Regulations Don't Get More Absurd Than This One

We're all used to regulations that make no sense, but there's one that isn't just absurd, but downright offending... Or, at least, it should be to any and every U.S. investor. I'm talking about the enormous disconnect between insider trading rules that apply to executives at public U.S. companies and foreign companies that trade here. […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Regulations Don't Get More Absurd Than This One By Herb Greenberg --------------------------------------------------------------- [Revealed: Apple's future iPhone design]( You're looking at the details of a patent application that Apple quietly filed in 2021 for a flexible iPhone. The unique screen in the design blueprint could be the result of a new technology that is going to change our lives. Forbes calls it "the next Industrial Revolution." It will help make everything cheaper, faster, better, and safer... from smartphone screens to computer chips, to vaccines, to construction materials, and more. And one little-known company is leading this revolution. Getting in early could lead to huge profits. But you'll have to do it before the news of this company reaches the masses. [Click here before it's too late](. --------------------------------------------------------------- We're all used to regulations that make no sense, but there's one that isn't just absurd, but downright offending... Or, at least, it should be to any and every U.S. investor. I'm talking about the enormous disconnect between insider trading rules that apply to executives at public U.S. companies and foreign companies that trade here. Making the situation that much more outrageous, this regulatory disconnect has made it possible for insiders of non-U.S. companies – mostly China but also Russia, India, the Netherlands, and the Cayman Islands – to sell stock before bad news. And they do it considerably more than insiders at U.S. companies. As this [academic study]( from last week explained so clearly (emphasis added)... While executives at U.S. public companies must disclose trades in their company's stock within two business days, the Securities and Exchange Commission ("SEC") has exempted insiders at foreign firms listed on U.S. exchanges from those requirements. Instead, insiders at foreign-domiciled but U.S-listed firms report their trades on paper forms mail-filed with the SEC, evading market scrutiny that is well-understood to accompany American insiders' transactions. You read that correctly: Different rules designed to deter illegal insider trading apply for U.S. and foreign companies, and the foreign companies have been having a field day. It's all laid out in the study, written by former SEC Commissioner Robert []Jackson and Daniel Taylor and Bradford Lynch of the Wharton School of Business... The fact that Jackson is involved is noteworthy, since he knows the inner workings of the SEC, which on its own can propose a change in the inequitable nature of the rule. (And which former SEC Chairman Jay Clayton did, but it has since gone nowhere.) Taylor, meanwhile, is the person who realized just how egregious the situation is, took it to the SEC, and went public complaining about it. What they found in their study is that while the rules really do appear to deter illegal insider trading by U.S. companies, insiders at foreign firms have proven themselves to be "opportunistic" – selling well before news that causes stocks to crater. By doing so, the researchers figure that foreign insiders have avoided $11.9 billion in losses over the past five years... with $10 billion of that coming from China. As an example, the researchers used Chinese e-commerce giant Alibaba (BABA), whose insiders pocketed a hefty profit by selling before stock-rattling news. You may remember it... In October 2020, Alibaba affiliate Ant Group was getting ready to go public. But on October 24, Alibaba CEO Jack Ma publicly criticized Chinese regulators and Communist Party officials. Chinese leaders fired back, and on November 3 the Ant initial public offering ("IPO") was suddenly suspended, causing Alibaba shares to fall more than 8%. As the report explains... Unbeknownst to most investors, however, the day before that announcement Skyscraper Limited, an entity controlled by Alibaba insiders, sold more than $150 million in Alibaba shares, avoiding millions in losses. Disclosure of that transaction was provided not in the widely-watched form that U.S. insiders must provide but rather on a little-known paper filing stored in file cabinets in the SEC's reference room known as Form 144. --------------------------------------------------------------- Recommended Link: [Pentagon Consultant: Big asset shift is coming]( Man who briefed U.S. Pentagon officials five times in past year says digital tech stocks will get steamrolled by something you've never heard of before. [Click here to learn more](. --------------------------------------------------------------- It gets even better... Those Form 144s are held in the public reference room for only 90 days. After that, they apparently disappear into the ether. And with the pandemic, there was a twist to the story... In addition to snail mail, companies were given the option to e-mail in the Form 144s, where they wind up buried deep in the SEC's EDGAR database – on a [page]( that is a mishmash of Form 144 filings from foreign and U.S. companies. (For U.S. companies, the Form 144 is filed in conjunction with a Form 4 filing, which is the electronic filing required for top executives. The Form 144s cover more than the top executives.) Source: U.S. Securities and Exchange Commission What's more – and remarkably so – is that page isn't searchable. Good luck trying to find the equivalent of a needle in a haystack. It's unknown how many foreign companies might have used the mail-in process during the reference room's closure... and are just sitting there signaling trades before bad news that may have occurred. There's plenty more to this story, but the obvious question is... why would foreign companies be given favorable status on something like insider trading? Well, for the same reason foreign companies don't have the same rules for oversight of their auditors as U.S. firms: As an incentive to get them to list their stocks in the U.S. And that boils down to the fees the exchanges – the New York Stock Exchange and the Nasdaq – charge firms... As the number of U.S. firms going public started to dwindle, U.S. exchanges actively started courting foreign companies. One way to make it attractive: when regulators changed insider trading rules in 2002, creating the two-day rule, foreign companies were excluded. In other words, U.S. regulators made the reporting of insider trades more onerous for U.S. companies – not the companies, it turns out, that have seen their fair share of bad news and even... fraud. All, it appears, because the exchanges didn't want to risk losing listings... or the chance of getting more. Everybody wins, except the investors. So why is the SEC dragging its feet on this? Truth is, in theory it has bigger, sexier stories to chase. This one probably fits into the "too arcane" bucket, but I wouldn't be surprised if a lobbyist or two is somehow involved. As comedian Bill Maher is fond of saying, "I don't know it for a fact... I just know it's true." Speaking of regulations... Let's close today with this [tweet]( from my friend Peter Atwater... Source: Twitter/@Peter_Atwater And responding to himself, he added: Source: Twitter/@Peter_Atwater Have a great weekend. As always, feel free to reach out via e-mail by [clicking here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Herb). And if you're on Twitter, feel free to follow me there at [@herbgreenberg](. My DMs are open. I look forward to hearing from you. Regards, Herb Greenberg April 8, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. 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