosecute when the insider does not work for the company, Davidson says. He points to a case he and Christo Pirinsky, a finance professor at the University of Central Florida, outline in a May 2022 paper on insider trading, published in The Accounting Review.
The case centered on a therapist working with a Lockheed Corporation executive, with the therapist making trades using information the executive revealed during counseling. In that case, the trades were “completely independent of the firm and it appears there is little the firm could have done to prevent a licensed therapist from abusing doctor-patient confidentiality,” Davidson and Pirinsky write.
What does Becker’s Form 4 tell us?
Here is the story that can be understood from Becker’s Form 4, the one showing stock sales worth $3.6 million on Feb. 27.
At the beginning of the day, Becker owned 92,552 Silicon Valley Bank securities in the form of common stock. Common stock is the typical type of security routinely traded on stock exchanges. Each of these securities represents an ownership share of the firm.
Becker exercised options to buy Silicon Valley Bank common stock at a price of $105 each, and he bought a total of 12,451 shares. An option is a contract between the firm and an employee, often an executive, that allows the employee to purchase company shares at a set price by a certain date. In this case, Becker’s option to buy the shares at $105 apiece would have expired on May 2.
“Executives routinely wait until their options are about to expire before they exercise them,” Davidson says.
The same day Becker acquired the $1.3 million worth of Silicon Valley Bank stock, he sold them on a stock exchange at a price of around $285 per share.
This sale of 12,451 Silicon Valley Bank shares was worth $3.6 million. Subtracting the acquisition cost of $1.3 million, we arrive at a pre-tax profit of $2.3 million. Becker began the day with 92,552 in Silicon Valley Bank common stock, and ended the day holding the same amount.
Here is another important thing to know, noted at the bottom of the filing: Becker put this trade into motion on Jan. 26, 2023. The trade was made Feb. 27, nine business days before the bank failed, but the plan to purchase the options and sell them was set 31 business days in advance of the collapse.
This trade was made ahead of time using a Rule 10b5-1 trading plan. This type of plan is meant to serve as an affirmative defense against insider trading allegations. Executives can and often do put these plans into motion months or years before stock sales happen.
Imagine a situation in which an executive moved ahead on Jan. 1, 2022 with a Rule 10b5-1 trading plan that says she will sell 5,000 in common stock two years later, on Jan. 1, 2024. In December 2023, her company announces a major acquisition that sends stock prices soaring. Weeks later, she makes a tidy profit. The executive can point to the trading plan as evidence the stock sale was adopted well before the acquisition.
Davidson stresses that intent is nearly impossible to determine on the basis of a single filing. Again, intent is the main thing when it comes to prosecuting insider trading: What is the overriding reason the executive made a trade? Becker’s options were due to expire soon, Davidson notes.
Also notable is that the Securities and Exchange Commission recently changed the parameters for a Rule 10b5-1 trading plan. These changes apply to trading plans made after April 1, 2023, and require directors and officers to separate the adoption and execution of a trading plan by at least 90 days.
This means Becker’s trading plan, with about one month between adoption and execution, would not have been allowed if it had been adopted just a few weeks later.
“It’s very difficult to infer intent without looking at a broader set,” Davidson says. “How many Form 4s have people been filing? How many shares are they trading?”
EDGAR search results show leaders at Silicon Valley Bank have filed more than 500 insider trading reports since January 2018. Here are a few outstanding questions about these reports worth exploring:
- How does the volume of transactions compare to other similarly sized banks?
- What is the dollar breakdown of stock purchases and sales within those over 500 insider trading reports?
- Which executives have traded the most and profited the most, and when?
- Was there a flurry of insider trading after July 2022, when the Federal Reserve Bank of San Francisco began closely reviewing Silicon Valley Bank governance practices?