Inco executives sold shares before surprise profit warning

Governance experts were particularly critical of the trading done by David Maynard, head of Inco's global marketing unit in Britain. He made a profit of $359,660 after selling 26,000 shares at $31.19 each on Oct. 14 — the day before Inco's profit warning.

The Globe and Mail
October 23, 2003

Inco executives sold shares before surprise profit warning
Karen Howlett

Inco Ltd. is reviewing internal policies governing employee trading in company shares after a slew of insider sales by executives, including one who sold $811,000 (U.S.) worth of stock a day before the nickel producer issued a surprise profit warning that hit its shares.

“That's something we might want to look at, not because we see problems in terms of compliance with existing policy but simply because we're sensitive to the optics in cases like this,” Inco spokesman Steve Mitchell said yesterday.

However, he added, “optics are one thing and facts are another, and the facts here are no one traded on inside information.”

Inco's chief financial officer and six other top executives at the company sold $3.58-million worth of shares before the company disclosed that production glitches at its key Sudbury operations would hurt its third-quarter profit.

The trades, first reported by Bloomberg news service, have prompted corporate governance experts to call for new rules governing blackout periods. Securities laws prohibit corporate insiders from trading shares on information not disclosed to the public. But as things now stand, there are no laws requiring companies to impose blackout periods — specific times when trading by employees may not take place. A survey of 140 Canadian companies done by the regulators last year shows that practices are all over the map.

At Inco, Mr. Mitchell said the company's conflict-of-interest guidelines contain an absolute prohibition against trading on insider knowledge, typically any material information not disclosed to the public. About 1,000 employees sign a copy of the guidelines every year, he said.

Inco also has blackout periods when officers and directors may not trade shares, beginning on the last business day of the month before the company releases its financial results and ending two days after the announcement.

In the case of the third-quarter results, released on Tuesday, the blackout period began on Sept. 30 and ends today. The company blamed a three-month strike at its Sudbury operation and a slower-than-expected return to operations after the strike ended for its disappointing third quarter. It posted a loss of $27-million or 16 cents a share, compared with a profit of $91-million or 46 cents for the same period the previous year.

Inco had announced on Aug. 28 that it planned to resume its Sudbury operations by Sept. 12. But on Oct. 15, it released the surprise earnings warning, saying it took longer than expected to get the operations back into full production.

Wayne Fraser, a director with the union that represents Inco workers, said employees recognized in early September that the third-quarter results would be affected by startup problems.

“Our guys knew when they went back to work in early September that chutes were plugged, that furnaces had problems — they knew long before October 15 that the third quarter wasn't going to be where it should have been with those [nickel] prices,” said Mr. Fraser, Ontario/Atlantic director with the United Steelworkers of America.

Inco's unionized workers in Ontario walked off the job on June 1 after their contracts expired. The strike, affecting about 3,300 workers in Sudbury and another 140 in Port Colborne, Ont., lasted until Aug. 28, when workers ratified a new three-year contract.

Between Sept. 15 and Oct. 14, one director and seven executives sold shares, including chief financial officer Farokh Hakimi and treasurer Donald Hurley.

Governance experts were particularly critical of the trading done by David Maynard, head of Inco's global marketing unit in Britain. He made a profit of $359,660 after selling 26,000 shares at $31.19 each on Oct. 14 — the day before Inco's profit warning. Mr. Maynard had acquired the shares the same day by exercising stock options at prices ranging between $16.96 and $18.16.

Inco's shares closed at $30.81 on the New York Stock Exchange, down 34 cents, the day after the warning. Inco's Mr. Mitchell said Mr. Maynard clearly did not have prior knowledge of the earnings warning. “That knowledge was restricted to a small group of people at our corporate office,” he said.

“It seems a particularly inappropriate moment, minutes before a profit warning comes out, for executives to be selling their shares and it certainly does not cast a very favourable light on the way they do manage the insider trading,” said David Beatty, managing director of the Canadian Coalition for Good Governance.

Mr. Mitchell said Mr. Maynard's trading is also not subject to the blackout period because he is not considered an officer of the company. Officers are defined as anyone at the vice-president level and above as well as operations and regional officers, he said.

As for the other executives who sold shares, Mr. Mitchell said they acted in full accordance with the company's policies, including having their trades cleared ahead of time with either the chief executive officer of Inco or its head lawyer.

Mr. Hakimi made a profit of $174,180 by selling 20,000 Inco shares on Sept. 29 at prices ranging between $27.90 and $28, according to his insider trading reports filed with regulators.

The trades by Inco executives have highlighted the need for rule changes surrounding blackout periods, governance experts say. Mr. Beatty, for one, says he plans to put the topic on the coalition's agenda.

According to the survey done by the Ontario Securities Commission last year, the most common practice is to have the blackout period begin on the last day of a quarter and run until two days after the financial results are publicly disclosed. While 46 per cent of companies surveyed fall into this category, 7 per cent of companies do not start the clock until two weeks after a quarter ends and 28 per cent have no blackout policies.

Certain periods in a company's information cycle are high risk by definition, such as when the quarterly or annual financial statements are being prepared, said John Hughes, manager of continuous disclosure at the OSC.

“There's just lots of information that's flying around. It's safer, both in practice and as a matter of perception, to just impose a period when people can't trade,” he said. “It's better to just bring down the curtain and just eliminate any chance of anyone stepping out of line.”

With files from reporter Wendy Stueck

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