Securities Fraud Lawyers Blog
Peloton Interactive Inc. (“Peloton”) is making headlines this month – but not for the reasons its shareholders might hope. After reaching a peak of $162 per share at the height of the COVID-19 pandemic in December 2020, Peloton’s share price now sits at just $27. [1]
While the driving factors behind this downturn are many, the impact of the pandemic is undeniable. As an at-home exercise equipment company with the ability to connect users from their homes across the world via real-time classes, it’s no wonder the company and its stock soared through 2020’s COVID-19 lockdowns. Less clear, as of now, is Peloton’s staying power as consumer demand wanes, leading the company to hire consultants at McKinsey & Co. to review finances and to halt production on several of its models. [2]
In light of Peloton’s precipitous fall, some have turned their attention to massive stock sales undertaken by Peloton insiders before the downturn began. SEC filings from late 2020 and into 2021 show that insiders at Peloton sold approximately $500 million in stock before the price began to plummet. [3]
Among these insider sales were that of Peloton’s CEO and co-founder, John Foley, as well as the company’s president, William Lynch. First, in November 2020 Foley sold shares worth $119 million as part of a selling plan for “personal financial management purposes.” [3] Then, Lynch sold over $105 million in stock during 2021, the majority of which was sold in February 2021 at an average price of $144. [3]
While the timing of these Peloton insider trades might appear “lucky” in hindsight, the well-timed insider trades certainly were not unique. In fact, 2021 saw a new record for insider selling, which reached $170 billion, up from $94 billion in 2020. [3] As Daniel Taylor, associate professor at the Wharton School of Business succinctly explained, “[o]ne of the most well-accepted facts from decades of research on insider trading is that corporate insiders buy near bottoms and sell near peaks.” [3]
Given this well-established pattern of insider trading, two questions emerge: first, when does insider trading cross the line from legal to illegal; and second, how might everyday investors use knowledge about insider trades to their own investing advantage?
To start, insider trading crosses the threshold into illegality when company insiders trade securities when they have access to material information that the public does not. [4] Such illegal insider trading can be committed by anyone who has material and nonpublic information about a company – whether it be the CEO, a broker, or even an employee’s family or friend. [4]
Conversely, insiders may lawfully trade securities so long as they adhere to trading restrictions which lay out specific timing and other conditions for when trading is legal. [4] As a result, insider trading like that of Peloton and other executives throughout 2021 is both routine and legal, unless shown otherwise.
But how can these trades help individual investors? As described, insiders often sell stock when the price is high. At a base level, this may serve as a signal to investors with a short-term investment plan to consider selling their positions as well, while the stock is still high.
Furthermore, research has shown that executive’s insider trading activities can be extrapolated out to broader trends in the market. A company’s stock tends to outperform the broader market when executives of the company buy shares, and a company’s stock tends to underperform the broader market when executives sell. [4]
Helpfully for individual investors, the SEC requires that all corporate insiders report their stock sales or purchases within two business days of each transaction. [4] This information can then be accessed by the public either on Yahoo! Finance or on the SEC’s EDGAR Database.[4]
With more attention on insider trading as its volume rises, more individual investors may have their sights set on learning from these trades to inform their own investment decisions. When doing so, it is critical to remember that data on insider trades may not always tell the full story. A corporate insider may indeed have different motivations relating to other financial considerations, such as taxes, than would the average investor. Thus, it is possible to view insider trades as a guidepost, but investors should continue to exercise their own due diligence in making personal investment decisions.
Sources:
[4] https://www.investopedia.com/articles/02/061202.asp