Trick Play: Beware of Insiders Trying to 'Paint the Tape'
Don’t let clever executives fool you by making token purchases of their companies’ stock. If you examine the circumstances surrounding their dinky trades, you might just suspect some of those insiders of attempting to “paint the tape.”
Over the past few months, we sure have noticed an awful lot of rather suspicious trades. In fact, we can easily present you with half-a-dozen recent examples right now.
Take the pathetically small purchase of ANI Pharmaceuticals (Nasdaq: ANIP) stock by CEO Arthur Przybyl a few weeks ago, just for starters. When Przybyl decided to spring for a measly 1,000 shares of AVIS on Sept. 9, he already owned so much stock in the company that – on the surface – his transaction looked almost pointless. With almost 190,000 shares of stock in AVIS ahead of that trade, he barely raised his overall stake in the company at all.
Nevertheless, that modest transaction actually seemed to make a notable difference. Dangerously close to sinking below its 200-day moving average
when Przybyle intervened, ANIS suddenly reversed course and bounced from $26.50 to more than $28 a share after its CEO came to the rescue.
Now, let’s move on to a similar – but even more striking – example. Earlier this month, right after BioDelivery Sciences (Nasdaq: BDSI) Executive Vice President Andrew Finn dumped $1.35 million worth of stock as it headed toward new highs, his boss hastily responded with such a tiny purchase that it looked downright offensive in comparison. After all, since CEO Mark Sirgo already owned 920,000 shares of BDSI at the time, his decision to buy another 2,000 shares -- boosting his stake in the company by a pathetic 0.02% -- seemed to make little sense, let alone a legitimate difference.
Talk about some excellent timing, though. After reaching a new high the previous day, BDSI had suddenly tumbled all the way below its 10-day moving average
when Sirgo decided to make his move. BDSI suddenly recovered once its CEO bought those paltry 2,000 shares, however, and managed to rack up some rather impressive gains before losing its momentum and showing signs of weakness yet again.
Gelactin Therapeutics (Nasdaq: GALT) weathered such a brutal hit this summer that, with its stock in freefall mode, the company needed a little more help just to stabilize its own battered shares. Last month, when GALT sank to a new 52-week low of $4.22 a share – less than one-quarter of the price that it fetched during the early part of the year – four different insiders (the CEO, the CFO and two members of the board) reacted to the situation by joining forces to purchase a “whopping” 8,000 shares of the hammered stock combined. That sudden flurry of buying triggered a series of helpful alerts, catching the attention of a friendly analyst who further publicized the news in spite of the meager investments that those insiders had actually made.
“Galectan insiders have been buying moderate amounts of the stock in the past week,” one analyst rushed to declare, “which lends confidence in the view that the stock is cheap” right now.
Hopelessly falling before those insiders decided to take action, GALT has since regained enough strength to stage a modest comeback. While far from an actual winner at this point, with the former highflier barely topping $5 a share, GALT at least found a bottom after those insider trades and finally started traveling north for a change.
The next two companies that caught our attention might look familiar to those who have followed TheStreetSweeper in the past. We flagged both KEYW Holdings (Nasdaq: KEYW) and Revolutionary Technologies (Nasdaq: RVLT) as risky investments long before company insiders recently started trying to support their spiraling shares.
Back in June, KEYW Chairman Len Moodispaw purchased 15,000 shares of stock in the company at $10 a share on the very day that the stock plummeted to its lowest price of the entire year. He already owned close to 350,000 shares of KEYW at the time, so that transaction (while larger than those we have examined up to now) barely even lifted his overall stake in the company.
With KEYW facing a potential liquidity crisis at the time, however, that outward display of confidence certainly couldn’t hurt. The very next month, KEYW managed to raise a fresh mountain of cash by selling a bunch of convertible debt in spite of the enormous sums that the bleeding firm already owed. Freed from the potential threat of imminent bankruptcy (on a temporary basis, at least), KEYW now trades comfortably above the low that it set back when Moodispaw executed that handy trade.
A director at RVLT who already owned 250,000 shares of the stock – and controlled nearly 47 MILLION shares indirectly on top of that total – James DePalma decided to spring for an extra 25,000 shares, as the stock kept plunging to new lows, about a month ago. So far, however, that trade has totally backfired. Even with RVLT Chairman and CEO Robert LaPenta following his lead by purchasing 100,000 shares of that battered stock after it tumbled from $2.10 to $1.65 a share -- and making no real difference in the massive stake that he controlled in the company, either -- RVLT continues to languish very near its 52-week low.
Granted, they're not the only company insiders to strike out after pulling that kind of stunt. A board member with a huge stake in Virtual Piggy (OTC: VPIG), George McDaniel III has suffered an even uglier fate since making a similar move of his own. Even though he already owned a staggering 3 million shares of VPIG (and another 550,000 shares indirectly), McDaniel decided to purchase another 50,000 shares of the stock – in three back-to-back transactions – earlier this month, as the stock tried to stage a major breakout from its recent trading range.
Perhaps McDaniel should have just saved his money, too. Down almost 20% since he bought most of those shares, VPIG obviously shot in the opposite direction instead.
“I feel like it’s getting more common to see some company insider making a minute open-market purchase in order to support a stock that’s rolling over, or to keep a rally going,” noted a savvy hedge fund manager who has developed a keen eye for manipulative trading over the course of his long and successful career. “The buys seem to work – at least temporarily -- even though the purchases are not big enough to signal anything meaningful …
“Buying 20,000 shares, when you already own 3.3 million, really just means you are trying to pump the stock, I would argue.”
Our advice? Don’t place too much faith in a company just because some wealthy insider happens to make a token purchase of its shares. Be sure to check for any sign of ulterior motives before you even think about following that insider's lead.
After all, you sure would hate to realize -- a bit too late -- that you just repeated a rather foolish mistake.
* Disclosure: As a matter of policy, TheStreetSweeper prohibits members of its editorial team -- including the author of this post -- from taking financial positions in any of the companies that they cover. While the owners of TheStreetSweeper have shorted KEYW and RVLT in the past, they have since covered both of those positions and currently have no financial interest in any of the companies mentioned in this report. To contact Melissa Davis, the editor of TheStreetSweeper and the author of this story, please send an email to [email protected].
