WSJ.com - Tracking the Numbers

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Reading the fine print pays off when tracking share sales by corporate executives and directors.

They are increasingly turning to financial transactions that allow them to cash in on their holdings and defer capital gains -- all without drawing much attention to such potentially bearish moves.

Don Ackerman, chairman of Florida home builder WCI Communities Inc., executed one last summer, as the housing market showed signs of cooling. Under the deal, known as a prepaid variable forward contract, an investment bank paid him $14 million in return for as many as 500,000 shares to be delivered in 2008. Another plus: If the stock price rises before the delivery date, he turns over fewer shares, but if it falls, he doesn't have to deliver more shares.

So far, that has worked to Mr. Ackerman's advantage. The shares were trading between $32 and $35 at the time he executed the deal. They closed Friday up 23 cents, or 1%, at $23.73 on the New York Stock Exchange, valuing his half million shares at $11.9 million.

As is typical with such forward sales, WCI disclosed the deal in a footnote to a Securities and Exchange Commission filing.

Mr. Ackerman, 72 years old, says he sold to diversify his holdings and remains bullish on WCI's stock.

Sophisticated investors look at insider sales for signs of how executives view their companies' prospects, but these transactions "are very easily missed," says University of Michigan professor H. Nejat Seyhun. In the worst of cases, he adds, "they could be used by insiders to camouflage their intentions."

Forward sales are legal, and their tax advantages are eagerly marketed by Wall Street. The value of these and other transactions like them by insiders increased 68% last year to $9.6 billion and has totaled $28 billion since 2000, according to Thomson Financial, a market-data provider, which found more than 1,000 such transactions.

Forward sales are part of a menu of options executives use to divest themselves of their stakes. Some vehicles allow executives to diversify their holdings by pooling them with stocks held by other big-league investors; some lock in a stockholder's profits within a preset price range. Of these, prepaid forward contracts have become the most popular during the past two years, says Mark LoPresti, a Thomson analyst who has scoured regulatory footnotes for details of the deals.

They have been used by directors and executives at scores of companies, including Walt Disney Co., Krispy Kreme Doughnuts Inc., Tyson Foods Inc. and home builders like WCI. Nonexecutives who are large shareholders also use the vehicles.

Critics of the transactions say they make executive holdings harder to track when regulators are trying to force companies to make compensation easier to figure out. In addition to pushing for clearer disclosure, regulators have recently turned to another pay issue, stock options, to scrutinize whether companies backdated or otherwise timed the granting of them to let executives take advantage of favorable stock prices.

Forward contracts, critics say, also could misalign the interests of shareholders and executives who have insulated themselves from falling share prices. Some companies prohibit or discourage their officers from entering into such transactions. Commercial Metals Co. of Irving, Texas, has an insider-trading policy that strongly advises against them, saying that directors using them "may no longer have the same objectives as other shareholders."

A December 2005 study by Stanford University professor Alan Jagolinzer and two co-authors found that in the weeks before insiders executed forward sales, their companies on average earned double-digit annualized returns. In the weeks after, prices barely rose and underperformed the broader market. The study looked at forward sales at 100 companies between 1996 and 2004.

The exact mechanics vary. In most cases, an insider agrees to hand over a certain number of shares to a securities firm or investment bank at a future date, typically in two to three years. The financial firm pays the insider a lump sum upfront, usually 75% to 90% of the value of the shares. That builds in a profit for the bank and compensates it for bearing the risk of swings in the share price. Typically, the insider can deliver fewer shares if the price rises significantly but doesn't have to hand over more shares if the price drops.

Two years ago, the SEC's enforcement division asked more than a dozen Wall Street securities firms for details on the forward-sales contracts they had written, to see if they were disclosed properly. That investigation was never officially closed, and no formal action has grown out of it.

More recently, the Internal Revenue Service has looked at the deals, which allow executives to defer capital gains taxes until they deliver the shares. Earlier this year, the IRS issued an opinion that could force executives to pay immediate taxes on such transactions in cases when they temporarily lend their shares to others to buy and sell before the delivery date.

In the case of WCI, Mr. Ackerman's 500,000 shares were valued at $17.6 million when a trust he controlled sold them to a securities broker via a forward contract for $14 million. If the stock price increases substantially by 2008, he could deliver a little less than 400,000 shares. Mr. Ackerman owns about 3.4 million common shares (including the 500,000 share he will relinquish in three years), or about a 7.9% stake in the company, according to CapitalIQ, a data provider.

Mr. Ackerman declined to name the investment bank that will receive the shares, as is sometimes disclosed in regulatory filings.

"I'm 72 now and I have a very significant concentrated position in WCI stock," he said. He noted that the structure of the forward contract allows him to keep more of WCI's shares if the stock price rises, as he expects. "If I thought the stock had peaked or wasn't going to rise, I would have just sold my shares," he said. A spokesman for WCI said most of the shares were acquired more than 10 years ago, and he owns very few options.

In September 2005, William Lyon, CEO and majority-owner of California home builder William Lyon Homes Inc., forward-sold 117,000 shares valued at about $18.1 million, or $155 each, for $16 million; he has to deliver the shares in September 2008. In the months following, the company's shares fell to $70. In March, Mr. Lyon reversed course and made a buyout offer for the rest of the company at $93 a share. He has since raised that to $109. He didn't return calls seeking comment.



	May 15, 2006