Intel CEO’s Stock Sales May Warrant SEC Examination
bloomberg.com
bloomberg.com
I am always skeptical that stories like this are actually about insider trading, just because it would be too dumb and obvious for Krzanich to dump his stock just before announcing bad news. Also: The news doesn't seem to have been that bad for Intel's stock, and in fact Krzanich's sales last year were mostly at prices below yesterday's close. As a diabolical plan it seems pretty unimpressive.
https://www.bloomberg.com/view/articles/2018-01-05/citi-forg...
That's a red herring. Krzanich had no idea how badly the news would impact the stock. He may have well overestimated it in his mind and chose to sell. Just because he didn't make huge gains from the possible insider trading, doesn't preclude the possibility of insider trading occurring.
So the whole argument here is:
1) Krzanich couldn't be possibly stupid enough to do this.
2) He didn't make a ton of money so it's a stupid plan, he could't possibly be stupid enough to do this.
Weak.
Seeing as he made to the the role of CEO of Intel Corp., I find that to be a very convincing argument.
I have to concede that there's precedent even for CEOs of huge corporations to be that stupid and/or criminal, most notably https://en.wikipedia.org/wiki/Dennis_Kozlowski.
Highly successful executives engage in insider trading quite frequently (see link). When they do, they take a calculated risk. You can be quite sure that none of them are stupid in any sense of the word. They take a measured risk and some succeed and some fail, depending on luck, skill, ambitions, and how big/rich they already are. From what little I know, doing it in a an open manner is actually the best best way to go about insider trading. If you attempt to skirt around it by doing anything shady like having friends/relatives execute the trades for you, the evidence is undeniable once discovered. If you go about it 'openly' and instead rely on blurry interpretation or your ability to plead ignorance or put the timeline into question, it's a lot harder to nail you.
There are many cases of brazen broad-daylight insider trading, such as Donald Trump right now. Only the ones that end in successful legal action go on to be considered stupid. Even when they do get caught, a lot of the time the penalties are relatively lax, like suspended or weekend sentences for first time offenders.
So no, just because he is successful as an executive at a major corporation doesn't at all make it 'stupid' for him to engage in insider trading. That line of reasoning is a diversion from the facts of the case.
https://en.wikipedia.org/wiki/List_of_major_SEC_enforcement_...
Most of the rest of his story seems more like sour grapes than any criminal conduct to the detriment of Tyco investors.
Peter Chang is probably a better model for insider trading criminal CEO (as opposed to merely CEO criminal).
You honestly believe that Intel as a company kept all information about these serious vulnerabilities from the CEO for 5+ months? And nobody got fired for this?
This isn't meaningfully likely to affect any of the contracts that Intel has with it's major customers, and it's not like competition is going to spring forth in a meaningful way because of this bug.
It's not like he sold his stock while the company was secretly on fire and about to collapse.
The class action lawsuits are only just being filed within the past few days.
If you already know the outcome of these lawsuits, you should probably contact the lawyers and judges to let them know. /s
[1] https://www.theverge.com/2018/1/4/16851132/meltdown-spectre-...
Also, I shouldn't have to point this out, but not everyone runs the same systems in the same fashion.
Lastly not only has everyone not patched their systems yet, but patches for many people don't even exist at this point:
https://techcrunch.com/2018/01/08/intel-ces/
I'm not trying to say it's going to be the worst case scenario, but I am saying it's extremely foolish to pretend that you can predict anything until people actually start patching their systems.
Time will tell, and it's best in every scenario to refrain from making gigantic blanket assumptions based on almost no data points.
That means the people who have the best information about mitigating this issue have a fix that apparently has minimal performance impacts on their cloud workloads, and I suspect their cloud customer SLO's would be taking a shitkicking if that weren't actually true.
Could Google not just have found a mitigation with non-negligible performance impact, and made a behind the scenes change to the actual hardware resources assigned at each vCPU level to mask the average impact, eating the cost in the short term (while evening it out in the long term by delaying price decreases they would otherwise implement)?
They've had a lot more time with the problem than anyone else has, and billions of dollars to gain by solving it better than anyone else.
If they had a 15-30% loss of performance in their 3+GW of infrastructure, it would almost certainly cause a significant dip in their quarterly results, and they would want to warn the markets about that well in advance to soften the blow.
https://techcrunch.com/2018/01/11/google-claims-its-spectre-...
Insider trading is trading with the knowledge of privileged information not available to public investors. If he did it, it's a crime. Doesn't matter if he made $50 million or $5.
Their CEO has a well-documented six-year history of acquiring and disposing INTC stock. As the CEO, he implicitly always has access to privileged information. How exactly does the SEC determine the legality of a specific trade?
