10-K, 10-Q, F-1, F-3, F-4, S-1, S-3, S-11, 13F, Form 4…
If those letters and numbers strike you as alphabet soup, you’re not alone. Most people won’t recognize them.
In fact, they’re the names of just a few of the many forms that companies and their executives file on a regular basis with the Securities and Exchange Commission (SEC) in Washington, D.C.
And they’re pure gold if you know how to read them (more on that to come).
As a cub reporter for The Wall Street Journal a few decades ago, I spent my days poring over these forms in search of nuggets of information that I could turn into interesting newspaper stories.
But I have to be honest… At the time, I didn’t really understand the value of these documents – beyond offering a good yarn for the Journal. I knew they contained information about initial public offerings, mergers and acquisitions, sales and profits, lawsuits and patents, and 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.
Sure, we at the Journal would occasionally find an intriguing filing and write a small article about it. But institutional investors didn’t much 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 (this is before the SEC went digital).
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 annual and quarterly reports, and more… all the stuff a good financial journalist should be knowledgeable about (though unfortunately too many are not).
What Exactly Is MNPI?
I also learned about material nonpublic information. For those who are a bit hazy on “MNPI,” it’s information about a company that the general public is unaware of and that 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 profit from it (to buy or sell securities based on it).
I wrote many articles 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 mostly left it to the courts to figure out.
There was a major Supreme Court ruling on the topic a few years ago, but even so, what qualifies as insider trading remains about as clear as mud.
And it’s not hard to figure out why. As Alexander Green often points out, company insiders have the best information about whether a company is succeeding or failing… or whether it’s on the cusp of winning a big contract, getting a drug approved by the FDA, making a meaningful acquisition, etc.
Distinguishing between material nonpublic information and general information that goes around the executive suite can be very difficult. How good or specific does the information have to be to qualify as “material”? How much of it must be well known to render it “public”?
The SEC relies on transparency to help resolve these issues. The theory goes like this: 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 part of the alphabet soup comes into play, specifically the Form 4.
An insider – defined as a corporate officer or director or a shareholder who owns more than 10% of the company’s stock – has to file that form every time they make a buy or sell order on the open market or exercise stock options.
Here’s an example of a Form 4 filed a few years ago by a CEO you may have heard of…
When an insider does buy or sell company stock and discloses 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.
And in markets like this one, where panicky sell-offs can push stock prices to discount levels, watching what company insiders do can be even more valuable, Alex tells me. When a company’s executives believe investors have driven the stock price below its true value, they often step in and start buying.
Of course, Form 4s are filed all the time. So finding the insider moves that indicate a potential stock price move requires a lot of skill, screening and intuition.
I remember my time in the SEC press room, watching specially trained teams of experts spend their days reading through hundreds of Form 4s like they were panning for gold. For every filing that meant something, they tossed aside 50 others that were just routine stock option plans or liquidations by executives who needed the cash for yet another vacation home.
It seemed mind-numbingly boring to me at the time. Now I know what I was missing.