Twitter Insiders Are Selling Shares

NEW YORK (TheStreet) -- Newly minted IPO shares in social media giant Twitter (TWTR) rapidly declined in value in front of the lockup expiration. A lockup period is designed to protect investors from nefarious stock marketing efforts by underwriters and management. Lockups often have several tranches and 180 days is a key expiration that most investors closely monitor. Significant inventory can come on the market from management, staff and pre-IPO investors at 180 days.

If pre-IPO investors pull the ripcord and jump, shares can fall precipitously, causing significant shareholder pain. May 6 was Twitter's lockup expiration date.

On April 30, CNBC's Carl Quintanilla interviewed Twitter's CEO Dick Costolo and brought up the lockup issue. Costolo responded that he took the time to find out the intentions of most of the pre-IPO investors and as a result of insiders standing still, Twitter, unlike most other companies, would not need a secondary.

Costolo painted a picture (granted with broad strokes) of management's solidarity in its conviction that the shares should appreciate higher.

I understand part of Costolo's job is to be head cheerleader, and I'm not suggesting he lied, because I didn't hear him say anything that's not accurate. However, I also didn't hear him say that some insiders, including the chief operating officer, will sell at the first chance they get.

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Twitter's Chief Operating Officer Rowghani Ali sold 300,000 shares for more than $10 million on the first day allowed. That's almost 25% of his current holdings. General Counsel Gadde Vijaya sold more than $400,000, and Baratta Luca, a VP in Finance and Accounting, liquidated more than $290,000 worth of shares on May 6, according to SEC filings.

In total, it's almost $11 million worth of selling on the very first day by management insiders. No rules or laws were broken, but I think investors have a right to question why Costolo didn't disclose in the high-profile interview that at least one insider will sell some shares.

Costolo brought up his grandmother in the full interview. Would he give the same answer to her? I don't think so, because as technically correct as his response was, it's this type of slight-of-hand that frustrates the average investor.

I have three sons. If you have more than one child, you know that finding out "who did it" can be a challenge at times. If my wife asks one about the latest situation they created and the reply is "Brenton and I didn't do it", while knowing full well that the third brother is the culprit, it's not considered an honest answer in this house.

That answer is going to get someone's bike taken away for a few days. My wife and I rightfully expect to hear a full and complete response.

Since SEC filings will let the world know anyway, what's the point of not disclosing it in April?

Granted, the relatively small number of shares sold by Vijaya and Luca aren't material, but this does have the appearance of trying to keep the share price higher for Ali's massive sale. There's no doubt that it's possible and even likely that Costolo and Ali didn't discuss the matter beforehand. I'll let you be the handicapper of the odds.

What I do know is that I'm not as convinced a diluting secondary offering is as unlikely as I was before the sell.

At the time of publication, Weinstein had no positions in securities mentioned.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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