Ann: Investigation of Concerns around CEO Share Trading, page-45

I don’t think it’s really necessary to consider his whole tax position.

As far as I’m aware the basic logic behind tax liability on vesting shares is:

On the 25^th July 114,968 performance rights vested and were converted into ordinary shares. He paid Nil for these but for tax purposes they would have had a deemed value of current market value. (Might have been 5 day VWAP) but let’s just go with market close on the day of $31.47. Therefore he would has deemed assessable income of 114,968 x $31.47 = $3,618,043 which would be taxed at his marginal tax rate – presumably 45% plus 2% levy plus Medicare = 49%

$3,618,043 x 49% = $1,772,841 tax liability for the vested shares.

In the past he has sold at the time of vesting to cover the tax liability and I can’t fault the logic of providing for the tax liability at the time it’s incurred. However this time he chose not to sell at the time of vesting. Vesting didn’t occur inside a blackout window so he could have sold – I assume he thought waiting would bring him a better sale price.

He had ample opportunity to sell again after the half year results and the blackout window starting 4 weeks prior to the AGM. He sold immediately after the AGM blackout window.

He sold for 74,968 @ $28.48. If he sold the vesting parcel from July he would have a $223,865 loss on capital account which could not be offset against the $3,618,043 deemed income but could be offset against other capital gains – we have no idea of what parcels he may have sold – so actual tax liability becomes speculation.

Breaking the nexus between vesting and sale to cover the tax liability arising from vesting means he was happy to take on timing risk to obviously try and maximise his wealth, But he got caught with his pants down – and however you spin it, it reeks of him having much more information than the rest of us at the time he sold and tried to limit the damage of his timing attempt.

The questions arising:
Did our CEO engage in insider trading?
Was continuous discloser delayed because of the episode – To a reasonable person should the CEO in his role be aware of dosage growth slowdown by the time of the AGM and the information released to the public? Obviously if the information was released he could not have sold for $28. More like $15 which means he would have had to sell all the 115,000 vested shares to cover the tax liability – that’s the risk of trying to time it which he created when breaking the nexus between liability occurring and sale to cover tax.

If continuous disclosure according to the rules was not sufficient is the board complicit or were they deceived by the CEO?
I personally don't think disclosure is sufficient when the CEO can sell knowing or should know actual sales numbers which are not provided to the other owners of the business - and the company's restated public forecast of those sales numbers just prior to his sale soon turn out to be wrong.

My logic tree says either, there is no story and release of the daily dose figures clears all things up or the board has either been deceived into or is complicit in inadequate continuous disclosure.

Decisive action or release of sales data is required to restored confidence - what do we get, an investigation Ya! I’m so inspired by their decisiveness.

Leaks to trading institutions matched by leaks to authorities. Management and board that have lost the confidence of long term committed owners of the business. What a soap opera.

Sad thing is the internally funded growth of the business to date could have been a great legacy to current board and management and still could be if they can quickly pass the baton onto the right people for the next stage of the SRX story.