Posted on 02/25/2005 2:22:00 PM PST by holymoly
Feb. 25--Thirteen days after the arrest of a suspect in the ChoicePoint identity theft case -- and more than three months before the problem surfaced publicly -- the company's top two executives began selling their stock.
Since the sales began in November, ChoicePoint CEO Derek Smith and President Douglas Curling have sold 472,000 ChoicePoint shares worth nearly $21 million, according to the executives' Securities and Exchange Commission filings.
Smith said Thursday that he did not know about the security breach at the Alpharetta-based company until well after he began selling the stock. Curling was not available for comment Thursday.
The stock sales -- for what the executives described as estate planning and asset diversification -- continued this week, even as ChoicePoint's shares began to tumble nearly 10 percent. The identity theft was disclosed publicly only last week.
ChoicePoint chief marketing officer James Lee said outside advisers suggested continuing with the trading program. "Their advice is that the program is fine, even in light of the recent events," he said.
"If you are trying to make the case that this is somehow insider trading, you are going down the wrong road," Lee said.
The selling of stock by Smith, the CEO, and Curling, the company's president, normally wouldn't raise eyebrows, since the sales were part of a prearranged stock trading plan allowed under SEC rules.
Lee said ChoicePoint's board approved the stock trading plan on Oct. 26, the day before police in Los Angeles -- after being tipped off by ChoicePoint -- made their only arrest in a case that has become the biggest security breach in the company's history. ChoicePoint is notifying about 145,000 people that their personal information -- possibly including their Social Security numbers and credit reports -- may have been sold to identity thieves.
Smith and Curling have been selling shares of their company's stock weekly since Nov. 9, when their Rule 10b5-1 trading plans took effect. The plans expire in April.
In an interview with Journal-Constitution reporters Thursday, Smith said he first found out about the identity theft problem in late December or January, which would be about two months after the company notified California law enforcement officials.
Smith said his stock sales aren't inappropriate.
"I didn't do anything that I had any belief that was inappropriate or whatever," he said. "To the extent that it gives any impression of anything that I knew or the company knew that would have weighted on the value of the stock, then that would be unfortunate. Because it certainly isn't true."
A lawyer familiar with the enforcement of federal securities laws thinks an inquiry by the Securities and Exchange Commission is inevitable.
"Even with this public statement that he did not know until January about the problems in California does not mean that the SEC will not ask questions anyway," said Jacob S. Frenkel, chairman of the securities enforcement and white-collar practice at the Shulman, Rogers, Gandal, Pordy & Ecker law firm in Rockville, Md.
"The SEC will not only ask him, but they also will ask everybody who knew about the information, including what they told others and when they told them," said Frenkel, a former SEC enforcement lawyer and federal prosecutor. "They are going to look at anybody who may have traded the stock."
Smith said he has not been contacted by the SEC about the stock sales.
Smith and Curling have sold about 64 percent of the total 737,380 shares they have until April to sell under the plan, after exercising employee stock options permitting them to acquire the shares at various prices. The prices they paid for the stock were significantly below the market price at the time of sale, allowing the executives to make significant gains.
The options allowed Smith and Curling to acquire shares at prices ranging from $5.65 to $13.94, according to SEC filings. They sold the shares at prices ranging from $40 to $46.82.
The options, expiring on various dates, represented about 11 percent of Smith's stake in ChoicePoint and about 13 percent of Curling's, according to a news release that disclosed the trading plans Nov. 3.
Rule 10b5-1 plans are relatively new. They were introduced in 2000 to give corporate executives flexibility to sell their stock without worrying about running afoul of company insider trading policies and SEC regulations.
There are several requirements to provide this flexibility and protection: The plan must be in writing, it must state how many shares are to be bought or sold and their potential prices, and the timing of the transactions, Frenkel said.
"The main limitation on the ability to use a Rule 10b5-1 plan is that it must be adopted while the executive does not possess material nonpublic information," Frenkel said. "If he does, the plan is not valid."
Smith said he did not learn of the breach of confidentiality of consumer information until just before mentioning it in a January meeting of the audit committee of ChoicePoint's board.
And it wasn't until after that meeting that "I got a complete update on what was going on," Smith said Thursday. "I did not know they had gone to the California police. I didn't know a guy had been arrested. I didn't know any of that."
Before he learned of the problems in California, the potential breach of the company's data banks was handled as a law enforcement investigation, Smith said.
"We didn't know in fact whether it was a crime and whether it was sufficient enough to warrant a serious issue on behalf of the company," Smith said.
In a Dec. 14 court hearing, Detective Duane Decker of the Los Angeles County Sheriff's Department testified that ChoicePoint representatives had told him that "something like 4 million people have been exposed."
Decker made the comments in a preliminary hearing for Olatunji Oluwatosin, the only person who has been arrested in the case. Decker recently said the 4 million figure was a "rough first estimate," and he suspects the accurate number is much lower.
In retrospect, Smith said he was not notified in a timely manner about the breach or its severity.
He said he included a limit in his stock trading plan that barred shares from being sold if the market price sank below $40. The shares closed Thursday at $41, down 22 cents.
"I felt very positive about the company and where it was going," Smith said.
Other CEOs have made similar bullish comments, Frenkel said.
"The mere fact that they make that statement begs this question: If a CEO did not know some significant information about the company, why did he not know?" Frenkel said.
What the heck?
Just what I was thinking....I smell something.
""If you are trying to make the case that this is somehow insider trading, you are going down the wrong road," Lee said. "
Famous last words. Hope they find out that the ID theft was an inside job too, and they all go to jail.
The stock sales -- for what the executives described as estate planning and asset diversification -- continued this week,
Insiders at almost every company often sell during the fourth quarter, either to get a little liquidity or (more often) to take some losses for the tax year.
Yup - there is no information in this article that is inconsistent with estate planning or re-balancing or other normal, non-criminal motivations. They are handcuffed to their shares for long periods and can only sell during certain prescribed periods, and then only after registering the plan to sell.
Choicepoint was once part of Equifax - and I recall the famous words of the Equifax CEO as the spin-off was coming about (I think this was in 1997). He explained the lame performance of Equifax shares as being dragged down by the unit which was to become Choicepoint. Some veteran Equifax employees agonized over the decision to move to Choicepoint as the division was spun. They turned out to be the lucky ones - as Equifax continued to perform in a mediocre fashion and Choicepoint shares did well. At least until the last couple of weeks. 9/11 and the heightened sense of security and the increased use of employee background checks really boosted Choicepoint revenue.
On the fundamental issue of security and appropriate access to the information they sell - the jury is still out. But if there is some legislative/regulatory backlash on Choicepoint - it's going to blow back on Equifax/Experian/TransUnion as well.
OH,gosh,I would hate to see anything happen to the big credit reporting companies. (sarcasm off)
They were unaware that the suspect was arrested, in a serious security breach at their own company? I just find that a little hard to believe.
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