Correction: 11/30, 3:00 PM.
FORTUNE -- When it comes to insider trading and executives, the market has always responded with a wink and a nod. By definition, every time an executive buys or sells a stock it's insider trading. Do CEOs have information that no one else has about their company? You betcha. Do they trade on that information? Too many of them seem to.
And this is no secret. There is a whole school of investing devoted to watching the trades of executives -- it's viewed by some investors as legitimate insider trading.
So it's no surprise that the Wall Street Journal was able to round up a number of questionable examples of insider trading by executives. The WSJ's study itself, as others have pointed out, was flawed. It was set up in a way that was the data equivalent of entrapment.
But those who are harping on that are missing the point. The WSJ didn't need to do its own study. In the past two years, the Securities and Exchange Commission has nabbed an alarming number of hedge funders for insider trading, some with the help of top executives. The SEC seems to be building a case against top hedge fund manager Steven Cohen of SAC Capital -- it recently charged one of Cohen's former traders with one of the biggest insider trading schemes in history. What's more, there are plenty of studies out there already that show insiders routinely beat the market, something very few full-time professional investors are able to replicate.
A decade ago, the SEC came up with a system it thought would limit or eliminate executives from profiting from insider information. The agency encouraged executives, but didn't require them, to lock in dates well in advance for when they would buy or, more often, sell their companies' shares. If stock sales were planned for months, and were routine, then there would be no ability to cheat. Right?
Not exactly. The plans proved to be more flexible than the SEC envisioned. But that's not their biggest weakness. In most instances of apparent insider trading by an executive, a CEO miraculously appears to be able to dump a big chunk of their stock holdings right before the company reports bad news, like the quarter was worse than expected, saving them hundreds of thousands, maybe millions of dollars. Other shareholders, not in the know, take the hit.
But a pre-set stock plan won't stop that. That's because a CEO has the ability within some reason to decide when to let the market know that his business has taken a turn for the worse. Seems natural to release news that will be bad for shares on a day when you are holding less of those said shares.
Alan Jagolinzer, a business professor at the University of Colorado Boulder who has studied these plans, says there is a lot of variation in the way the plans are set up, but there isn't any evidence to suggest that executives are kept in the dark as to when their pre-set sales will occur. Indeed, a recent study of executive stock option plans found that companies were more likely to announce bad news in the days after a stock grant expired than before.
So given that preventing insiders from acting on private information is very, very hard, what can we do about it? First off, executives who lock in stock sales in advance shouldn't be able to know when the actual sales will occur. Blind trusts aren't perfect, but they are better than the alternative.
MORE: Who needs a blind trust?
Second, executives should only be allowed to sell after earnings releases, not before. The point of stock options is to align executives with shareholders. They should be forced to share the pain when their company fumbles, not be able to sidestep it by selling in advance.
There actually is one silver bullet that would end 90% of all illicit insider trading by executives: Ban stock options, or otherwise paying top executives in stock. Unfortunately, that's probably not going to happen. Not just because of a widely held, but not really proven, belief that executives who are paid in shares are better for shareholders. The reason options and stock grants aren't going away is because of accounting.
By current rules, paying executives is cheaper that paying executives in cash. Shareholders, too, share in the benefit of the accounting illusion. But it's not costless. Until the market is willing to give that up, there will always be executives who are able to cash in by knowing before others that they have screwed up, leaving regular shareholders to take the hit.
Correction: An earlier version of this story said that companies don't have to expense compensation when they pay executives in cash. That's wrong. Companies have to amortize those payments overtime.
A new NBER study suggests you might want to check out the marital status of a company's CEO before investing.
FORTUNE -- Here's another study that will make you scratch your head about corporate America. A working paper released this week by the National Bureau of Economic Research finds that the stocks of companies with chief executives who are single are riskier than the shares of companies run by CEOs who MOREStephen Gandel, senior editor - Mar 13, 2012 5:00 AM ET
A look back at the highs and lows of the past year in the financial markets.
