Is The Boss Dumping Stock?

d more than five minutes listening to experts talk about Enron, you keep hearing one word over and over: "transparent." No, they're not talking about a window into Enron's outlandish high jinks and power struggles. They're talking about "transparent financial markets": markets that provide enough information in a timely manner to offer a clear view of what's going on. American markets are supposedly the most transparent in the world. But one of the nasty lessons we've learned from Enron is that our markets have some big blind spots. How else could Enron get away with cooking its books for at least five years?

There are all sorts of reform proposals floating around to prevent "another Enron,'' from changing the accounting industry to reining in Wall Street. For now, though, let's skip the complicated stuff and try to shed some light on something simple: when insiders have to tell us that they've sold or bought company stock.

You can see why it's good to know what chief executives and other insiders are doing. But thanks to ridiculously lax disclosure rules, a CEO can wait between 10 days and 410 days to report a transaction. It depends on things like whether he's selling on the open market or to the company itself. The huge range of lag times can be misleading, to put it mildly.

Which brings us to--surprise!--Kenneth Lay, Enron's former chairman. Lay gave Enron investors and employees a perfectly legal but misleading account of his transactions in Enron stock last year, as it lost 99 percent of its value. If you consulted insider-trading databases last fall, when Enron entered its death spiral, you saw that Lay had frequently exercised options and sold the purchased stock at fat profits, but hadn't reported any outright sales after July 31. In fact, on Aug. 20 and 21, he reported paying about $2 million to buy shares and didn't report selling them. He seemed to be showing confidence in Enron's stock.

But not really. On Aug. 21, it turns out, Lay sold $4 million of Enron shares, and he sold $12 million more by the end of the month. He kept selling through Oct. 26. Why does this matter? Because on Sept. 24, you may recall, Lay told employees that Enron stock--then $27, now around 27 cents--was an incredible bargain. He didn't tell them he had sold $20 million worth in the previous six weeks.

Lay didn't have to disclose those sales until this past Valentine's Day. Why? Because he was selling his stock to Enron rather than on the open market. When insiders sell in the open market, they have to file a Securities and Exchange Commission Form 4 within 10 days after the month in which they sell. But when they sell stock to the company, they have to file a Form 5--which isn't due until 45 days after the company's fiscal year ends. In Enron's case, that was Feb. 14.

In his Form 5, Lay reported selling $70 million of stock to Enron last year, more than double his open-market sales disclosed on his Form 4's. Lay's spokesman said that he sold stock to Enron to repay loans he had taken from the company to finance money-losing purchases of other stocks. Lay wasn't trying to delay reporting his sales, the spokesman said, he was just following the disclosure rules. Which shows how silly the rules are. You can bet that Enron's stockholders, creditors and especially employees would have dearly loved to know that the company's leader was selling, regardless of who was buying.

I won't bore you with the history behind the long and differing lag times. Suffice it to say the rules made sense when they were adopted in the 1930s, but make no sense today. Even worse than the lag times is that in an Internet world, these forms can be filed on paper rather than electronically. Electronic filings can be accessed quickly on the SEC's Web site, which is why the SEC requires U.S. companies to file almost everything electronically. To access paper forms, you have to go to SEC headquarters in Washington or hire a service. My data come from Thomson Wealth Management.

The SEC now proposes to require companies to electronically disclose insiders' transactions in company stock within a few days after they occur. Yay! "We've been looking at how to do this on a more timely basis, and electronically, since well before Enron," says Alan Beller, director of the SEC's division of corporation finance. Now it looks like a good bet to happen.

We'll see how much corporate America cares about transparency when the debate moves on to thorny issues like subtracting the value of stock options from reported profits. For now, let's relish our imminent small victory. Even low-hanging fruit is better than no fruit at all.