Updated from 7:12 a.m. EDT

eBay ( EBAY) insiders have been selling the company's shares at a torrid pace this year, even as institutional investors have rushed in to buy.

In the first five months of this year, 10 eBay directors and executives sold 1.7 million shares, a little more than 0.5% of the outstanding shares, at the beginning of the year, according to data compiled by Vickers. In the process, those insiders realized more than $116 million in gains from those sales. During that period, eBay shares rose more than 40%.

Topping the list: eBay CEO Meg Whitman, who realized some $57.3 million through the sale of about 685,000 shares. The stock sales represented about 9% of the stock held by Whitman at the beginning of the year.

Overall stock sold by the eBay insiders in the first half of the year was up about 6% over the same period last year. But the estimated value they realized from those sales was up an estimated 54% over the first half of last year.

Insider stock sales are not necessarily a red flag, said Gary Lutin, an investment banker and corporate governance critic. But the sales are something that investors should investigate, he said.

"You certainly need to find out what's behind it," Lutin said. "The most likely thing is that people are nervous and think the share value is inflated."

eBay representatives did not return calls seeking comment about the stock sales. However, they have said in the past that executives and directors at the Internet auction giant sell shares on a regular basis to diversify their portfolios.


Insider Sales at eBay
Stock sales by eBay executives and directors from Jan. 1 through May 20.
Name Position Shares Sold Portion of Holdings Minimum Value Realized
Meg Whitman CEO 685,000 9% $57,330,150
Maynard Webb COO 200,000 38.1 8,380,800
Pierre Omidyar Chairman 150,000 0.2 14,186,750
Dawn Lepore Director 116,250 62.4 2,477,785
Jeff Jordan SVP 80,332 11.6 3,233,536
Scott Cook Director 200,000 21.3 16,195,000
Bill Cobb SVP 42,500 13.3 1,887,225
Matt Bannick SVP 141,715 30.3 5,056,848
Rajiv Dutta CFO 60,000 N/A 2,640,300
Mike Jacobson SVP 70,000 N/A 5,008,800
Total 1,745,797 $116,397,194.00
Notes: Sales as a portion of holdings are based on estimated holdings as of 12/31/02. Sales by everyone but Whitman and Omidyar were of options. Whitman's sales include those made by a trust fund. Value realized is estimated; where sales were of options, sellers often gave a range of strike and sales prices. Sources: Vickers, company SEC filings.

The insider sales at eBay have come as growing numbers of institutional investors have bought up the stock. In the first quarter, mutual, index and pension funds increased their net holdings in eBay by about 11.8 million shares, a stake now worth some $1.2 billion. Those purchases have helped send eBay's stock price up more than 50% for the year.

The sales also come amid growing scrutiny of eBay's compensation practices. On Thursday shareholders approved a greater than 50% increase in the amount of shares eBay can grant under its current stock options plan. Investors have approved similarly large increases in eBay's options pool in each of the past two years.

The proposal to increase its available options has proven controversial because eBay has been a prolific dispenser of options in recent years.

Many investors charge that the wide use of options encourages short-term thinking and illegal accounting gimmicks by management and overly dilutes their holdings.

In response, regulators are likely to force all companies to expense the cost of options; currently, companies can hide option costs in a footnote in their quarterly reports. Some companies such as eBay rival Amazon.com ( AMZN) already have begun to voluntarily expense the cost of stock options. Meanwhile, other companies, including Intel ( INTC) and Yahoo! ( YHOO), have begun to curtail their use of options.

eBay neither expenses stock options nor has moved to curtail their use.

Calling eBay's options grants "excessive" already, the California Public Employees Retirement System, the nation's leading public pension fund, has said it will vote against eBay's proposal. Other big eBay investors such as Fidelity and Vanguard may follow suit.

Selling High

As eBay's stock has risen, its options grants have turned into big money for its employees. Company employees cashed in options worth an estimated $129 million in the first quarter alone. That works out to an average of some $32,300 per employee at the company.

For all of last year, eBay employees cashed options worth about $247 million, or about $61,600 per employee.

But eBay executives and directors have sold shares worth considerably more than the company average this year.

Director Scott Cook, for instance, has exercised about 200,000 of his eBay stock options this year, in two separate sales, according to Vickers' data. Cook, whose options had a strike price of just $1.56, parlayed his sale into an estimated $16.2 million. Cook's sales represented about 21% of his eBay's holdings at the beginning of the year.

In contrast, during the same period last year, Cook sold about 120,000 options, about 11% of his holdings then, realizing some $6.3 million.

Another big seller of options was Maynard Webb, eBay's chief operating officer. Webb exercised some 200,000 options, about 38.1% of his total stake in eBay at the beginning of the year, in three separate transactions, according to Vickers. Despite having a strike price much higher than Cook's, Webb still netted an estimated $8.4 million from his sales.

In terms of shares sold, Webb's sales were even with the same period last year. But the value he realized was up considerably from the estimated $2.5 million he made during the first half of last year.

Among the insiders tracked by Vickers, director Dawn Lepore sold the biggest portion of her eBay stake in the first half of this year. Lepore, whose bid for re-election to eBay's board is being opposed by Calpers, has sold off an estimated 62% of her eBay holdings this year. In the process, she has gained about $2.5 million.

Lepore didn't sell any of her eBay holdings last year, according to Vickers' data.

But insiders aren't just selling stock options. Whitman's sales, for instance, appear to be from her holdings of actual stock, not options. Although Whitman's stock sales are down by 22% from the first half of last year, the value she realized from her sales is up about 28%.

That Whitman has continued to sell large quantities of eBay stock is not necessarily a surprise. She sold more than $100 million worth of eBay shares between February 2002 and February this year.

Meanwhile, Pierre Omidyar, eBay's chairman, sold 150,000 of the shares he created by founding eBay. Omidyar's sales, which amounted to just 0.2% of his total eBay holdings, earned him about $14.2 million.

That activity was up considerably from the first half of last year, when Omidyar sold 60,000 shares, realizing some $3.5 million.

Among the other big insider sellers were two trust funds that sold 2.4 million shares in the first half of the year. Wilmington Trust is the trustee for the funds, but a company representative did not return calls seeking comment about whose stock was held within them. The trust funds' sales were worth an estimated $195 million, according to Vickers.

One portfolio manager, whose fund recently sold off its eBay stake, said the insider sales at the company were never a big concern. The selling seemed pretty predictable as Whitman and others sold at specific times throughout the year, said the portfolio manager, who asked not to be named.

"We felt reasonably good about that not being some sort of bad signal," said the portfolio manager.

The manager's fund exited eBay in recent months out of valuation concerns, the portfolio manager said. eBay is now trading at about 70 times its projected 2003 earnings, not including the cost of stock options.

"It's a great company and a great business model," the portfolio manager said. "The only reason we sold it was that it got so high on our valuation work."

But eBay insiders are likely looking at the same thing in making up their minds to sell the stock, Lutin said. It doesn't take insider knowledge to realize that eBay's stock is overvalued, Lutin said. All it takes is "common sense."

"There's no common-sense foundation for eBay's stock price, other than that some other sucker will pay more for it," Lutin said. "Realistically, if everything went perfectly for eBay over the next 10 years, it still wouldn't be worth what it's trading for today. And the probability that everything will go right for eBay over that time period is less than 1%."

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