US: Insider trading
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US: Insider trading

Just when you thought you had read almost everything that could possibly be written on the subject of stock options, Stanford University professor Alan Jagolinzer published a study that suggests that Rule 10b5-1 trading plans could be abused in a number of ways to "facilitate trading based on inside information".

(This article appears courtesy of International Financial Law Review, sign up for a free trial on their site
Morrison & Foerster, New York The Enforcement Division of the Securities and Exchange Commission has indicated that it expects to focus closely on the use and operation of 10b5-1 plans.

The SEC adopted Rule 10b5-1 in 2000 to "clarify and strengthen" insider trading laws. Rule 10b5-1 establishes that trading by an insider while they are aware of material non-public information will give rise to insider trading liability – abolishing the distinction that had previously been argued in insider trading cases between use and possession of inside information. The rule provides company insiders and the company with affirmative defences to insider trading claims for sales made under documented, pre-existing plans or commitments and sales by broker-dealers and others made on their behalf. To qualify for the safe harbour, an insider must have entered into a binding commitment or adopted a written plan before becoming aware of material non-public information. The plan must not permit the insider to exercise any further influence over how, when, or whether to effect purchases or sales. The defence to liability would be lost if the plan or instruction were altered or hedged in any way at any time.

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