Holding Foreign Insiders Accountable

Abstract

While corporate insiders at US-listed, US-domiciled companies must disclose their stock sales electronically within two business days on Form 4, the SEC has exempted insiders at US-listed, foreign-domiciled companies from this requirement (e.g., Astra Zeneca, Alibaba). Instead, these “foreign insiders” report their sales on a paper form mail-filed with the SEC. Using a unique dataset compiled from digitized versions of thousands of paper forms, we examine the stock sales of foreign insiders and compare their trading to that of their US-counterparts. Consistent with a lack of public scrutiny facilitating opportunism, we show that foreign insiders’ stock sales are highly opportunistic, and that opportunistic trading is concentrated in companies that are domiciled in non-extradition countries beyond the reach of US legal authorities: specifically, Russia and China. The average stock sale by foreign insiders affiliated with companies domiciled in these countries is over four times larger than that of US insiders and occurs prior to stock price declines of at least –18%. In our sample, we estimate that insiders at these companies have traded to avoid losses of over $9 billion. Collectively, we interpret our results as suggesting that corporate insiders associated with Chinese and Russian companies listed on US exchanges trade in a highly opportunistic and abusive manner; and that the SEC has unwittingly enabled such trading by exempting these insiders from Form 4 reporting requirements––preventing the market from scrutinizing and disciplining their trading behavior.

Keywords: insider trading, Form 144, extradition, enforcement, public scrutiny, disclosure