Finance Trading: January 2007

The record volumes aren't an indicator of volatility alone since the Dow industrials and S&P 500 reached new all-time highs last week. They also reflect a sea change in the way trading is done—through online trading programs used by a growing number of large institutional investors including mutual funds and hedge funds in the past five years.

"The days when humans traded with each other are gone. Now computers trade with each other," says James Angel, associate professor of finance at Georgetown University's McDonough School of Business. "Computerized systems are capable of handling big spikes in volume with minimal problems."

For Chris Concannon, executive vice-president of NASDAQ Transaction Services, heavy trading volume is an indication of the increasing efficiency with which the market is now able to execute trades, whether through online brokers or institutional investors using algorithms and electronic trading systems to place orders. Much of that has to do with technology, but it's also a function of much lower trading costs compared with 5 or 10 years ago. "If you can trade for $5, you may be inclined to trade in and out of positions on volatile days. There are very low costs for brokerage fees," he says.

Investors' ability to get in and out of positions all day owing to electronic trading programs means that record volume doesn't necessarily point to broader participation in the market. "Bigger institutional players like hedge funds that have that capability can bang in and out of the market a couple times a second," notes Rueckert. "Even though the same computer systems are trading back and forth, it's going to drive trading volume through the roof."

Cyberonics says 4.2 million Americans' lives could improve with a medical implant device the company makes to treat severe depression and epilepsy. The FDA approved its product. But federal investigators are probing Cyberonics' compensation practices. This USA TODAY Special Report examines one company caught up in the nation's expanding stock-options scandals. The report explains how a few Cyberonics executives and directors made nearly $50 million in stock-trading profits while selling a money-losing device that remains controversial.
Cyberonics (CYBX) said Monday that its chief executive and chief financial officer had resigned after an internal investigation found that unnamed insiders had incorrectly reported the dates of company stock options for years.

Cyberonics general counsel David Wise said in a filing to the Securities and Exchange Commission that the company had under-reported its executive compensation expense by about $10 million and would have to restate its financial statements going back to 1999.

In June, Cyberonics said that it was one of the companies under investigation by the SEC and by the U.S. Attorney's office in Manhattan. The company also faces several options-related lawsuits by shareholders and is embroiled in a proxy fight with a large investor demanding substantial changes in the board's makeup and governance practices.

Cummins had been directing Cyberonics' drive to win Medicare reimbursement for its medical devices to treat severe depression, a decision that he said could open up a $1 billion sales market for the company. Medicare's administrators have not yet ruled on the application.

Earlier, in June, former Cyberonics chief financial officer Pamela Westbrook, who resigned Sunday, told investors that "all stock options" issued by the company "are granted the day of approval and are priced at fair market value on the date of the grant." Westbrook said the company "fully followed securities and accounting regulations."

A USA TODAY investigation reveals that Cyberonics' board has engaged in a series of questionable practices to reward Cummins, certain directors and some executives with stock and options almost from its inception as a public company in February 1993. Among its practices, the company frequently issued stock options just before market-moving events that insiders participated in, including merger talks, regulatory milestones and earnings advisories. It also repeatedly issued options at the lowest or second-lowest monthly trading price, SEC filings show. On one occasion, management, including Cummins, and a director who serves on the compensation committee, bought company stock at a discounted price in which Cummins represented himself both as the CEO selling the shares and as an individual buying them.

Over the past year, academic research at several major universities has identified widespread problems in dating of stock options granted to company insiders. A joint study at Harvard and Cornell universities published last week estimated that about 850 CEOs at 720 companies benefited from opportunistic timing. The study, "Lucky CEOs," said the findings reflect widespread governance problems.