In The Crosshairs Of Our Insider Periscope: Tesla, Sprint, AMD

Includes: AMD, S, TSLA
by: Robert Gabele

Certain "gaming" of 10b5-1 trading plans by Tesla director observed.

Update on increasing loan related share pledges by both Elon and Kendal Musk.

Liquidation of holdings by certain Sprint insiders provide information to handicappers.

We are discounting the selling at Advanced Micro Devices.

I have never been in the “buy/sell” game. My career has been based on providing clues for investors to use in their own analysis. In other words, what I offer are a few extra tools to add to the toolbox that you already are using. And oftentimes the addition of some knowledge interpreted from the actions of insiders can sharpen the details. In this era of microscopic scrutiny of insider behavior, the obvious is usually best discounted. The steady selling, for instance in Advanced Micro Devices (AMD), looks draconian on the surface, since monthly selling by key company insiders had been evident through 2017. Though the sales have tended to occur at successively lower prices during the period, we note that most have occurred under the cover of 10b5-1 plans (see below) and have not wavered in size from previous offerings. Also, when viewed within the context of the company’s huge annual equity compensation (in the form of both options and restricted shares), what appears to be a high level of insider selling hardly upsets the balance of the holdings of those involved. In other words, their selling picture, having remained consistent over time, does not represent anomalistic behavior in our view. I could go on but suffice it to say, subtle is where it’s at.

To this, I would like to introduce a series of ongoing slices of my observations for you. As I mine the Insider Data from SEC public documents on a regular basis (Forms 3, 4 and 5, 144 filings, Proxies, 10Ks, 10Qs), I constantly come upon interesting clues. Oftentimes these pieces of information could use more detail before being considered fully developed enough to be worthy of their own story. Having said this, once observed, these bits serve as pointers suggesting we keep a closer eye on the issue involved since subsequent data may arise, confirming what we already have seen. So allow me to offer some of my observations from recent insider data that have caught my eye:

Tesla (TSLA) - Kimbal Musk, CEO Elon’s brother, not only serves on the board of Tesla but also his sibling’s other major venture, SpaceX. Kimball also made out in the SolarCity deal. Acquired by Tesla in a somewhat controversial acquisition, most of SolarCity’s board had ties with the auto producer. So did Kimball, as he acquired just under 16,200 Tesla shares in that deal. Over time, insider clues at the company have proved thin. For instance, we had become conditioned to seeing Kimbal’s regular selling of portions of his TSLA position via the 10b5-1 trading vehicle path. These trading programs are designed to provide safe harbor for those intending to monetize a portion of their holdings on a regular basis. They are assumed to be created at a time when the insider involved is not in the possession of "material non-public information" (MNPI). Occasionally however, they are gamed by insiders who have conditioned the public to become used to their regular “estate planning etc.” selling. It seems that Kimbal is one of these. His related Form 4s reveal that during the course of 2017 he had sold simultaneously under two separate plans, one created on 9/14/16 and the other on 2/24/17. Now, it is no secret that experts advise against operating under concurrently operating plans. Though there are many sources on this, consider the following according to Harvard Law School Forum on Corporate Governance and Financial Regulation: here.

Establish Only One 10b5-1 Plan
The existence of multiple plans raises suspicions and is suggestive of impermissible hedging. A single plan can incorporate multiple strategies and achieve the same desired outcome. For plans designed to buy securities, arrangements for funding such purchases should be determined upon establishment of a plan since funding a plan when sales are affected may be viewed as implementing a new plan, which would require re-evaluating the existence of MNPI.

These plans exist so that insiders can sell in a pre-determined orderly fashion (typically for estate planning) so as not to be accused of trading with knowledge of significant upcoming events. Doing so under two such plans simultaneously contradicts the spirit and intent of rule 10b5-1 and jeopardizes the safe harbor concept it offers. Nevertheless, Kimbal’s regular sales of 2,500/month (effected under his September 2016 plan) found company in April of 2017 when he not only sold his typical 2,500 shares but slipped in another 2,191 sold under a new 2/24/17 plan. So, in April of last year, utilizing the “cover” of two simultaneous plans, he was able to double his sales. This all the while the public data simply stated that his sales were “automatic,” having been generated under a 10b5-1 plan. Pretty crafty. In May, he went back to selling solely under his 9/14/16 plan (2,500 shares). His subsequent June and July sales, at 4,600 shares each, were, as in April, again almost double the sales, had been executing normally. This a result of his selling under both the above mentioned plans simultaneously.

