Insiders Don’t Always Buy or Sell Very Smart

According to conventional wisdom, when company insiders either buy or sell shares of their own firms, investors should take notice: so-called “insider trading” is supposed to be one of the best indicators of where a particular stock is going.

After all, market mavens ask, “who is in a better position to forecast a company’s near-term performance than its chairman, its president or its chief financial officer?”

But, are the insiders always right?

Not always.

Documents filed with the Securities and Exchange Commission indicate that executives of some Orange County companies whose stocks have experienced big moves during the last couple of years have not always known when to buy and when to sell.

For instance, Michael Dunn, the recently resigned chairman and founder of troubled Westworld Community Healthcare Inc., on Sept. 22 took advantage of the drop in his company’s stock price to pick up 5,000 shares at $3.75 each.

Contrasted with Westworld’s 1986 high of more than $15 a share, the price Dunn paid for the 5,000 shares might have seemed like a bargain. Indeed, Stephen Arterburn, who succeeded Dunn as the Lake Forest company’s chief executive, also bought 100 shares at $3.75 each that day.

A couple of weeks later, when Westworld stock dropped another 90 cents, Dunn bellied up to the bar, purchasing 2,000 shares at $2.85 each. That purchase brought Dunn’s stake in the company to just over 1 million shares.

Since his resignation in December, Dunn has gotten rid of nearly half his stake. According to SEC filings, he sold 353,000 shares at prices ranging from a high of $1.09 a share to a low of just 61 cents a share. He also gave away another 160,000 shares.

“That just goes to show you that I’m stupid,” quipped Dunn, who is in the process of selling 200,000 of the 500,000 shares he still holds. A market maker, he said, has offered to pay 12.5 cents a share for the stock.

Although the proceeds of the previous sales helped finance a new business--the former Westworld chief aims to acquire and run hotels and motels in rural areas--Dunn said he is selling now because he doesn’t want to own 5% of Westworld anymore. “For what the stuff is worth, it just isn’t worth the trouble of filing the reports,” he said.

But, at least one Westworld insider bailed out while the bailing was good.

In July, 1985, Walter Kaczor, Westworld’s chief financial officer, acquired 22,222 shares at $1.50 each by exercising stock options. Eight months later, shortly before the bad news began to break, he sold 20,000 shares at $14.12 each, grossing a profit of more than $250,000.

Another example of stock transactions that could have been better timed can be found in the executive suite at ICN Pharmaceuticals Inc. The Costa Mesa drug maker’s stock has been one of Wall Street’s most-volatile issues of the last year.

New York Stock Exchange-listed ICN blasted up from a low of only $10.25 a share in early 1986 to $34 a share by last August, on speculation that its drug Virazole was a cure for AIDS and influenza. But, skepticism has taken its toll: ICN closed Friday at $13.875 a share.

More dramatic has been the rise and fall of shares of ICN’s publicly traded Viratek Inc. subsidiary. The NASDAQ-listed stock went from a low of $10.375 a share to $98.50 last year. During 1987, however, Viratek has fallen to a closing price Friday of $19.50 a share.

In early February of 1986, before ICN had its run-up, Milan Panic, the company’s chairman and chief executive, sold 18,500 shares in three transactions at prices ranging from $13.25 to $13.63 a share, according to SEC documents.

In August, just before a bullish “buy” recommendation by a Paine Webber analyst drove the stock to the $34 a share mark, Panic acquired 40,700 shares of ICN common stock through the conversion of preferred stock, selling the shares the same day at $18.50 each.

Similarly, Panic sold himself out of Viratek in early 1986, again on the eve of the stock’s dramatic run-up. In four separate transactions that March, the ICN chairman sold 100,000 shares at between $27.55 and $29.30 a share. Viratek eventually hit $98.50 a share.

“He has proven to my satisfaction that he doesn’t know what he’s doing when it comes to buying and selling stock,” one securities analyst remarked privately.

No one can accuse Panic of profiting illegally from his transactions. SEC records show that he never sold his shares at their highs, and no sale ever took place at a time of peak interest on Wall Street. Still, he made out like a bandit last year.

In one instance, Panic grossed more than $7.5 million from the December sale of 270,000 shares of SPI Pharmaceuticals Inc.--another ICN subsidiary--at $29 a share. Panic made his hefty profit because he acquired the stock a year earlier for $1 a share by exercising options.

Panic, who sold the stock for a variety of reasons, including tax planning and to provide endowments for various charities, said last week that his profits were not excessive because he paid upwards of 50% in taxes on earnings from those sales.

Robert Elliott, chairman of Irvine-based VLI Corp., certainly knew when to sell.

In a series of transactions during February, Elliott took advantage of a window of opportunity that opened briefly--VLI jumped from a low of $2.75 a share to a high $8.125 a share--to sell some stock at considerably more than it is trading for now.

On Feb. 25 and 26, Elliott sold 135,000 shares at prices ranging from $5.50 to $7 a share. In all, Elliott’s sales totaled more than $830,000.

Since then, VLI’s share price has drifted as low as $4 a share, before rebounding to a closing price Friday of $5.50 a share. The stock got a boost from reports that researchers have found VLI’s contraceptive sponge to be effective against sexually transmitted diseases.

“My reason was very simple,” Elliott said last week. The proceeds were used to pay for a vacation home near Palm Springs, said Elliott, who estimates that his stake in VLI now totals only about 20,000 of the company’s 11.7 million shares outstanding.

Insider selling is not as significant as buying because insiders sell for a lot of reasons, said Paul Simmonds, a researcher with the Insiders, a Florida-based stock letter.

“There has to be an underlying reason people buy stock. And, that reason is that they expect it to go up,” Simmonds said. “But they’re selling for different reasons: college educations for their kids, vacations, girlfriends, whatever.”