April 25, 2013
10b5-1 Plans in the News
Posted by Usha Rodrigues

I vividly remember learning about 10b5-1 plans while in practice: they struck me then as an elegant and sensible way to insulate yourself from insider trading liability.  Even when I don't cover insider trading in Business Associations, I always make sure to mention them.  For those unfamiliar, 10b5-1 plans take the trading discretion away from corporate insiders, either by setting some type of formula or prearranged schedule for when to buy or sell company shares, or by vesting the power of decision with a third party that lacks inside knowledge.  When done correctly, this "set it and forget it" style investing works great.  "I don't know why everyone doesn't set up these plans," I tell my students every year.

Well, apparently many insiders agree--and are doing them the wrong way.  The WSJ had an article last November detailing executives setting up plans and then trading almost immediately--when they likely had material nonpublic information.  Or, rather than "setting and forgetting," modifying the plan repeatedly.  

Today's WSJ has another front page article on 10b5-1 plans, this one focusing on outside directors .  The article implies that nonexecutive directors using these plans is in itself questionable, which seems wrong to me: what's good for the goose is good for the gander, and outside directors should be able to protect their personal trading as well as insiders.  But the chief problematic examples the article cites involve directors who represent hedge funds, with the hedge fund using the trading plan and trading soon after adopting or modifying it. Take this one:

Double-Take Software... adopted a "cautious stance" about its future financial results on Oct. 27, 2009, according to securities analysts' reports at the time.

Shortly before that, the company briefed board members on its business outlook, said a person familiar with the matter. Among those briefed, the person added, was Ashoke Goswami, a general partner of ABS Capital Partners, a Baltimore-based firm that invests in small, growing companies.

On Nov. 11, 2009, ABS amended a trading plan for Double-Take shares, a change Mr. Goswami disclosed in a regulatory filing. The director then reported the sale by ABS of $3.8 million in Double-Take stock, most of it under the revised plan, in trading from mid-December through Feb. 2, 2010.

On Feb. 3, Double-Take released earnings guidance below analysts' estimates. The stock plunged 21% in a day.

Last week Brian Breheny of Skadden posted some thoughts on these plans over at the Harvard Law School Forum on Corporate Governance and Financial Regulation.  He reports that the Council of Institutional Investors recommends that the SEC

  • limit the time period for adoption of Rule 10b5-1 trading plans to the issuer’s open trading window;
  • prohibit the adoption of multiple, overlapping trading plans;
  • require a mandatory three-month or longer delay between plan adoption and the execution of the first trade pursuant to the plan; and
  • limit the frequency of modifications and cancellations of trading plans.

Skadden takes issue with some of these recommendations, but the last two make good sense to me.  3 months might be overkill, but requring a delay between adoption and first trade would prevent a lot of of gaming, as would limiting modifications.

I'm not sure where I fall on making the terms of the plans themselves public--I can see that knowing when the CEO has to sell or buy shares would be valuable information, and there might well be good reasons to keep that from the market.  In any event, I expect we'll see more and more about these plans in the future.


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