Is greed good? Do managements with "skin in the game" work harder to make shareholders wealthy?
These two seemingly unrelated investing truisms -- the first famously (if fictionally) espoused by Gordon Gecko in Wall Street, the latter a central tenet of our investing strategy at Motley Fool Hidden Gems -- were certainly called into question by events this week.
According to the Wall Street Journal, investors in Perot Systems (NYSE:PER) took a break from their cheering over Dell's (NASDAQ:DELL) buyout to boo one Reza Saleh. The employee of H. Ross Perot's family investment firm allegedly traded on advance knowledge of Dell's offer, "earning" $8.6 million in profit from buying call options prior to the deal's public announcement.
If illegal insider trading is proven, the affair will echo a pair of scandals we saw back in 2004, when unnamed parties used inside information first on Royal Bank of Scotland's (NYSE:RBS) buyout of Charter Financial, and then on General Electric's (NYSE:GE) purchase of InVision, to reap millions of dollars' worth of ill-gotten gains. Simultaneous with news of the Perot debacle, the Journal gave us an inkling of why Marvel Entertainment (NYSE:MVL) disagreed so strongly with investors who felt the company got a raw deal from Disney (NYSE:DIS).
Turns out, Marvel's CEO had a vested interest in this deal going through -- one even greater than you'd think from his 37% stake in the company. Just weeks after his company began discussing the deal with Disney, CEO Isaac Perlmutter wrangled himself another 1.27 million stock options -- options priced at as little as half the price Disney was willing to pay for them.
Naturally, Marvel management argues there was no impropriety (move along ... nothing to see here), and that Perlmutter was due for a bonus in any case. It also seems a bit strange that a man due to reap $1.4 billion from selling his company would jeopardize his reputation, and his freedom, just to stuff an extra $34 million in his wallet. But stranger things have happened. (Witness Steve Jobs and the Apple (NASDAQ:AAPL) backdating scandal of 2007.)
What's it all mean to investors?
In a nutshell, it means this: We still believe investors are better off when managers have a stake in the success of the businesses they run. Perlmutter's (allegedly, always allegedly) sticky fingers notwithstanding, his sellout to Disney still promises to net investors an $11 profit on any shares they owned prior to Aug. 31. A CEO without any interest in the company might have been just as happy collecting a paycheck forever, and unwilling to entertain Disney's bid.
Now it's your turn to tell us what you think, Fool. Is insider trading a pure and unmitigated evil that destroys faith in "the system" and drives up the cost of mergers when insiders get paid off? Or is there perhaps a plus side to be found in insider trading? Scroll down to our comments board, and sound off.
