A good rule, if not of law then at least of etiquette, is that if you are the BP employee in charge of BP's "oil collection and clean-up operations in the Gulf of Mexico and along the coast," don't immediately go and sell all of your and your family's $1 million worth of BP stock and stock options before everyone finds out the full extent of the disaster. Come on! At a bare minimum that is extremely insensitive.
Is it also illegal? The Securities and Exchange Commission thinks so, since it today charged former BP crisis manager Keith Seihan with insider trading for doing that. And Seihan settled the charges by agreeing to pay about $224,000 in fines and disgorgement. Which seems sensible of him, because, one, would you want to go tell a jury why this trading was perfectly fine? And, two, because he seems to have avoided about half a million dollars in losses by acting fast to sell his stock, so at $224,000 he's getting off pretty cheap.1
Also, according to the SEC complaint, he did some gloriously dumb things, including:
- Buying back the BP stock (for cheap!) after the cleanup was finished (come on!), and
- e-mailing BP's in-house lawyer after insider trading, saying "I would like to discuss with you soon," and then proceeding to ignore the attorney's attempts to contact him.2
One suspects that half-confessing to the lawyer and then going silent might be what got him caught, though I guess it was overdetermined. Really, don't insider trade in your own company's stock when it's in the news, that's what strangers at Grand Central are for.3
On the other hand it is maybe not the strongest insider trading case ever? The legal, as opposed to etiquette, question is, did Seihan have material nonpublic information when he traded in BP's stock? At the time, everyone knew that there was oil pouring into the Gulf of Mexico. But not everyone knew how much:
On April 24, 2010, the day after the discovery of the oil leak, Unified Command released the first public estimate of the flow rate of the oil leak, which was 1,000 barrels of oil per day. Four days later, on April 28, Unified Command increased that estimate, publicly stating that the flow rate “could be as much as 5,000 [bopd].” And, on April 29 and 30 and May 4, 2010, BP furnished to the Commission Forms 6-K stating, among other things, that current estimates of flow rate were “up to 5,000 barrels a day” or “some 5,000 barrels . . . of oil per day.”
In carrying out his duties and responsibilities as an Incident Commander and On-Scene Coordinator, Seihan gained direct and immediate access to a variety of nonpublic information, which, among other things, indicated that the size and scope of the Deepwater Horizon oil spill exceeded the public flow rate estimates provided by both Unified Command and BP.
Weirdly, the SEC complaint does not make the strongest case for this. The facts seem to be that, when Seihan sold his stock on April 29, he thought that that (1) the flow rate was probably 5,000 barrels per day, but (2) it might be quite a lot more.4 Meanwhile BP's public statement was that the flow rate was "currently estimated at up to 5,000 barrels a day." I read "currently estimated at up to 5,000 barrels a day" to mean "probably 5,000 barrels a day, maybe more," though that reading is based on the grammar of cynicism rather than the grammar of English.5 So Seihan's information and BP's public statements tied together ... I dunno, reasonably closely.
But he can't really make that argument. Not just because, come on, he sold all his BP stock while he was in charge of BP's cleanup, he can't make any arguments, but also because everyone seems to agree that BP was knowingly understating the size of the spill.6 BP itself agreed to pay the SEC $525 million for exactly that, and pleaded guilty to criminal charges for related false statements. BP's 5,000 barrel estimates seem to have been mostly made up, and from the BP settlements it sure sounds like anyone at BP would have known that.7 So the guy in charge of the cleanup at BP probably wouldn't sound great claiming that he didn't know it.
Especially since he sold all his stock! That sort of creates its own materiality. Whatever Seihan knew, it was bad enough to make him dump all his stock all at once. That's not a great look, generally, if you're accused of insider trading. There's a feedback loop here: The fact that BP seems to have been fudging its numbers makes its crisis manager's stock sales look worse, and the fact that its crisis manager dumped all his stock makes BP's number errors look more intentional.
It also -- ugh, doesn't it make his crisis management look worse? His lawyer says, "Mr. Seilhan is widely respected for his work helping to lead the cleanup and containment efforts in the Gulf of Mexico in 2010," but this can't help. Really, if you're the crisis manager for BP, and BP has an enormous crisis, you gotta let your portfolio go down with the ship.8 It's just the right thing to do.
1 I guess? Here's the SEC complaint:
On April 29 and 30, 2010, while in possession of this material, nonpublic information, and in breach of duties owed to BP and its shareholders, Seilhan caused to be sold his and his family’s entire $1 million portfolio of BP securities. Specifically, Defendant caused to be sold his and his family’s holdings in the BP Stock Fund, a fund consisting almost entirely of BP American Depository Shares (“ADSs”), held in Defendant’s and his family’s retirement accounts at BP. In addition, Defendant exercised three different sets of options to purchase BP ADSs and immediately sold the underlying shares.