I'm not trying to be flip here, I don't really have an opinion on the matter. It just seems that when the CEO is allowed to apparently buy/sell as they please, and not on a predetermined announced-in-advance plan, you could argue that every single trade was illegal insider trading.
http://www.businessinsider.com/the-story-of-joseph-nacchio-a...
Which I find amusing. This is just one of the many places where legality of an action greatly depends on consensus and established practices, which can change overnight. For example court ruling based on implicitness of access to privileged information would effectively eliminate high ranking officers from trading altogether.
That's a VERY different question to a binary "is it insider trading?"
It’s possible to put an advance order in place to sell shares on a plan, which clears the issue because that decision is made in advance.
That's what he did, no?
Edit: The date on the last part is wrong, which doesn't change the fact that he changed his orders in the time between internal and public disclosure of Meltdown. I misread the article, in 2017 he issued his orders in February not June (2015).
Wouldn't that reasonably make any sale, at any time, illegal?
Or, alternately, when would a CEO not possess (non-public) material information?
Two major points
(1) Intel was informed in June. His stock sale was planned in October and executed in November.
You'd have to believe that somehow the CEO was not informed about this vulnerability during this huge time period.
(2) This wasn't a normal executive stock sale. He dumped all of his shares other than the required minimum holdings. The vulnerabilities aside, this just looks bad in general.
I'll give you that this plan seems pretty unimpressive. I just have a very hard time buying the idea that Intel kept him in the dark all those months and that him dumping all of the stock he possibly could is some sort of coincidence.
Technically this was a normal executive sale. He is holding the required shares and is the second largest inside shareholder after Andy Bryant, the chairman. In general INTC executives own very little stock. I have been somewhat bearish on INTC for a variety of reasons and now I will add what appears to be the lack of insider ownership to that list.
To reach that scenario you'd have to have engineers lying to their bosses about what they're working on, or managers hiding information from executives.
It's possible, but I don't buy it.
Sounds good. Let's also assume data-driven decision-making.
> failing to (a) appreciate the damage a security vulnerability (or exploit) can cause
As far as I'm aware, neither of these is known to have resulted in damage yet, so as far as I'm know there is nothing to fail to appreciate.
> failing to (b) receive timely notice of said occurrences
This is a problem if and only if the above damages actually do occur more quickly than the people in charge have time to act. So it loops back to the above. _______________________________________
EDIT: It seems everyone is misunderstanding my point. I'm not looking at this from the standpoint of either of the parties. Yes, they can sue for damages, and perhaps they even should. That's perfectly fine! That has nothing to do with what I was trying to say.
Rather, I'm looking at the problem from an 'outer' standpoint -- the same perspective I would assume a lawmaker would have (or at least should have), which is the perspective of: "Is the system able to handle its problems?" If the legal system can already handle this "exception" and sort out the problems and hand out appropriate penalties for everyone involved, then the system is working as designed, i.e. we fail to have grounds for e.g. requiring early disclosure. On the other hand, if people who are not parties to the case are getting hacked and/or having their identities stolen, then that is a failure of the legal system that needs to be addressed, e.g. by requiring timely disclosure.
Basically, the fact is that we all like timely disclosure (myself included) and yet we are failing to explicitly show what problem exactly it would solve. So far, it is not clear that earlier disclosure would have prevented any problems that we are already seeing. If and when we get solid data to that effect, then we have grounds for blaming lawmakers and demanding change.
Damage as in malicious? No. Damage as in co's reporting higher instance usage on cloud services after patching? Yes. Don't discount companies being angry about higher hosting costs and taking it out on Intel via a financial damages suit.
Playing devil's advocate a bit here, but you could also think about it differently. This whole time, faster-but-more-insecure processors were providing everyone with cheaper prices than they would have had otherwise with more secure processors. I feel your notion of "damage" is far weaker than mine.
How many sysadmins have been working overtime to investigate this, deploy out of band patches, and test their impact on infrastructure that may now be underprovisioned? Meltdown and Spectre are already inflicting serious costs even before exploits are found in the wild.
In 2017, he set up pre-arranged sales of 28,000 shares
And then in November he sold almost 900,000 shares.
on Nov. 29, Krzanich exercised and sold 644,135 options and sold an additional 245,743 shares that he already owned
> Explanation of Responses:
> 1. Transactions reported on this Form 4 were made pursuant to trading instructions adopted by the reporting person on October 30, 2017 that are intended to comply with Rule 10b5-1(c).
https://www.sec.gov/Archives/edgar/data/50863/00011276021703...