Here are the links to the related filings. The important details lie in the footnotes:

April 2017 Sale under 9/14/16 Plan

April 2017 sale under 2/24/17 Plan

June 2017 sales under both 9/14/16 and 2/24/17 Plans

July 201 sales under both 9/14/16 and 2/24/17 plans

January sales under 2/24/17 plan modified on 11/13/17

So, during the June and July all-time peak for TSLA shares, Kimbal’s subtle use of concurrent 10b5-1 plans helped obfuscate the fact that he was actually doubling his sale volume. This sort of sleight of hand has become rather rare these days, causing us to take significant note. For whatever reason, he dropped back to selling 2,190 shares/month under just one plan (his 2/24/17 effort) through the close of 2017. In January of this year, he again reverted to selling over 4,000 shares. This time, his sales were under a modification of his earlier-utilized 2/24/17 plan. It has become unusual to find selling under “modified” plans. In fact, this practice can also raise eyebrows in the legal community just as it has ours. The following from the same Harvard Law School forum referenced above:

Avoid Multiple Modifications, Suspension and Termination
Modifications, suspension and termination actions are technically all permitted but may weaken the good faith defense. A change is permissible if the participant does not have MNPI at such time. Plans that are sufficiently broad may not require frequent modifications absent changes in personal circumstances of the plan participant. Although termination (even when the plan participant is aware of MNPI) does not a priori invalidate the defense, it could affect the availability of the defense for prior plan transactions if it calls into question whether the plan was entered into in good faith and not as part of a plan or scheme to evade the insider trading rules.

It would be valuable to see the original plan and how it was modified. The SEC however, does not require such disclosure. From the same Harvard forum:

Public Disclosure
Although public disclosure of Rule 10b5-1 plans is not required, issuers should consider publicly disclosing (e.g., through a Form 8-K) the establishment, but not complete details, of plans for themselves as corporate entities (e.g., in connection with a stock repurchase plan) and for their insiders.

We would heartily argue otherwise. Having observed 10B5-1 plans and their abuse since the rule's inception it is our firm belief that better transparency of their detail would inure to the benefit of investors. So, given the current level of disclosure, the only thing we can safely surmise is that Kimbal has been rather successful in gaming the spirit of 10b5-1 plans and his future actions should be watched closely.

Elon and Kimbal Musk TSLA share pledges - The fact that Elon Musk has hypothecated portions of his TSLA ownership positions in the past is no secret. As of the company's 2016 Proxy Statement, he had pledged 9.4 million of his 37.2 million share and exercisable option equivalent (25% of his holdings) as "collateral to secure certain personal indebtedness." His hocked share position however, has risen quite further. As of TSLA's 2017 Proxy, his pledged total had risen to 32% of his holdings, or 11.5 million of his 36.2 million share and exercisable options. The company files its annual Proxy statement in April of each year. It will be important for interested parties to look for any changes in his loan exposure exposed in the coming document.

Kimbal Musk's share position, like his brother, has pledge ties. His April of 2017 Proxy holdings, reported as 220,823 shares, were encumbered by pledges of 164,514 shares, or 75% of his holdings. This up from 71% the year prior. As in the case of Elon, Kimbal's shares have been pledged as "collateral to secure certain personal indebtedness."

History has shown the risks of the potential negative effects of margin calls associated with such pledging in the event of share price erosion. We touched on this a few months back in an article about John Malone's hypothecation tendencies:

John Malone: Leverage The Holdings, Hedge The Risk, Damn The Governance

To this, allow us a quote from that artcle

"The practice of pledging insider shares to margin accounts or against credit lines has been voted out by most governance conscious boards in recent years. Much of this a ground swell in the wake of the now infamous share pledging activities of the late Aubrey McClendon at Chesapeake Energy (CKE) back in 2007 and 2008. During that period, McClendon's entire CKE stake, which had grown to 29 million shares, had been pledged to margin accounts. This was all fine with CKE shares trading at above $60/share going into 2008. However, the subsequent crash in the shares during 2008, to $14, was exacerbated by McClendon's heavy selling as a result of margin calls as his 29 million share position had to be reduced to just over 500,000 shares in a hurry. And though it is not fair to blame the collapse of CKE shares entirely on McClendon's stake reduction, the bad PR had a major effect."

