In recent months, considerable attention has turned to a phenomenon dubbed “insider giving.” Insider giving includes many of the same traits as the more commonly-known insider trading, but instead of the purchase or sale of stock based on material non-public information, insider giving involves the donation of stock to a nonprofit organization—at a time when the donor possesses inside information that would have prevented them from purchasing or selling shares.
Several large insider donations of stock have made waves for their timing. In one particularly notorious example, following a massive, speculative increase in the price of Kodak stock, Kodak director George Karfunkel donated nearly half of his shares—worth $116 million at the time—to his own charity. Kodak shares had skyrocketed from $2 per share to more than $33 per share, and Karfunkel donated at the peak before Kodak’s share price dramatically fell back to Earth. Such a timely donation allows an insider to both avoid the capital gains tax on the appreciation of the stock and maximize the value of the donation and resulting tax deduction. Additionally, giving of that nature harms unknowing market participants when the charity sells donated insider shares before the inside information becomes public.
A new study by four authors to be published in the Duke Law Journal (but already posted online) reveals large shareholders’ charitable donations to be “suspiciously well-timed.” The study reviewed all stock donations by large shareholders of American public companies from 1986 to 2020. The 9,000 donations involved approximately 2.1 billion shares worth $50 billion. The authors found that stock prices rose by approximately 6% during the year prior to the donation and fell by approximately 4% the following year, with donations coinciding with the average maximum price over the two-year period.
Such incredibly timed donations certainly raise suspicions. The authors attribute these results to shareholders’ possession of inside information, as well as backdating of donations to favorable dates. Insiders can report stock donations as many as 410 days after the donation—as opposed to two days for stock trades. The study finds insider giving both “a potent substitute for insider trading” and “far more widespread than previously believed.”
A prior 2016 study published by three of the four authors in the University of Pennsylvania Journal of Business Law observed a similar phenomenon among executives. The authors noted that “empirical evidence suggests that corporate insiders use their access to inside information to time their stock donations prior to price declines and thereby increase their federal income tax deductions.”
An oft-cited 2008 study by Professor David Yermack of the NYU Stern School of Business—which seemingly kicked off this field of inquiry—found donations of public-company stock by CEOs or Board Chairs to their own family foundations suspiciously well timed. Yermack found that such donations “occur at peaks in company stock prices, following run-ups and just before significant price drops.” He also found donations by this group to other recipients “well timed, as they occur at local maximums in company stock prices, but the typical price decline after these gifts is less pronounced….”
While the authors of these studies suggest existing laws could apply to insider giving schemes under certain circumstances, more robust oversight would occur with modifications to current legislation and rules. The authors of the 2016 study make several suggestions, including the following. First, they suggest requiring disclosure of insider giving within two days of the gift, in line with the reporting requirements for insider trading. Second, they suggest that Sarbanes-Oxley could be amended to apply disclosure requirements to gifts of stock and to further confirm the circumstances under which the federal securities laws would apply to donations of stock. Third, they offer that the average stock price over the previous 90 days be used as the value of the donation for deduction purposes—a suggestion in line with the 90-day look-back period baked into the federal securities laws.
While both a problem and potential solutions have been identified, it remains to be seen whether Congress or the SEC will take action to address the concerns raised by academia and the press.