10b5-1 Plans
Marvin S. Swift, Jr.
(602) 382-6211
mswift@swlaw.com
Jeffrey Beck
(602) 382-6316
jbeck@swlaw.com
Melissa Sallee
(602) 382-6302
msallee@swlaw.com
DENVER
LAS
VEGAS
ORA NGE
Character comes through.
COUNTY
PHOENIX
SALT
LAKE
CITY
TUCSON
Rule 10b-5 Insider Trading Liability Employment of
Manipulative and Deceptive Devices
SEC Rule 10b-5 prohibits any person, directly or indirectly, by the use of any
means or instrumentality of interstate commerce, or of the mails, or of any
facility of any national securities exchange, in connection with the purchase
or sale of any security:
•
To employ any device, scheme, or artifice to defraud;
•
To make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not
misleading; or
•
To engage in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon any person.
©2005 Snell & Wilmer L.L.P.
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Rule 10b5-1 Implements the Manipulative and
Deceptive Devices Standard
The Rule prohibits, among other things, the purchase or sale of a security of
any issuer “on the basis of” material nonpublic information about the
security or the issuer.
What does “on the basis of” mean in connection with the purchase or sale of
a security?
•
Is proof required that the person “used” material nonpublic information
in connection with purchase or sale?
•
Is it enough to prove that the person “knowingly possessed” material
nonpublic information at the time of the trade.
©2005 Snell & Wilmer L.L.P.
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Courts Have Split on the Applicable Standard
•
Second Circuit in U.S. v. Teicher suggested that “knowing possession” is
sufficient to trigger insider trading liability.
•
Eleventh Circuit in SEC v. Adler held that “use” was the ultimate issue,
but that proof of “knowing possession” provides a strong inference of
use that suffice to make out a prima facie case.
•
Ninth Circuit in U.S. v. Smith requires that “use” be proven in a criminal
case.
©2005 Snell & Wilmer L.L.P.
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Rule 10b5-1(b) Implements a “Knowing Possession”
Standard
•
A person is deemed to have purchased or sold a security “on the basis
of” material nonpublic information if the person was aware of the
information when making the purchase or sale.
•
From the SEC’s view, if the person is aware of the material nonpublic
information, the person will inevitably make use of the information.
•
A person can be “aware of” the information from surrounding
circumstances or from circumstantial evidence and the person can’t
successfully argue that his or her knowing the information had no impact
on his or her decision to trade.
©2005 Snell & Wilmer L.L.P.
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Affirmative Defenses
Rule 10b5-1(c) sets forth two separate affirmative defenses:
1.
If the trade was made under a binding contract, trading instruction,
or written plan that came into existence before the person became
aware of the material nonpublic information (applies to natural
persons and entities).
2.
If the entity was not aware of any material nonpublic information
and implemented reasonable policies and procedures to ensure the
person making the trade would not violate the insider trading laws
(applies only to entities).
©2005 Snell & Wilmer L.L.P.
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Rule 10b5-1 Plans
•
Designed to provide insiders flexibility to plan future transactions, at a
time when they are not aware of material nonpublic information so that
the future transaction(s) can occur - even if the insider has material
nonpublic information at the time of the transaction(s).
•
The Plan must be entered into in good faith and not part of a scheme to
evade the 10b5-1 rules.
©2005 Snell & Wilmer L.L.P.
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Requirements of a 10b5-1 Plan
Before coming aware of the material nonpublic information, the person must
have:
•
Entered into a binding contract to buy or sell the security;
•
Instructed another person to buy or sell the security for their account;
or
•
Adopted a written plan for trading securities.
©2005 Snell & Wilmer L.L.P.
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Requirements of a 10b5-1 Plan (cont’d)
The contract, instruction, or plan must:
•
Specify the amount of the securities to be purchased or sold, the price
at which and the date on which the securities are to be purchased or
sold;
•
Include a written formula, algorithm, or computer program for
determining the amount of the securities to be purchased or sold, the
price at which and the date on which the securities are to be
purchased or sold; or
•
Prohibit the person from exercising any subsequent influence over
how, when and whether to effect the purchase or sale.
©2005 Snell & Wilmer L.L.P.
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Requirements of a 10b5-1 Plan (cont’d)
The purchase or sale must occur pursuant to the contract, instruction or
plan.
•
The purchase or sale is not pursuant to the contract, instruction or
plan if the person who established it altered or deviated from the
contract, instruction or plan or entered into or altered a corresponding
or hedging transaction or positions with respect to the securities.