FORTUNE -- To borrow from the 1978 camp classic, "Greece" is the word. Looking back at 2011, the European debt crisis -- particularly Europe's protracted will-they-or-won't-they debate over coming to the aid of their Greco-roamin' common currency partners -- was probably the single biggest factor to impact the financial markets. As if that weren't enough, MOREDec 12, 2011 5:00 AM ET
Has any group ever been more richly rewarded for failure than the CEOs of the six biggest U.S. banks?
Over the past decade the too-big-to-fail banks have showered a staggering $1.15 billion in cash and stock on a changing cast of hard-charging if inept chief executives, according to regulatory filings. That works out to an average paycheck of $19 million a year – this in a decade in which the biggest banks ripped off everyone in sight on MOREColin Barr - May 24, 2011 6:40 AM ET
How out of it are America's overpaid CEOs?
Pretty out of it, if you can glean anything by comparing some recent glowing surveys of CEO confidence with the sinking signs coming out of the job market.
The latest bad news on the jobs front comes from the Conference Board, which said Monday its employment trends index posted its biggest decline last month in two years. The index is based on eight data MOREColin Barr - May 9, 2011 12:04 PM ET
Fatal Risk: A Cautionary Tale of AIG's Corporate Suicide, by Roddy Boyd
If you want to know how AIG (AIG) became the time bomb that nearly torched the financial system, "Fatal Risk" is a good place to start – despite the author's evident admiration for Hank Greenberg, the former AIG chief who is in my view one of the unsung villains of the financial crisis.
Boyd, a former reporter at the New MOREColin Barr - Apr 24, 2011 9:48 PM ET
Are America's optimistic CEOs getting a little carried away?
The Business Roundtable's CEO outlook index hit its highest level on record in the first quarter, the trade group said Wednesday. The 9-year-old index, measuring expected sales, capital spending and hiring trends, hit 113 – a full 7% above than the previous high water mark.
A survey of 142 chief executives showed 92% expect sales to rise in the next six months, and MOREColin Barr - Mar 30, 2011 11:28 AM ET
Did someone neglect to remind Duncan Niederauer that people are anxious about jobs nowadays?
You might wonder after the NYSE Euronext (NYX) CEO's snappish performance at Tuesday's press conference announcing the $10 billion tie-up of the NYSE and Frankfurt's Deutsche Boerse.
By his own admission, Niederauer turned "snippy" after being asked how the deal will change the NYSE. He badgered naysaying reporters about focusing on possible job cuts at the expense of what he naturally sees as the MOREColin Barr - Feb 15, 2011 2:12 PM ET
Yahoo's Carol Bartz is the new face of excessive CEO pay.
Bartz (right) sports the biggest paycheck on the list of 25 overindulged big companies compiled by proxy adviser Glass-Lewis.
She took home $39 million last year, including a $10 million make-whole payment for options relinquished when she left Autodesk (ADSK), her previous employer. All this as Yahoo was pushed to the brink of irrelevance by the likes of Google (GOOG).
Bartz was MOREColin Barr - Oct 11, 2010 3:29 PM ET
Business leaders are saying thanks but no thanks to shareholder democracy.
The Chamber of Commerce and the Business Roundtable, the lobbying groups representing many of America's biggest companies, sued the Securities and Exchange Commission Wednesday to overturn a rule that ends management's exclusive lock on nominating corporate directors.
The rule, known as proxy access and adopted last month, allows major long-term shareholders to nominate directors to a big company's board without organizing MOREColin Barr - Sep 29, 2010 3:58 PM ET
|Men's Wearhouse fires the 'I guarantee it' guy|
|U.S. oil boom helps thwart OPEC|
|Investors hold their breath for the Fed|
|Men are disappearing from the workforce|
|Chrysler relents, agrees to recall 2.7 million Jeeps|