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10b5 -1 Plan Abuse
Last month, we wrote that the latest hot topic in corporate executive abuses may be manipulation of traders under prearranged Rule 10b5-1. We said that once a determination is made to review the historical operation of a 10b5-1 plan, reviewers should consider as a threshold issue whether they are sufficiently independent from the subject plans and traders to be properly regarded as objective. We continue with a list that describes several steps that could be taken to reveal some of the 10b5-1 plan abuses that commentators speculate may exist.
Ensure That Plans Have Been Properly Adopted And Effectuated
Before becoming aware of material nonpublic information, the insider must irrevocably commit to the trade in a contract, instruction or written plan. With respect to any transaction under the plan, the insider must expressly specify the terms and date; provide a formula, algorithm or program for determining terms and times; or completely relinquish influence over how, when or whether to make trades. All purchases and sales must be made under the 10b5-1 plan; the insider cannot have altered or deviated from the plan or entered into a related hedging transaction. Finally, the safe harbor is not available if the 10b5-1 plan was part of a scheme to evade the insider trading rules or otherwise was not made in good faith.
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