As a result of his illegal trading, Seilhan realized unjust profits and avoided losses in excess of $100,000. Following Seilhan’s trades, the price of BP ADSs declined by approximately 48% over time, reaching its lowest point in late June 2010.
So, do you understand that $100,000 number? If you sell a million dollars worth of stuff, and the stuff then drops in value by 48 percent, then you've saved ... $480,000, right? Actually the SEC does a little more math for us:
On April 29, 2010, at 11:56 a.m. and 12:00 p.m. central time, Defendant caused to be sold a total of 87,512 units of the BP Stock Fund (in his and his family’s retirement accounts) at $11.25 per unit, resulting in proceeds of $984,697.01.
And then after the well was capped:
Thereafter, on July 21, 2010, Defendant again traded in BP securities, selling all of his retirement account holdings in the S&P 500 index fund and reinvesting all of the proceeds therefrom back into the BP Stock Fund, purchasing 94,025 BP Stock Fund units at $7.80 per unit, for a total purchase price of $733,642.39.
So he ended up with more BP stock than he started with, plus $150,000 in cash. Nice work!
2 I love this:
Further, on May 5, 2010, at 4:08 p.m. central time, six days after Defendant first sold BP securities as alleged in this complaint, a BP in-house attorney sent an e-mail message to a number of BP response personnel, including Defendant, reminding them that “[t]he Code of Conduct prohibits you from trading on the basis of any price sensitive information relating to either BP securities or those of any other publicly traded company.” In the e-mail message, each recipient was asked to contact the BP legal department if he was considering trading in BP securities and had any doubt about whether he was in possession of such information. Defendant, having recently traded BP securities, responded on May 5, 2010, at 5:02 p.m. central time: “Thanks for this. I would like to discuss with you soon.” And, on May 11, at 1:18 p.m. central time, a BP in-house attorney responded to Defendant’s e-mail message and subsequently left Defendant a voicemail message asking Defendant to call her to discuss the matter. Defendant never responded to the e-mail message or voicemail message nor otherwise disclosed his trades to BP.
"Thanks for this"! This is a pinnacle of corporate-scandal passive-aggressiveness, up there with the time that Jamie Dimon asked the London Whale crew for an analysis of their hedging and they were like "yeah we'll get right on that" and binned it.
3 And, really, if you do, don't go buy it back three months later. You want to be all "nonononono I wasn't trading because of the oil spill, I just needed money to buy a boat" or whatever, not "oh yeah I made an informed tactical decision that the stock was overvalued." Honestly I can't believe I still need to tell you things like this.
4 From the complaint:
Further, on the morning of April 22, 2010, Seilhan received an e-mail message from a BP manager commenting on worst case discharge estimates performed by BP engineers. These worst case estimates, which were nonpublic, ranged from 64,000 bopd to 110,000 bopd, well in excess of BP’s public flow rate estimates.
On April 26, 2010, Defendant received a NOAA memorandum and distributed it to other senior BP employees. In the memorandum, which was written at a time when the official, public flow rate estimate was 1,000 bopd, it was estimated (based on over-flight observations of the size and density of the oil slick) that the flow rate was 5,000 bopd. However, in discussing the methodologies by which the 5,000 bopd estimate was derived, the memorandum’s authors made clear that the actual flow rate could be much higher and was not capped at 5,000 bopd. Among other things, the memorandum stated that the actual flow rate could be materially greater than the 5,000 bopd estimate, i.e., to “an order of magnitude.”
5 But, right? "Currently estimated" means "but could well go higher." "Up to X," where X is bad, means "X."
6 It was definitely understating the size of the spill, by an order of magnitude. The question is just, was it honest error or did they know their public numbers were wrong?
7 From the SEC complaint against BP:
Beginning on April26, 2010, Former Senior Executive A created, or caused to be created, several spreadsheets that purported to show a "best guess" of flow rate at 5,000 to 6,000 bopd. In creating this "best guess," Former Senior Executive A -- lacking any experience -- initially consulted the online encyclopedia "Wikipedia" for guidance, before reviewing more established sources. Ultimately, Former Senior Executive A developed his own methodology for estimating flow rates, which did not comport with established industry standards. Former Senior Executive A's application of his methodology was rife with mathematical and procedural inaccuracies. Despite the inaccuracies and the visual expansion of the spill, the "analysis" in each instance, yielded a desired result: a "best guess" of the range of flow rate that came close to the April 26 NOAA estimate of 5,000 bopd.
The Justice Department criminal information (paragraphs 30-34) goes into more detail about the badness of these estimates.
8 Or, for the love of -- don't have a million dollars in BP stock! You're a crisis manager! Be risk-averse.
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