I'm not talking about recalls of purchased product, just that Intel chose to continue to keep chips with major known issues on store shelves instead of choosing some other option.
Taking all their processors off the shelves would be suicide.
Microcode can be loaded by the BIOS.
Doesn't that open a huge attack surface? This code would run super-privileged isn't it?
So there is this layer of software that operates with this x86 interface on a hardware implementation of different instructions.
According to Wikipedia [1], CPUs have had microcode since the 1960s! However, this is mostly an artifact of CISC architectures. Since most programmers these mass-produce their instructions with a compiler rather than with artisinal, hand-crafted assembly code, CISC fell out of favor compared to RISC. Since the RISC instruction sets are simple (by design), there isn't much need for microcode. ARM chips typically don't have microcode (although they do break things into smaller instructions) [2]. But since Intel has to keep compatibility with 40 years of CISC instructions, they need microcode.
[1] https://en.wikipedia.org/wiki/Microcode
[2] https://superuser.com/questions/934752/do-arm-processors-lik...
I suggest Tanenbaum and Austin's "Structured Computer Organization" for a pretty good book about this (and other aspects of CPU design).
Intel can be trapped as a company to find half-way solutions, because proposing any of them can force them to do full-way solutions. Result, this vulnerability will last forever.
Here's an online form (I'm sure there are others) that'll do that for you: https://convertcase.net
I know that statement by that shouting at me, have never bothered to actually read it.
If I recall correctly, Weev tried to short AT&T in advance of the iPad hack, but only got a tiny intra-day dip. The stock that week ended higher every day.
It is risky to short based on security mistakes. I am willing to give this guy the benefit of the doubt. I wish the financial markets valued security more. There just isn’t a lot of evidence to support that hypothesis.
Look at the last year of equifax’s stock price. One major dip related to one major news story.
Their are a few anecdotes, but most of the time, there is no major financial impact.
Right. That's because this isn't a mistake, it's a criminal act with forethought.
"That sale decreased his overall holdings by about 50 percent, bringing his ownership level nearer to what he held at the end of 2013 and at the minimum number of shares he must hold under Intel’s ownership requirements"
That's pretty much all I need to read. The guy sold every share he could possibly sell without violating any contractual agreements and company policies that are/were in place.
Give him an orange jumpsuit and be done with it.
I understand this is just not legal, but otherwise why should they had not (i.e. why exactly is it illegal)? What the rationally logical plan they should have taken? Telling everyone about the vulnerability is irrational - it should be told to those who are supposed to write patches first, keeping the shares when you know they are going down is irrational too.
Edit: to say it differently, it's only irrational if you consider his personal profit exclusively and not the harm to the greater market and shareholders. As con artists and scammers demonstrate, fraud can be very profitable personally. I think the disadvantages are self-evident, however.
Which is why we have insider trading laws: to make it rational again.
"I know this insider information that means my shares will be worthless tomorrow when everyone finds out. It's not rational to keep them."
"If you do that you'll go to prison."
Still irrational?
I'd say a large portion of rules of society function this way for this reason.
I stick by my prediction from the thread when this came to light... he’s going to prison or at least going to be ruined, and someone at the SEC is going to make their career.
Intel can afford very good and very many lawyers for him. Intel may pay a fine to the SEC, after many years.
Martha Stewart did some time for what appears to be much less than what the Intel CEO has done. And as far as the general public is concerned, she is much higher profile and was likely quite a bit wealthier than Brian Krzanich.
You can get away with a lot of things if you’re rich, but annoying federal prosecutors is rarely one of them.
Also, technically, their caches / tables still work as designed we just didn't understand that design very well.
Even if he expected the stock price to be cut in half, he'd save just half a year's worth of his regular compensation. And Intel stock barely budged.
That would be an enormously stupid attempt at insider trading. Not only doesn't it pay very well. A CEO of such a company is closely watched by stockholder, the company's own lawyers, the media, competitors, and the SEC. The SEC regularly nails mid-level executives of unknown companies giving tips to their friends' dentists.
Martha Stewart went to jail for avoiding $45,000 in losses [1]. People don't always act rationally. More pointedly, you don't have to act in bad faith to break securities law. The lack of any disclosure surrounding this material issue, which Intel knew about for months prior to the CEO's sale and prior to Intel's Q3 Form 10-Q, is jarring and could result in liability.
[1] https://en.wikipedia.org/wiki/ImClone_stock_trading_case
Your link says exactly the opposite of that:
> On February 27, 2004, Judge Cederbaum threw out the charge of securities fraud which could have led to up to ten years in prison and a $1 million fine. The judge found that "no reasonable juror can find beyond a reasonable doubt that the defendant lied for the purpose of influencing the market for the securities of her own company."
