Wednesday, October 3, 2007

EADS Insider Trading and Rule 10b-5

I find this shocking:

Shareholders and executives at Airbus parent EADS engaged in "massive" insider trading, a press report said Wednesday, citing a document that also alleges the government had been aware of difficulties at EADS prior to the lucrative sale of shares … It cited the AMF as describing the selling, which took place between November 2005 and March 2006, as "simultaneous and massive" in scale. It said problems in the key Airbus A380 superjumbo programme that led to a June 2006 profit warning had been raised as early as June 2005 in an EADS board meeting.

I don’t know anything about security laws in France but I am aware of what the U.S. calls Rule 10b-5:

This provision defines when a purchase or sale constitutes trading "on the basis of" material nonpublic information in insider trading cases

Financial economists define an efficient market as a market in which security prices reflect all available information and adjust instantly to any new information. But what happens when the senior management of a company fails to disclose material information in a timely fashion? Fraud on the market can occur in a couple of ways. Perhaps the easiest to grasp is the case when an insider provides information that is false. For example, the CEO of a pharmaceutical company might try to claim their in-process R&D is about to garner regulatory approval for a hit new drug even though he knows the recent lab tests were discouraging. His fraudulent information sends the stock price soaring, which allows the CEO to cash in by selling his stock at a price above the true value of the firm based on full and correct information. This EADS situation is a good example where had negative information been provided in a timely way, the stock price would have declined as soon as the negative information was realized both by insiders and the public. However, the insiders here decided not to let this negative information become public, which means the stock price remained about what it would have been under full information.

1 comment:

Anonymous said...


I believe that the EMH problem with insider information has, over the last 10-15 years, been evaded through use of a 'semi-strong' efficient market hypothesis which assumes that only all public information is available.

'Available' and paid attention to are, though, two different things, especially as MSM etc. became caught up in promoting a lopsided pro forma version of, e.g., the so-called 'New Economy'.