'Insider' deals under scrutiny

THE bribery cloud hovering over Pinnacle Technologies may have lifted, but this does not mean the insider trading probe is dead.

THE bribery cloud hovering over Pinnacle Technologies may have lifted, but this does not mean the insider trading probe is dead.

What irked investors was that soon after Pinnacle's Takalani Tshivhase was arrested, three company executives sold shares worth R28.6-million. These executives included CEO Arnold Fourie and Tshivhase himself.

Notably, this was before news of the arrest leaked to the market. And, when Pinnacle did break its silence and revealed the charges, its share price predictably dived.

This prompted the JSE and the Financial Services Board to open investigations into insider trading.

This week, Pinnacle director Henry Ferreira argued that those executives got permission to sell shares before the arrest. That may be so, but the fact is that these shares were sold after the arrest and before the markets were aware of it.

The question is: If the share sales were so transparently above board (as Ferreira now argues), why are the JSE and FSB still investigating?

"Whenever there's an apparent breach of JSE rules, the JSE is obliged to investigate," he says.

Ferreira admits it does not look good - but only because it was "clouded by the allegation thing".

So why didn't Pinnacle announce the "allegation thing" when the allegations were made, rather than 20 days later?

"You've got to do things right. If we'd rushed out and said by the way, one of our directors has been arrested but he's been released and no charges have been laid, it would have been irresponsible, to say the least."

Fourie's R23-million share sale, which came almost immediately after Tshivhase's arrest and before any other shareholders knew of it, was part of a zero-cost "collar deal" that Fourie made with a bank three years ago, Ferreira says.

Essentially, this is a hedging strategy adopted by executives to protect themselves from sharp falls in their company's share price. There is an argument that, although this is legal, it is ethically dubious and contrary to good corporate governance because it separates the interests of executives from those of their shareholders.

Ferreira says there are no plans to refer the practice to Pinnacle's ethics committee - although some analysts believe minority shareholders have every right to feel seriously aggrieved by the executives' share sales that preceded what they should have known would be a dive in the share price.

The CEO had "absolutely no control over the sale of those shares", he says.

Apart from anything else, though, what sort of confidence does it demonstrate when the CEO in effect shorts his own company's shares?

"The first thing he did was to buy a whole bunch of shares," says Ferreira. "This demonstrates the faith he has in his company."

Ferreira does not mention, however, that Fourie bought his "bunch of shares" after the price had collapsed. Within hours of this week's announcement that charges had been dropped - which, according to Ferreira, the company had no doubt would happen - the share price rocketed 35%.