To this, we urge to keep a sharp eye out for the upcoming April Proxy in order to monitor any change in the pledging status for the Musk brothers.

Sprint (S) - Clearly, there is a lot of conjecture surrounding Sprint and its future, especially in the wake of the collapse of the potential for a T-Mobile (NASDAQ:TMUS) merger in November. Majority holder SoftBank (OTCPK:SFTBY) has continued buying tons of shares, picking up 73 million since the talks ended and setting up the perception of having created a price floor. Again, to our toolbox analogy, our purpose here is not to evaluate Sprint’s prospects going forward. Many analysts have burnt plenty of BTUs doing just that. No need to be repetitive. General opinion of the outlook however appears bifurcated into distinct camps, each with their own method of deciphering a potential outcome. We have uncovered clues from the inside camp which indicate somewhat of a break in ranks since the collapse of the T-Mobile talks. Those involved have moved to monetize their entire vested positions of options, which amounted to their complete actionable holdings (vested derivatives plus common shares). Their decisions to trim their liquid holdings shed interesting light on the equation.

Tarek Robbiati - CFO - Sprint’s outgoing CFO may have tipped off his ouster with his November sales. On November 13, Robbiati exercised options, not set to expire until 2026, for 90,497 shares at $3.44. He then sold the entire amount plus and additional 273,032 shares. The 363,529 shares were sold at $6 each and represented his only such dispositions since first coming on board in 2015. Though the details of his severance were not provided at the time of his employment termination, upon reviewing the Company Proxy it would seem that it should be considered “without cause.” In such case, he would have lost options vesting past the 90-day period following his January 31, 2018, termination date. Given this timing assumption, he would have forfeited 180,996 of his remaining $3.44 options and 132,000 of his $5.06 options. He continues to have 68,000 of the latter options, which have vested. He has until approximately 4/30 to exercise these.

Dow Draper - Chief Commercial Officer - Draper exercised every available option in his quiver on 12/6/17, cashing in 130,558 of his $4.75s and 112,149 of his $4.70s before selling the entire amount for $5.71 each. This was his first sale since coming on board in his current capacity (2016). Though his related filing indicates he continues to hold 984,600 shares, a look to the footnotes reveals that 894,445 of these are in the form of unvested restricted share units which continue to be subject to forfeiture. It is important to note that his exercised options were not set to expire until between 2024 and 2025. Consequently, his early exercise of all available derivatives (his only other options are well out of the money, at $8.53 to $8.99) at such an early date and at a slim 17.5% premium to market value should be considered a noteworthy event. Could it be that he felt the risk of these options sliding underwater in the intermediate future?

Paul Scheiber - Controller - Consistent with the behavior of the others, Scheiber monetized his entire available total of options on 12/13/18, selling the underlying 144,041 shares at $5.75 each. In doing so he cleared out his $2 tranche (not set to expire until 2022), his $4.75s (expiring in 2024), his vested $4.70s (expiring in 2025) and his $3.44s (expiring in 2026). His post-sale holdings were listed on his filing as 184,728 shares but these consisted of 184,498 in the form of unvested restricted share units which are subject to forfeiture.

Jorge Enrique Gracia - General Counsel - The picture for Gracia is not unlike the others. In his first sale since coming on board in his current capacity (January 2016) he exercised all available vested options in his control and sold the underlying 122,959 shares at $6.18 each on 11/27/17. These options would not expire until 2026. As in the case of the others, his filing listed his remaining holdings at 817,822 shares. However, the entire amount exists in the form of unvested restricted share units subject to forfeiture.

One wonders what the recent price trend in Sprint shares would have looked like without the persistent SoftBank purchases. Indeed, given the many long-lived options that have been liquidated far before maturity, we are inclined to infer that the current crop of insiders are not handicapping highly the prospects for any potential Sprint business combination to result in meaningful upside to current share valuations.

Adding to this, we would like to hear from you. If you are observing certain insider action and would like to hear our analysis of the situation, drop a line. This type of interaction is clearly in our wheelhouse and we are more than happy to help shed some light on any situation… Bob Gabele

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.