Finisar Insider Sales: A Lesson in Due Diligence

| About: Finisar Corporation (FNSR)
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Retail investors have plenty of reasons to hate the stock market. In many ways, the odds appear stacked in Wall Street's favor. Even with access to "real-time" information and sophisticated trading platforms, Main Street tends to be several steps behind the pros. Given this reality, insider selling often raises the ire of individual investors.

Generally, I don't think twice when I see insiders, particularly of high-flying tech names, selling stock. If I had the opportunity to make myself a millionaire several times over, I would do it too. When a VP of Sales dumps a hundred grand worth of stock to buy a new Porsche, I don't look at it as a bad omen vis-a-vis his company's fortunes. From time to time, however, I do come across situations that pique my interest.

While conducting research for another article, I stumbled upon eye-opening insider sales transactions for Finisar Corporation (NASDAQ:FNSR). On March 8, 2011, seven officers of the company, including CFO Kurt Adzema and SVP of Sales and Marketing Todd Swanson, combined to sell 2,445 shares of the company's stock, or so it appeared. Proceeds from the sales totaled $97,896. This represents mere chump change given the scale of insider selling that goes on in many companies, but many retail investors would not sneeze at even a fraction of that money. Add to this, the timing of what Yahoo! Finance defined as "Non-Open Market Dispositions."

The aforementioned sales took place at FSNR's closing price of $40.04 on March 8th. After the bell on that day, FNSR announced earnings. They weren't good. The stock sold off in after hours, closing the next day's regular session at $24.61, on over 40 million shares traded. On the surface, these FNSR insiders appeared to have sold off stock on the basis of knowledge not available to the public.

For some, psychological filters would have prevented further investigation. The information up to this point fits nicely with the going thesis - Wall Street's rigged in favor of the insiders. While I don't disagree, with this statement in some respects, this case required a deeper look. It's important to know where to look.

Next, I went to the U.S. Securities and Exchange Commission's (SEC) website. There was no doubt in my mind that these sales would be reported. If not, something was seriously wrong, and it likely would have been a big story a couple of weeks ago. I searched the filings and found the pertinent SEC Form 4s' reporting each of the seven insider transactions. You can see a copy of one of them here.

While you can certainly argue this point, I don't think the timing of these sales is anything but coincidental. If I am wrong, there's a reason for anger. What the Form 4 tells me, however, is that the proceeds of the disposition cover the taxes due as a result of each individual's acquisition of "restricted stock units." The respective filing shows that the issuer of the stock pays the taxes for each individual from the proceeds of the restricted sales.

The lesson for investors: Don't jump to conclusions. While insider selling, at times, should raise serious red flags regarding a company's future, this was not the case here. It always pays to take the extra step to determine if there is more to something that seems fishy on the surface.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.