Talk about two guys who should have known better. Yesterday, the SEC settled with two executives accused of insider trading at Sirius Satellite Radio (NASDAQ:SIRI). According to the SEC, in anticipation of the official announcement of Howard Stern's massive contract with the satellite radio provider in October 2004, a Sirius executive and the former president of Stern's accounting firm backed up the truck. Shortly after the deal was announced, they both cashed out at respectable markups.
Easy money. Until you get caught.
I am not going to justify such actions. However, I do want to shed some light on what we're talking about here, and the way the future can shade our perceptions of the past. Sirius shares closed at $3.35 a stub on Oct. 5, 2004. The next morning, Stern announced the deal on the air. Starting in 2006, Stern would be moving his radio show exclusively to Sirius in a five-year, $500 million deal.
Yes, the stock traded as high as $4.29 before closing at $3.87 that day. However, four trading days after the deal was revealed, Sirius shares closed at $3.52, not much higher than where they were before the Stern news came public.
These two guys were up to no good, but let's not assume that paying Stern $100 million a year would have been seen by the market as a can't-miss slam dunk for Sirius. After all, by most accounts, XM Satellite Radio (NASDAQ:XMSR) was also once bidding on Stern, and it had the larger audience to divide the acquisition costs into. It passed. Sirius was hungrier, scrappier, and -- ultimately -- smarter.
The day the deal was announced, Seth Jayson wondered whether Stern really was worth $1 billion, because that was the amount of the market cap spike that day. Well, now, more than 14 months later, that $1 billion spike has become a $5 billion spike.
It leads one to wonder where the lines should be drawn. Would an Apple Computer (NASDAQ:AAPL) insider who buys before the iPod's initial rollout be held to blame? It's not an easy question to answer, because the stock really didn't start moving until the iPod proved itself as an Apple savior. Microsoft's (NASDAQ:MSFT) next operating system has been worked on by countless developers. If a confident employee buys in, is that corporate pride or insider trading?
The SEC has every right to dig into these matters and dispense judgment. I realize that these two guys reportedly bought under questionable circumstances, with privileged information, and then flipped the shares days and weeks later. Not cool. Then again, maybe we should look into the folks who bought those shares, because the fireworks really didn't kick in until former Viacom (NYSE:VIA) radio programming guru Mel Karmazin was brought in a month later. At that point, it was just a matter of weeks before the stock peaked just above the $9 mark.
Satellite radio is going to be a major growth industry over the next few decades. XM or Sirius may not seem cheap at the moment, but that hasn't stopped our Rule Breakers newsletter service from picking up attractive companies at less-than-ideal valuations. In fact, two months ago, the newsletter recommended the purchase of XM Satellite Radio, with some praise going Sirius' way to boot.
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Longtime Fool contributor Rick Munarriz has been a satellite radio subscriber since 2004. However, he does not own shares in any of the companies mentioned in this story. He is a member of the Rule Breakers analytical team, seeking out tomorrow's great growth stocks today.