> On March 5, 2004, Stewart was found guilty by a jury of eight women and four men on all four remaining counts against her: conspiracy, obstruction of justice, and two counts of making false statements to a federal investigator.
Martha Stewart went to jail for having the temerity to be a target of a federal investigation, not for doing anything.
A stupid crime is still a crime. It could all be coincidence that his biggest selloff came just after he learned of the vulnerability but the circumstances merit investigation. And he might have thought the stock price would go down more (I sure did).
[1] https://en.wikipedia.org/wiki/Tom_Coughlin_(Walmart_executiv...
"Intel says the sale was preplanned - but that plan was put in place months after it learned of the chip vulnerability"
http://www.nasdaq.com/quotes/insiders/krzanich-brian-m-87241...
I dunno how to read this, but it seems he sold off a chunk of his shares regularly, and that he traded almost a million down to 250K, but how did he have so many? Can someone who knows how to read that explain it to me?
Look at the link you posted. He goes from trading a few thousand shares here and there to trading almost a million in one go.
There would be so many counterweighting forces at play at any time that it would be EASY to rationalize why this one shouldn't affect the share sale's view in the court of public opinion. Given that none of the other sales did either.
Case in point, we are analyzing this timely disclosure a full quarter later. I count at least five 8-k's since then, let alone form 4's
[1] https://www.washingtonpost.com/news/wonk/wp/2013/07/26/insid...
This was a scheduled sale. It's not clear to me what the SEC is seeking to investigate. Breaking a scheduled sale to take a loss is also illegal insider trading.
Because the WaPo article linked to is about insider trading.
http://www.forexlive.com/news/!/intel-ceo-reportedly-sold-39...
2. >Breaking a scheduled sale to take a loss is also illegal insider trading.
Source? I don't think this is correct - it is illegal to insider trade but not to refrain from trading. See e.g. https://www.statnews.com/2016/08/08/insider-trading-biotech/
Regarding the second point, yes it's a grey area. Refraining to trade when the trade is part of a scheduled plan in order to avoid a loss is insider trading if you have privileged information. In principle refraining to trade in general is probably illegal, but I admit that's a murkier area.
Do you have a source for your first claim that cancelling to avoid a loss is insider trading?
Yes: https://www.sec.gov/rules/final/33-7881.htm.
The purpose of a prearranged stock plan is that it's autonomous and outside the control of insiders with privileged, confidential information. Making any decision with regards to the plan once it has been adopted, either to trade or not to trade, voids that autonomy.
I don't see where they ban refraining from trading.
Actually it might be legal. Which doesn't make sense, because trading or not trading based on insider info has the same effective impact on the market, but it may not be 'insider trading' if you decide not to trade.
'After Rule 10b5-1 was enacted, the SEC staff publicly took the position that canceling a planned trade made under the safe harbor does not constitute insider trading, even if the person was aware of the inside information when canceling the trade.'
It doesn't seem like Krzanich falls under this though because he went through with the sale.
https://en.wikipedia.org/wiki/SEC_Rule_10b5-1#A_possible_loo...
Google disclosed the vulnerability to Intel in June. On October 26th, Intel filed its quarterly numbers and made no mention of Project Zero or the word "vulnerability." It failed, in Item 1A, to disclose any new risk factors [1]. On October 30th, Krzanich gave trading instructions [2]. On November 29th, the trades occurred; on December 1st, their confirmations were disclosed [2].
I'm not an expert on the sale of stock in public companies by insiders. But implementing sale instructions after finding a material risk factor and failing to disclose it in a subsequent filing looks shady.
(I continue to default to the assumption of sloppiness over bad intent, though even that is punishable, albeit with fines versus jail time.)
[1] https://www.sec.gov/Archives/edgar/data/50863/00000508631700...
[2] https://www.sec.gov/Archives/edgar/data/50863/00011276021703... Explanation 1
If you care that little about equality why not go all the way and just say laws don't apply to the rich, not just in fact but by law.
The only point of having laws is prevent people with power from amassing ever more power and hurting others. Without that there would be no reason for anyone to not take whatever they can the moment they get an opportunity
Insider trading laws don't stop this from happening. People not considered "insiders" can impact the price of stock. For example, in 2007 Lululemon stocks took a temporary dive when their seaweed claim was challenged:
"Not so, says the New York Times, which commissioned its own test after a Lululemon investor, who is shorting its stock, supplied the paper with lab results."
