Amazon Chair Under Investigation by S.E.C for Possible Inside Trading

From The New York Times

The Securities and Exchange Commission is investigating stock sales by Jeffrey P. Bezos, the chairman of Amazon.com, in early February just before a Wall Street firm released a negative research report on the company, according to a person close to the matter.
In documents filed with regulators on Feb. 2 and Feb. 5, Mr. Bezos said he intended to sell 800,000 Amazon shares worth about $12.2 million. One week earlier, Amazon executives had received an advance copy of a research report by Ravi Suria, a convertible bond analyst at Lehman Brothers. Mr. Suria\'s report, which was made public on Feb. 6, questioned Amazon\'s ability to continue operating through 2001 and said the company\'s deteriorating financial condition could subject it to a credit squeeze this year.

Bill Curry, an Amazon spokesman, said that Mr. Bezos sold the shares to raise money and diversify his holdings and that the sales had nothing to do with the release of the Lehman Brothers report. \"There was nothing new in the report, and indeed the stock went up that day after the report was released because there was nothing new in it,\" he said.

Mr. Curry added that Amazon, like many companies, had finite periods of time when executives could sell shares. \"Feb. 2 was the opening of the trading window,\" he said. \"It opens several days after we release quarterly results.\"

As is its custom, the S.E.C. declined to say whether it was investigating the sales by Mr. Bezos. It is not yet clear how much Amazon stock Mr. Bezos actually sold since his filings only signal his intention to sell. Of the 800,000 shares covered by the disclosure, he reported actual sales of 375,000 shares at $14.69 each. The deadlines for reporting sales of the remaining 425,000 shares has not yet passed. But Paul Elliott at Thomson Financial/First Call said he thought the sales were consummated because, in the past, Mr. Bezos had always sold the shares he said he intended to.

Although the shares covered by the filings represented less than 1 percent of the Bezos holdings, the sales are interesting on several counts. First, they are unusual. Since the company first sold shares to the public in 1997, Mr. Bezos has sold only 1.3 million Amazon shares at prices that fetched $55.4 million, according to Thomson Financial/First Call. His recent sales, therefore, account for almost two-thirds of all the shares Mr. Bezos has ever sold. His current Amazon holdings are approximately 117 million shares, worth $1.36 billion.

Nevertheless, the timing of the sale, days before Mr. Suria\'s critical report was released to investors, is intriguing. Even though the stock rose the day the report was made public, an earlier report from the analyst had had the opposite effect on Amazon shares. Last June, in Mr. Suria\'s first report on Amazon\'s convertible bonds, the analyst questioned the company\'s promises of future profitability, and Amazon shares lost 19 percent of their value.

An executive at Lehman Brothers who spoke on the condition of anonymity said the firm sent Amazon a copy of Mr. Suria\'s report on Jan. 26. It is a routine practice at the firm, the executive said, to give companies the chance to comment on research reports that are critical.

On the day the report was made public and Mr. Suria held a conference call with investors to discuss it, Amazon shares fell 6 percent but rallied to end the day at $15.81, up 9.5 percent from the previous day\'s close. Some 19 million shares traded that day, more than double the average daily trading volume in the shares recently, suggesting the buyers were predominantly institutions.

Securities lawyers say that to win an insider trading case, the government must show that an insider acted on information that had a material effect on the company or its shares but was not public knowledge. The typical insider trading case involves corporate information, like important developments at the company that only an insider would know. But even though the information Mr. Bezos had came from a third party — an analyst — it would pass the \"nonpublic\" test because it had not yet been disseminated, lawyers said.

It will be more difficult to prove the report had a material effect on the company or its shares. Because the stock price rose by the close of trading on Feb. 6, the effect of the report on the market for Amazon shares was diminished.

\"Looking at it at the time he first saw the report it probably was material information in light of the market\'s reaction to prior reports by this analyst,\" said Alan R. Bromberg, a professor of corporate and securities law at Southern Methodist University. \"But in reality, the market\'s reaction to it looks like the information was not material and there was no violation.\"

Amazon shares have sunk steadily since then. The closing price of $15.81 on Feb. 6 is the highest level at which the stock has traded for a month. And yesterday\'s closing price of $11.69 is 20 percent below the price Mr. Bezos received when he sold his shares more than a month ago.

Story by Gretchen Morgenson
The New York Times
March 9, 2001

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