Insider Trading in a 401(k)?

[Guest lkramer]

Is is considered insider trading if an employee would re-allocate his 401(k) investments to our company stock fund based on confidential information? I know it is illegal to do this on the open market, but not sure how it applies to company stock within our retirement plans.

[QDROphile]

Insider trading is insider trading regardless of the medium employed for the illegal activity.

[Guest FREE401k]

Just this week I have seen a story somewhere about this very issue. I just skimmed the article but it seems like the CFO or some executive at some company moved money out of the 401(k), then back in, right around the time of the company's earnings announcements. If memory serves me correctly the article said that person was fired and is now under investigation. I can't remember the name of the company or where I read it, but it may very well have been on the benefitslink electronic newsletter...

[MGB]

That was the CFO of Nortel Networks. They had a mutual fund option in the 401(k) that was primarily NT stock. Just before each (negative) earnings announcement, he moved out of that fund (not out of the 401(k)) into other investments and then came back later. Fired. The most ridiculous part of it was that it was only $80,000. In all of the articles I read on it, the best one I saw was a quote "How can such an idiot get to be the CFO of an S&P 500 firm?"

[mbozek]

MGB: could you explain what is a mutual fund option? My understanding is that the rules against trading based upon material non public information only apply to stocks- not mutual funds... The CFO could have been fired any number of other reasons, e,g., for violating the company's code of conduct, for bringing on bad publicity in the post Enron world or because the company had one too many negative earnings announcements. By the way employees sometime sell company stock in a qualified plan before quarterly reports based upon rumors they overhear - this is the traditional reason to restrict employee sales of stock. It is preferred to selling stock owned outside of the plan because no captial gains tax is imposed on the sale.

[Jon Chambers]

I believe the Nortel plan had a unitized company stock fund, that permitted next day settlement--not truly a mutual fund, but not exactly company stock either. And I believe there was a story in the WSJ that indicated that the termination was due to unauthorized trading on Nortel stock inside the plan. It's not at all uncommon to have periods during which section 16b insiders are not permitted to trade, although other participants are allowed to trade.

[Kirk Maldonado]

Just to add a bit of clarifcation to Jon's comment.

Trading on material non-public information is illegal, regardless of whether the malefactor is the CEO or a janitor.

However, many companies impose "blackout periods" during which employees are forbidden from trading in company stock, even if they do not know of any material non-public information. Those companies typically restrict the application of these "blackout periods" to senior executives.

[Jon Chambers]

Thanks Kirk. To clarify further your clarification, these senior executive "black out" periods are often tied to the company's earnings reporting cycle. There is a period of time during which the company is preparing its earnings reports that it is highly likely that senior executives will have more or better information regarding the company's quarterly earnings report than investors in general. During these periods, executives are prohibited from trading, whether or not they have access to material non-public information.