©2005 Snell & Wilmer L.L.P.
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Amount, Price and Date Defined
•
The Amount must either be a specified number of shares or specified
value of shares.
•
The Price means the market price on a particular date or a limit price, or
a particular dollar price.
•
Date means in the case of a market order, the specific day of the year on
which the order is to be executed and in the case of a limit order, the
date of the year on which the limit order is in force.
©2005 Snell & Wilmer L.L.P.
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Other Issues and Considerations
•
Best practice is to establish the trading plan during an open trading
window.
•
The program should either specify precisely how determinations as to
amounts, prices, dates and frequency of transactions are to be made, or
delegate responsibility to a party not subject to the influence of the
person who established the program nor is in privy to nonpublic
information.
•
The program should specify a termination date.
•
The program should make allowances for unforeseen circumstances that
would warrant automatic cancellation of the program (e.g.,
announcement of a merger, Regulation M, underwriting lockup, etc.).
©2005 Snell & Wilmer L.L.P.
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Other Issues and Considerations (cont’d)
•
Need to take into account other notification requirements, for example
Rule 144 and Section 16 (Form 4’s).
•
Frequent modifications are not advisable and any modification needs to
be made when not in possession of material inside information.
•
Terminations are tricky – generally there is no requirement to sell, so
presumably the plan can be cancelled at any time.
►
Warning – cancelling a plan raises serious questions about the
good faith intentions so persons are advised to wait a substantial
period (between 6 and 12 months) after the unscheduled
termination of a plan to enter into any subsequent plans.
►
Emerging Issue – what is the impact if an insider causes a
company to delay or accelerate the release of material
information with knowledge a future transaction will benefit from
such release, or delay?
©2005 Snell & Wilmer L.L.P.
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Other Issues and Considerations (cont’d)
•
Many companies publicly announce trading plans established by senior
executive officers and directors.
•
Many commentators believe a period of at least 30 days should elapse
between the time a plan is entered into and the time the first trade is
scheduled to occur.
•
Rule 144 filing issue can be tricky since the Form must be filed prior to
the transaction – consult with your lawyer and broker on the best way to
navigate this requirement.
©2005 Snell & Wilmer L.L.P.
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Litigation Focusing on 10b-5 Plans
Countrywide Financial (2009)
• SEC filed complaint against the former CEO of Countrywide Financial,
Angelo Mozilo, alleging that he used Rule 10b5-1 plans to trade illegally
on inside information.
• SEC alleged that Mr. Mozillo had material nonpublic information about
Countrywide’s deteriorating mortgage business when he instituted his
trading plans.
• Mr. Mozillo implemented no fewer than four separate plans during a three-
month period and sales under the plan began soon after their adoption.
• Mr. Mozillo amended one of his Rule 10b5-1 Plans two months after
adopting it and “actively amended and modified” his 10b5-1 Plans.
©2005 Snell & Wilmer L.L.P.
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Litigation Focusing on 10b-5 Plans (cont’d)
Backe v. Novatel Wireless, Inc. (2009)
• California federal court refused to dismiss a lawsuit against a
company’s officers based partly on allegations that they amended
their 10b5-1 Plans to sell more stock before the market learned of
a significant business development.
• Judge commented that the pattern of the officers’ sales “does not
square with a typical 10b5-1 plan triggering stock sales on certain
dates and at certain prices,” noting that the executives sold varying
amounts of stock just before the adverse development became
public and on varying dates.
©2005 Snell & Wilmer L.L.P.
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SEC Guidance
SEC has provided guidance about Rule 10b5-1 plans in its Compliance and
Disclosure Interpretations
• A person may not rely on the Rule when he or she institutes a trading plan
while aware of material nonpublic information, even if the plan is
structured to delay all transactions until after the information becomes
public.
• The Rule’s affirmative defense is available only for plans that are entered
into in good faith and not as part of a “plan or scheme to evade” insider
trading laws. The SEC has stated that this requirement will be assessed
in light of all relevant facts, specifically including the time period between
canceling one trading plan and establishing a new one.
• A corporate insider may transfer a long-standing Rule 10b5-1 Plan to a
new broker, if the broker that has been executing the plan’s transactions
goes out of business—even if the insider knows of material nonpublic
information at the time of the transfer. The transfer must be timed to avoid
any cancellation of transactions under the plan, however, and the new
broker must observe the plan’s original terms.
©2005 Snell & Wilmer L.L.P.
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