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Greenberg Chat: Going Inside With Herb

Herb talks insider trading in a chat on AOL.

Herb Greenberg chatted on AOL MarketTalk on Tuesday, Sept. 19. AOL's MarketTalk is produced by Sage Online (Keyword: MarketTalk).

SageMoola:

Good afternoon and welcome to MarketTalk, Mr. Greenberg!

H Greenberg2:

I'm very happy to be here. Let's get on with it on this gorgeous day in San Diego!

Question:

Doesn't insider buying of stock have more relevance than insider selling?

H Greenberg2:

That is what people used to say a long time ago, a number of years ago. The thought was that if an insider is putting his money where his mouth is, so should you. But, as with anything, that's subject to interpretation. That's subject to manipulation. And that's subject to games.

H Greenberg2:

And unless you understand the nuances and the art of interpreting insider trading, you can find yourself buying somebody else's problems.

H Greenberg2:

That's not to say that insider buying can't be a fabulous indicator, but as with selling it's more than just the fact that the trade has occurred.

Question:

What does it typically mean when a CEO begins selling stock of his company?

H Greenberg2:

Let me first say something, to make it clear here. We're doing this chat because of a story I wrote in the current issue of

Fortune Magazine

. I'm not an expert in insider trading, but I talked to lots of experts on insider trading.

H Greenberg2:

The whole point of this story was that you can't simply say that a CEO selling is a sign that there is trouble. This is not something my short-selling friends like to see or hear, but people really do decide they're going to buy houses.

H Greenberg2:

People really do have daughters that are getting married. And people really do go out and buy expensive cars. And people really do have taxes to pay for which they sell their shares.

H Greenberg2:

That said, one of the red flags that is going to catch the attention of the insider trading crowd is when a CEO or a CFO are selling shares after the stock has fallen.

H Greenberg2:

But more importantly than that, they look for patterns based on past purchases or sales, and they look for groups of trades by more than one person. That's one way you can eliminate the issue of a new house, a daughter getting married, a new car, or taxes.

Question:

Should people start selling

Microsoft

(MSFT) - Get Report

since Gates and Allen are?

H Greenberg2:

Good question. That was one of the very issues raised by one of the insider trading folks I talked to in the

Fortune

story.

H Greenberg2:

And the answer is, no. Because they've been selling all along. The red flag would be if suddenly the amount of sales picks up. Lots of executives who had their wealth tied up in the stock of a company get on regular plans to sell their stock.

H Greenberg2:

They really want to diversify, just as you wouldn't put all of your money into one stock. Or perhaps you shouldn't. They don't want to have all their money tied up in their own company's stock.

H Greenberg2:

That's not called a lack of faith in the company, that's just called prudence. And for many of these companies, or I should say for many of these executives, estate planning is an important part of the puzzle.

Question:

What exactly is a Form 144 and a schedule 13D, and their relevance to insider trades?

H Greenberg2:

A Form 144 must be filed by any insider. I can't actually tell you off the top of my head what constitutes an insider. It's an intention to sell stock, it doesn't mean they've sold stock. And that generally means that they have or very soon will sell the stock.

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H Greenberg2:

That's usually how people see that someone is selling stock.

H Greenberg2:

But let me tell you something, especially as it applies to IPOs. 144's are generally irrelevant. It's very common for early investors in the company, people who perhaps have a very low basis point of a few pennies or a dollar to immediately sell when the lockup period is up.

H Greenberg2:

More than that, venture capital firms often distribute their shares in the company to investors in their funds, and those people, without thinking about what company they own, lickity split sell it.

H Greenberg2:

So you might see a lot of 144s with people seeing 1,000 shares or 2,000 shares, that's generally considered irrelevant.

H Greenberg2:

Now a 13D is filed by a person or entity after they purchase 5 percent of a company's stock

H Greenberg2:

That could be a sign that there's someone obviously very interested in a company. Some people track 13D's to see where they may be some signs of serious interest in terms of serious investors in a company that previously may have gone overlooked by Wall Street.

H Greenberg2:

In the old, old days of about 10 to 15 years ago, people watched 13D's like a hawk to see potential corporate raiders and what their next targets would be.

Question:

What are some companies, and sectors, that have shown the heaviest selling by company chief executive officers (CEOs)?

H Greenberg2:

Again, I don't track insider trading. But one person who does is

Bob Gabele

of

Thomson Financial

, and he has a Web site at www.cda.com/investnet and he has a watch list there.

Question:

What is an initial public offering (IPO) lockup agreement?

H Greenberg2:

An IPO lock up agreement, requires anybody who holds restricted shares in the company, or anyone who has shares in the company at the time it goes public - these include venture capitalists, insiders, early employees, early investors.

H Greenberg2:

It prohibits them from selling for a certain period of time, that period of time is 180 days - usually.

H Greenberg2:

But the lock up period can be lessened by the investment bankers, at the whims of the investment bankers.

Question:

Why do underwriters want the insiders to sign a lockup agreement?

H Greenberg2:

So they just don't take the money and run!

Question:

Does the stock price always drop when the lockup expires?

H Greenberg2:

No.

SageMoola:

Thank you very much for joining us today, Mr. Greenberg!

H Greenberg2:

It's been a delight being here. I hope to do this again. Don't forget to join me every day at

RealMoney.com

and

TheStreet.com

.