The curious case of insider trading by a regional bank

By Mark Hulbert

Is the stock market a level playing field for both corporate insiders and outsiders? Activity at First Horizon Bank raises questions.

A number of insider stock sales at First Horizon Bank over the past year have raised questions among one of the academia’s leading experts on insider trading.

He is Nejat Seyhun, a finance professor at the University of Michigan who recently helped launch a subscription website to help investors scrutinize insider transaction data collected by the U.S. Securities and Exchange Commission.

First Horizon (FHN) is a Tennessee-based bank with $79 billion in assets as of the end of March. The bank has been in the news not only because of the banking crisis triggered by the collapse of Silicon Valley Bank and Signature Bank, and the associated investigation of smaller regional banks. First Horizon has also been in the news as a merger between the company and Canada’s TD Bank (TD.T), announced in February 2022 for $25 per share, fell apart in early May.

First Horizon shares were trading at $24.77 per share in late February 2023. It closed below $12 per share on June 7.

Between March 2022 (after the merger was announced) to February of this year, First Horizon officers and directors collectively sold 1.1 million shares of the company’s stock at an average price of $23.35. Seyhun finds this curious. In an email, he said that “during this 12-month period, no insider was needed to sell stock on the open market, especially below the $25 merger price.”

The largest insider selling during this 12-month period came from Daryl Byrd, First Horizon’s executive chairman of the board of directors. In June 2022, he sold more than 200,000 shares for $22.59, significantly below the proposed merger price. That got Seyhun’s attention, as Byrd could have gotten 10% more by waiting for the merger to close.

Beth Ardoin, senior executive vice president and chief communications officer at First Horizon, said in an email that the timing of Byrd’s sale was due to the imminent expiration of options previously granted to him, which he would have had to forfeit. if it were not exercised.

Seyhun says he finds this explanation questionable, “since having to exercise does not at the same time create an obligation to sell shares.” When asked about this, Ardoin said: “You question the actions taken last June [2022]a time when TD publicly, clearly and consistently expressed their confidence in their ability to complete the transaction” to acquire First Horizon.

Assuming the TD Bank merger was still on track, Byrd could have gotten a higher price by waiting. Responding to a question about whether the First Horizon transactions raise red flags, a spokesman for the Securities and Exchange Commission declined to comment.

In an interview, Seyhun emphasized that he asks these questions because of the circumstantial evidence; he has no specific information to suggest that any of these transactions were improper. He says his focus on First Horizon in particular was triggered by the stock price nosedive in the wake of the failed merger with TD Bank.

Seyhun also says he had no investment interest in First Horizon during the 12 months in question when the insider sales took place. In the wake of the collapse of the bank’s merger with TD Bank, he says, he bought a small long position in First Horizon stock.

Pre-planned transactions

A valid question is whether any of the 1.1 million shares sold during this 12-month period were preplanned, in accordance with an SEC rule known as 10b5-1. This rule allows insiders to sell a predetermined number of shares at predetermined times; insiders are using 10b5-1 plans in hopes that it will exempt them from regulatory scrutiny and accusations that their sales are motivated by insider information.

While one of the insider sales during this period was a 10b5-1 sale, this raises questions. This was a sale by Bryan Jordan, CEO of First Horizon, of 93,157 shares on February 24; the sale represented 6% of the First Horizon stock he owned at the time. The specific 10b5-1 plan under which this sale was made was approved last September. Seyhun said the plan was adopted while the merger with TD Bank was still in progress. Seyhun argues that this sale should be viewed as critically as the other unplanned sales.

In an email, Ardoin said Jordan set up his 10b5-1 plan in September 2022 as a “safety measure” in case the TD Bank merger was delayed, as he held a number of options that expired in March 2023, after which she would have been worthless.

Seyhun wonders why Jordan was afraid the merger might be delayed. “A potential delay exposes shareholders to the risk that the share price could fall significantly, as it also increases the likelihood of cancellation,” Seyhun wrote in an email.

Read: First Horizon CEO says bank ‘never assumed regulatory approval was a given’ in sunk TD merger

A class action lawsuit was recently filed alleging that several individuals involved in the proposed merger between First Horizon and TD Bank “made false statements and/or concealed that TD Bank failed to disclose material information to the market that they deficient internal controls that posed a significant risk to the completion of the First Horizon transaction.” Seyhun is not involved in this case.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected]

More: Jefferies repeat buy on First Horizon as Raymond James maintains market performance rating

Plus: These 5 stocks stand out in a banking sector full of great bargains

-Mark Hulbert

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10/23/06 1026ET

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