Markets: News  

By Mark Hulbert

Is the stock market a level playing field for both corporate insiders and outsiders? Activity at First Horizon Bank raises questions.

A number of insider stock-sales at First Horizon Bank over the past year are raising questions from of one of academia's leading experts on insider trading.

He is Nejat Seyhun, a finance professor at the University of Michigan, who recently helped launch a subscription website to assist investors in scrutinizing insider transaction data that are collected by the U.S. Securities and Exchange Commission.

First Horizon (FHN) is a Tennessee-based bank with $79 billion in assets as of the end of March. The bank has been in the news not only because of the banking crisis precipitated by the collapse of Silicon Valley Bank and Signature Bank, and the corresponding scrutiny of smaller regional banks. First Horizon also has been in the news because a merger between it and Canada's TD Bank (TD.T), announced in February 2022 for $25 per share, fell apart in early May.

First Horizon stock was trading for $24.77 a share at the end of February 2023. It closed below $12 per share on June 7.

Between March 2022 (after the merger was announced) until February of this year, First Horizon officers and directors collectively sold 1.1 million shares of the company's stock at an average price of $23.35. Seyhun finds this curious. In an email, he said that "there was no need for any insider during this 12-month window to sell any shares in the open market, especially below the merger price of $25."

The largest single insider sale during this 12-month period was from Daryl Byrd, executive chairman of First Horizon's board of directors. In June 2022 he sold more than 200,000 shares at $22.59, significantly below the proposed merger price. That drew Seyhun's attention, since Byrd could have received 10% more by waiting until the merger closed.

Beth Ardoin, senior executive vice president and chief communications officer at First Horizon, said in an email that the timing of Byrd's sale was due to the imminent expiration of options he had previously been granted, which he would have had to forfeit if not exercised.

Seyhun says he finds this explanation questionable, "since having to exercise does not simultaneously create an obligation to sell shares." When asked about this, Ardoin said, "You are questioning actions taken last June [2022], a time when TD publicly, clearly and consistently stated their confidence in their ability to complete the transaction" to acquire First Horizon.

Assuming the merger with TD Bank was still on track, Byrd could have received a higher price by waiting. In response to a question of whether the First Horizon trades raise any red flags, a Securities and Exchange Commission spokesperson declined to comment.

In an interview, Seyhun emphasized that he is raising these questions because of the circumstantial evidence; he has no particular information that suggests that any of these trades were improper. He says that his focus on First Horizon in particular was triggered by its stock-price plunge in the wake of its failed merger with TD Bank.

Seyhun also says that he had no investment interest in First Horizon during the 12 months in question in which the insider sales occurred. In the wake of the collapse of the bank's merger with TD Bank, he says, he purchased a small long position in First Horizon stock.

Pre-planned trades

A fair question to ask is if any of the 1.1 million shares sold during this 12-month period were pre-planned, pursuant to a SEC rule known as 10b5-1. This rule enables insiders to sell a predetermined number of shares at predetermined intervals; insiders employ 10b5-1 plans in the hope that doing so will immunize them from regulatory scrutiny and the charge that their sales are motivated by inside information.

Though one of the insider sales during this period was a 10b5-1 sale, it raises questions. This was a sale by Bryan Jordan, First Horizon's CEO, of 93,157 shares on Feb. 24; the sale represented 6% of the First Horizon shares he owned at the time. The particular 10b5-1 plan pursuant to which this sale was executed was adopted last September. Seyhun said the plan was adopted when the merger with TD Bank was still proceeding apace. Seyhun asserts that this sale should be subjected to just as much scrutiny as the other non-pre-planned sales.

In an email, Ardoin said that Jordan set up his 10b5-1 plan in September 2022 as a "safety measure" in case the merger with TD Bank was delayed, since he owned a number of options that expired in March 2023, after which they would have been worthless.

Seyhun wonders why Jordan was worried that the merger may be delayed. "A potential delay exposes the shareholders to the risk that the stock price could drop substantially, as it also increases the likelihood of cancellation," Seyhun wrote in an email.

Read: First Horizon CEO says the bank 'never assumed regulatory approval was a given' in scuttled TD merger

Most recently, a class-action lawsuit was filed alleging that various individuals involved with the proposed First Horizon-TD Bank merger "made false statements and/or concealed that TD Bank failed to disclose material information to the market that it had deficient internal controls that posed a significant risk to the closing of the First Horizon transaction." Seyhun is not involved in this case.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More:Jefferies reiterates buy on First Horizon while Raymond James keeps market-perform rating

Plus: These 5 stocks stand out in a banking sector filled with great bargains

-Mark Hulbert

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June 10, 2023 10:26 ET (14:26 GMT)

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