SEC Filings Carry a Wealth of Corporate Information

From the Baltimore Clubhouse – 10-K, 10-Q, 13F, F-1, F-3, F-4, S-1, S-3, S-11, 13F, Form 4.

If those letters and numbers strike you as so much alphabet soup, you’re not alone. They don’t mean much to most people.

In fact, they’re just a few of the many forms that companies and their executives file on a regular basis with the Securities and Exchange Commission in Washington.

And they’re pure gold… if you know how to read them.

As a cub reporter for The Wall Street Journal a few decades ago, I spent my days combing through those and other forms, looking for nuggets of information I could turn into interesting newspaper stories.

I have to be honest with you though. At the time, I didn’t really know the value of these documents – beyond a good yarn for the Journal. I knew they contained information about initial public offerings (IPOs), mergers and acquisitions, sales and profits, lawsuits and patents, and a vast number of other corporate happenings.

But I wasn’t fully aware that, in the right hands, some of that data could make an investor – most often a hedge fund or other institutional investor – very rich.

Alas, ordinary investors had little access to this data. (Isn’t that always the case?) Sure, we at the Journal would occasionally find an intriguing filing and write a small article about it.

But the institutions didn’t care about my articles. They spent their money – sometimes big money – on specialized services that employed savvy data miners who sat in the SEC press room, waiting for these paper filings to arrive on pushcarts throughout the trading day.

Those services knew exactly which forms had the most valuable data and precisely where to find it within them.

Still, it was a great education for me. I learned how mergers and acquisitions work, what an IPO entails, how to read an annual or quarterly report, and on and on… all the stuff a good financial journalist should be knowledgeable about (though unfortunately too many are not).

I also learned what material nonpublic information is. For those who are a bit hazy on “MNPI,” it’s information about a company that the general public is unaware of, which can have a significant impact on the value of that company’s stock.

Now, to be clear, it is illegal for holders of this kind of information, which is generally known as insider information, to benefit from it (to buy or sell securities based on it).

I wrote many a story about company insiders (high-level executives, board members, their relatives, etc.) who benefited from insider information and were prosecuted for it by the SEC and the Justice Department.

But insider trading remains an extremely murky area of securities law. The SEC, company insiders and lawyers on both sides have been waging battles in courts for decades over what exactly constitutes insider trading. For its part, Congress never actually prohibited the activity, instead leaving it to the courts to figure out.

There was a major Supreme Court ruling on the topic just a couple of years ago, but it’s still not clear exactly what qualifies as insider trading. It’s still about as clear as mud.

And it’s not hard to figure out why. As Oxford Club Chief Investment Strategist Alexander Green points out, company insiders have the best access to information about whether a company is succeeding or failing, or if it’s on the cusp of winning a big contract, getting a drug approved by the FDA, making a meaningful acquisition, etc.

But how good or specific does the information have to be to qualify as “material”? And how much of it has to be well-known to render it “public” or not?

So the SEC relies on transparency to help resolve this problem. The theory is that if everybody can know when company insiders are buying or selling company stock with their own money, it will level the playing field. At least a bit.

That’s where Form 4 comes in. An insider – defined as a company officer or a shareholder who owns more than 10% of the company’s stock – has to file that form anytime they make a buy or sell order on the open market, or exercise stock options.

When they do buy or sell the company stock and disclose it in a Form 4, it can be very telling.

“It’s hard to get a more clear-cut buy signal than when top executives who run a company buy significant amounts of their own company stock with their own money,” Alex says.

Of course, these forms are filed all the time. So to find the insider moves that indicate a potential stock price move requires a lot of skill, screening and intuition.

I remember my days in the SEC press room, watching these teams of experts spend every day reading through hundreds of Form 4s, looking for just the right one. For every filing that meant something, they tossed aside 30 others that were just routine stock options plans or liquidations by executives in need of cash to purchase yet another vacation home.

It seemed mind-numbingly boring to me at the time. Now I know what I was missing.

If you want to find out more about Alex’s trading service that follows what company insiders are buying and how to legally profit from it, click here.

Good investing,

Matt