The Associated Press
Four California utility executives sold small stakes in their companies last year before management began issuing dire bankruptcy warnings that contributed to a steep decline in the stocks.
The sales raise questions about whether the executives illegally profited from inside information that hadn’t been disclosed to other shareholders.
The San Francisco Chronicle reported the stock transactions of two Pacific Gas & Electric Co. executives in the paper’s Thursday edition.
Based on a review of Securities and Exchange Commission documents, First Call/Thomson Financial flagged the trading activity of two Edison International executives Thursday after an inquiry by The Associated Press. Edison owns Southern California Edison.
The revelations of the insiders’ profits threaten to inflame passions on the same day that Gov. Gray Davis signed a bill approving a $10 billion, ratepayer-backed bailout of the companies.
”The Legislature and governor should have thought twice before handing out a bailout to these robber barons,” said Doug Heller, consumer advocate for the Foundation for Taxpayer and Consumer Rights in Santa Monica.
PG&E said its executives sold their shares shortly after an Aug. 2 filing with the SEC updated shareholders on the company’s condition. ”We made a full disclosure of our financial situation and the potential negative impact from the energy crisis at that time,” PG&E spokesman Ron Low said.
In a statement late Thursday, Edison said its executives ”waited until disclosure filings had been made with the (SEC) and obtained clearance from the company before initiating their personal stock transactions.”
The utilities say they have accumulated more than $11 billion in losses buying high-priced wholesale electricity for their customers while their retail rates remained frozen.
As those losses began to accumulate in August, Gordon Smith, a PG&E executive who runs the utility, and Richard Clark, a former CEO and current director, got a combined pretax gain of more than $118,000 by selling a total of 32,500 shares.
During that same month, PG&E hired a bankruptcy attorney in a move that wasn’t publicly disclosed until recently.
After tapping into stock options that didn’t expire until 2005, Smith sold 7,500 shares at $28.53 on Aug. 11. The options cost $24.38 per share, putting Smith’s gain from the deal at $31,125.
The profit represents just a small piece of Smith’s income. His PG&E salary is $550,000 annually and he still owns nearly 400,000 more shares and options in the company. But most of those options are probably worthless now because of the decline in PG&E‘s stock.
At the time of Smith’s sale, PG&E‘s shares had appreciated by 39 percent during 2000. The stock rose even higher in September before descending. The shares, which traded as low as $8.38 last month, closed at $14.31 Thursday, up 6 cents.
It’s highly unusual for a top executive such as Smith to cash in options when the difference between the exercise and market prices is less than $5 per share, said Sean Loren, manager of the First Call research department that tracks insider stock sales. The practice is known as ”skimming options,” he said.
On Aug. 24, Clarke exercised 25,000 options priced at $24.75 that were set to expire. He sold the shares the same day at $28.25 for an $87,500 gain.
At Edison, Tom Noonan, the controller of Edison International, realized a pretax gain of $35,275 by selling 8,300 shares for $23.88 on Nov. 24, according to First Call. He tapped into stock options, priced at $19.63, that didn’t expire until 2006 and 2007, First Call said.
Mavash Yazdi, the company’s chief information officer, sold 3,000 shares for total of $72,750, or $24.25 on Nov. 1, First Call said. Yazdi’s profit from the sale wasn’t disclosed in the SEC records.
At the time of those stock sales, Edison had already warned that soaring electricity prices had become a financial drain, but the company didn’t publicly discuss a possible bankruptcy filing until December.
As of Nov. 24, Edison‘s stock was down by 9 percent during 2000. The shares, which traded as low as $6.25 last month, closed at $13.45 Thursday, up 11 cents.
Helaine Morrison, district administrator for the SEC in San Francisco, declined to comment on whether regulators will investigate the utility stock sales.
Generally speaking, ”trading on material, nonpublic information is a violation of a fiduciary duty,” Morrison said.
Because California’s power problems had begun to surface by August, it’s unlikely that the utility stock sales broke insider trading laws, said Michael Friedman, a securities lawyer in Pasadena.
”The sales certainly can’t be taken as a vote of confidence in their companies, but that’s more of a political issue than a legal issue,” Friedman said.