That, of course, doesn't include market professionals:
"Market professionals gain disproportionately from bans on insider trading because they are in a position to act on information that insiders cannot use, and can do so more quickly than any other group, including shareholders" [1]
[1] https://books.google.com/books?id=l9PuCAAAQBAJ&pg=PA161&lpg=...
Of course. The Intel CEO sells stock to investors without telling them that there is a vulnerability that makes the stock worth much less than they think, thus hurting these investors. Sounds intuitive, right?
The investors he sells to had already sent an order to buy to their broker. They were going to buy at the same or worse price anyway, so they aren't harmed by this. Someone else is harmed, but that's the market professionals who, months later, don't get an opportunity to profit off of the news before everyone else. I'm sure economics not being intuitive has something to do with why democracies end up with bad policies all the time.
B: you've moved the goalposts. I said it hurt others when they sell based on information they know as an employee, of the company whose stock they are selling. You are arguing that its fine because those people would probably be hurt anyway. If it was really fine then why didn't the CEO tell everyone about the vulnerability before making the sale? Those investors would have just bought it anyway, right?
[0]: http://www.businessinsider.de/intel-ceo-krzanich-sold-shares...
Whatever else, the optics are terrible. But he must have known they would be, so it's a little hard to see what his thinking was here.
And it's early days on the stock price - let's see where it is in 3-6 months.
If you don't believe me, look for yourself:
https://www.fool.com/investing/2017/12/19/intels-ceo-just-so...
https://www.sec.gov/Archives/edgar/data/50863/00011276021703...
And 'coincidentally', this massive increase in selling just seemed to somehow perfectly fit right in the middle of Intel being privately informed of Meltdown in June but before any public disclosure kept locked away all the way until now in January.
This is blatantly illegal insider trading. Don't let anyone tell you otherwise.
Any engineer sufficiently motivated to do so could have examined a CPU at any time in the last ten years, and, through skill, access to publicly available information (the instruction set, cpu datasheets) and immense amounts of hard work, uncovered the Meltdown flaw, without any access to Intel's internal trade secrets.
In short, his is precisely why CEOs insist on these pre-arranged plans to make their stock grants and stock options valuable without causing them to incur the damoclean sword of being ’allowed’ to monetise only when they have absolute certainty that none of the no doubt innumerable problems they are aware of and paid to manage will leave negative impacts on stock valuations (meaning: never, making their stock worthless).
There’s nothing to see here.
As such, he sold stock to people that didnt know about a piece of information he was withholding. So im not so convinced there shouldnt be any insider trader laws.
The people he is profiting at the expense of are not the investors who buy the stocks he sells or the investors who would have otherwise sold to the former investors, but the investors who would, many months later, once the vulnerability was public, sell or short the Intel stock. There isn't really any reason these people should profit from the information rather than anyone else, and the CEO isn't interacting with them in any way.
That's not really true, it is so in an individually imperceptible way but its there. If he then after stock plummeted 10% went back and bought back shares and kept the 10% as a profit, where did that money come from? It has to come from someone elses pocket, it was created out of thin air. Its just impossible to return that money to who it belongs to, because it belongs to everyone that traded the stock in a certain interim.
This is all related to information disclosure, which sometimes is necessary and sometimes isn't. A guy selling stock is a poor proxy to a disclosure of a security issue like this. I think intel is more responsible for untimely disclosure than the CEO for untimely selling.
If you chase it all the way down the chain, I hold funds that track the S&P500, which includes Intel. A tiny portion of that money he makes by insider trading comes out of my pocket.
If this is just about wealth redistribution, there are much better ways to do wealth redistribution. If this is about how Intel should have disclosed that there was a vulnerability earlier, then laws against insider trading didn't make Intel do that anyway. If this is about how people shouldn't be allowed to trade with asymmetric information, the prohibition against insider trading doesn't apply to the security researchers.
Indirectly, I deserve to lose some money because I am indirectly invested in a company that made faulty products.
However, I also do not deserve to lose money to the CEO of Intel because he was able to not only know about the faulty products before his sale, but to conceal that information from me while executing the trade (not an argument against responsible disclosure).
Wow, I've always considered american libertarianism a mental disease but this really takes the cake. So you have someone standing there saying "Hey, want to buy these stock? They're great!" knowing the value is about to dramically drop (and that the other party can't possibly know that!) and for you that still isn't doing anything wrong? Out of curiousity, are you also lobbying against punishing people for selling fake iPhones claiming they're real, etc.? Completely victimless crimes, right?
No, you have someone sending an order to sell stock to their broker. The other party had already sent a buy order and was already going to buy stock, so is not made worse off by this.