The SEC Rule 10b5-1(c) Trading
Plan Defense (UPDATED NOVEMBER 7, 2003)"Insider stock sales" conjure up images of Wall Street and fraud. There is nothing inherently wrong with insider stock sales. Investor advocates are the first people to demand that companies compensate their officers and directors via stock-based compensation (although there remains considerable debate on this point). High technology companies do this as a matter of course to attract qualified people at all levels of an organization. If the efforts of these talented people succeeds, there is no reason why they should not be able to enjoy the rewards, provided that they are not aware of material nonpublic information. SEC Rule 10b5-1(c) now helps honest corporate officials do this, by allowing them to create trading plans when they are not aware of material nonpublic information. Courts also have recognized that Rule 10b5-1(c) defeat unsupported private securities class action lawsuits at the start, by negating any ability to infer of scienter from stock sales. Setting Rule 10b5-1 aside, some courts have strayed from reason in accepting too-easy inferences of suspicion from stock sales.
The SEC Rule 10b5-1(c) Trading
Plan Defense (UPDATED NOVEMBER 7, 2003)
In August 2000, the SEC formally adopted the Rule 10b5-1 trading plan defense that was the subject of the above-reference comment. This article is in effect a practice guide. It walks through the requirements of a trading plan, and in so doing suggests how they should be written.
In a case argued by yours truly, Judge Martin Jenkins of the Northern District of California cited alleged Rule 10b5-1(c) trading plans in ruling that alleged stock sales were not suspicious.
SEC Declines Mandatory Disclosure
of Rule 10b5-1 Trading Plans (ADDED JULY 11, 2003)
After proposing mandatory disclosure of trading plans (see the next article on this page), the SEC has for now tabled the proposal but continues to consider it.
SEC Proposes Mandatory Disclosure of Rule 10b5-1 Trading
Plans (ADDED APRIL 29, 2002)
In the wake of Enron, the SEC has proposed speedier and more extensive disclosure (by Forms 8-K) of stock-related events by directors and executive officers. This article outlines the SEC's proposal, with particular focus on Rule 10b5-1 trading plans. Among other items, the proposal, as presently drafted, would require disclosure of trading plans that already have been adopted, if they remain in place as of the effective date of the final rule.
Issuers and their officers and directors now frequently disclose the existence of trading plans (and other stock-related transactions). This page lists such disclosures, and will be updated, to serve as a resource.
Initially, there was much concern that California State insider trading law would not recognize the trading plan defense set forth in SEC Rule 105-1. However, reflecting common sense and good judgment, the California Department of Corporations adopted first emergency, and then final, regulations to do just that. The accompanying Statement of Reasons also sets forth the elements of an insider trading violation.
One of the first executives to disclose a trading plan in a press release changed his mind three weeks later and resumed selling on a trading window basis. He's now been accused of securities fraud based, in part, on his post-plan sales. What may happen?
How
not to create a trading plan defense: Securities and Exchange
Commission vs. Lipson (UPDATED
FEBRUARY 14, 2002)
A lesson in how not to come up with an unsubstantiated trading plan "defense" to cover up what appears to be truly illegalinsider trading.
One of the most vexing problems facing corporate employees, officers and directors is, "how do I realize the benefits of my stock or stock options without being accused of illegal insider trading or securities fraud?" This letter to the SEC, originally written in May 2000, analyzes a new SEC proposal to sanction the use of trading plans -- that is, a set of instructions to buy or sell stock at predetermined times in the future -- as a means of avoiding SEC insider trading liability under a proposed addition to Rule 10b-5. It suggests that the proposal or its commentary be augmented to allow application of trading plans to private 10b-5 securities fraud class action lawsuits.