StorageNetworks' Insider Selloff

Speaking at a Salomon Smith Barneyinvestor conference on Sept. 4, StorageNetworks Inc. (Nasdaq: STOR) CEO Peter Bell did what any good CEO would do: He touted his company. StorageNetworks is on a clear and steady path to achieve our financial goals and reach our gross margin profitability metrics in line with our guidance,” he told the crowd. Three days later, he gave a similar presentation at an SG Cowen Securitiesconference.

Despite his proclaimed faith in the company, on the day of the Smith Barney speech, Bell sold 40,668 shares of the storage service provider (SSP) at $5.00 a share. He sold more stock on each of the following days right up through the day he spoke at the Cowen conference. During the four-day selling spree, he pocketed $714,918 as he unloaded 166,668 shares at an average price of $4.29 apiece.

In fairness to Bell, he was holding to an established a pattern of selling similar amounts of the stock on a monthly basis through a blind trust that defined in advance when stock sales will be made. The common rationale for such sales is that executives who benefit from stock grants and options need to diversify their portfolios. The trust is set up so specific amounts of stock are sold automatically on dates not known by the sellers. “That insulates Peter from a claim of insider trading,” says Dean Breda, StorageNetworks’ in-house attorney. So the selling should not have been much of a surprise.

Still, during Bell's September sales, the stock was flirting with its 52-week low of $3.65 a share. To those not aware of the blind trust, the appearance is that a key executive had no faith the stock would return to its 52-week high of $58.75, much less its $154 all-time high of July 2000.

This unfortunate perception is exacerbated by StorageNetworks' ongoing financial woes. Indeed, the SSP has been incinerating cash every quarter since its inception in 1998.This trend was reflected in the headline on the press release announcing its September quarterly report: "Company reaches gross margin profitability.” This means it’s finally not selling its services at a loss. But factoring in total costs -- including such incidentals as $22 million in stock compensation -- the company lost $33 million during the quarter.

Although StorageNetworks has $293 million cash, that may not last long. In a recent filing with the U.S. Securities and Exchange Commission, the company notes that money will be sufficient “for working capital and capital expenditures for at least the next 18 months.” Then what? “We believe that we will continue to incur losses on a quarterly and annual basis for the foreseeable future,” the filing states.

Not surprisingly, Bell isn’t the only StorageNetworks insider selling shares. Chief technical officer William Miller, also using a blind trust, sells 25,000 shares a month. During the period in early September when Bell sold his stock, Miller made several sales, ranging from $3.88 to $5.00 a share.

Other sellers include chief financial officer Paul Flanagan, who sold 68,750 shares in May and June for $1.2 million, and John Clavin, executive vice president of marketing, who sold 50,000 shares in June for $929,600. The parade of sellers doesn’t appear to be slowing. Harry Dixon, who resigned from StorageNetworks’ board of directors in September, filed plans in September and October to sell 3.75 million shares for $16 million.

Executives who want to inspire faith in their companies often buy shares when prices are down. But that’s not happening at StorageNetworks. A year ago, Miller was the last executive to buy the stock, when he purchased 4,000 shares, averaging $44.75 each, for $179,000. Meanwhile, insider sales at the company over the last year totaled a stunning $190 million.StorageNetworks’ stock closed down yesterday 26 cents (4.11 percent) to $6.06.

— Tom Davey, special to Byte and Switch, http://www.byteandswitch.com