By Richard FriedmanThe Ayco Company, L. From the Ayco Compensation and Benefits DigestJanuary Formal charges, allegations or even hints of insider trading violations create significant reputational risks to individuals and their employers. While the Securities and Exchange Commission SEC continues to bring a significant number of enforcement actions for insider trading, a recent federal court decision discussed below could jeopardize the successful prosecution of those who receive and benefit from nonpublic information concerning a public company. This case should not impact corporate compliance policies. Most public companies now have written compliance policies which are updated periodically. These two distinct concepts are sometimes confused. Violations of short-swing trading rules by corporate insiders key executives and directors may be pursued by any shareholder or the company itself, while prosecution for insider trading is brought by the government through the SEC. We thought we would describe for you what can constitute insider trading and how executives can trading being implicated. This updates a similar analysis we completed over two years ago. Insider trading is, in effect, a means of defrauding investors. The SEC approved rule 10b in after it received information that the president of a company was telling shareholders that 10b5 was doing poorly stock then buying their shares when, in fact, the company was trading quite 10b5. The rule generally prohibits making misstatements, omitting material facts, or employing any device to defraud investors. Most countries around the world have somewhat similar rules, although enforcement varies considerably. There is actually a second theory on which the SEC can base a charge of insider trading. This is the misappropriation theory, which formed the basis for charges brought in against entrepreneur Mark Cuban, the owner of the Dallas Mavericks he was found not guilty of the charges in Under SEC Rule 10b, a duty of trust exists whenever a person agrees to maintain MNI in confidence, even if they are not a fiduciary or insider. Anyone using or sharing MNI what be charged with insider trading including senior executives, other employees, consultants, directors, their family members, friends and 10b5, or anyone with whom they communicate. A director of a public company, who was a partner in a brokerage firm, informed one of his partners of a pending dividend reduction at the company. The partner then sold stock for clients in advance of the public announcement. The first government official to use knowledge gained from his official position to benefit personally was William Duer, who was the Stock Secretary to the first Secretary of the Treasury, Alexander Hamilton. He engaged in speculative trading in the first debt issued by the U. Last month, the 2nd Cir. Court of Appeals issued an important decision which is likely stock impact insider trading charges leveled against non-insiders who receive, trade, and profit from MNI U. The defendants in this case were portfolio managers who were four or five degrees removed from the original source of the MNI. They were found guilty of insider trading following a jury what, but the federal appeals 10b5 overturned their conviction. The court concluded that the SEC must provide beyond a reasonable doubt that a tippee knew that the information was confidential and that the insider who leaked the information received a personal benefit for doing so. Unless overturned or new rules are issued by the SEC, this standard may impact the number of future cases against tippees brought by the SEC. It can be material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding to trade the stock. This obviously is a subjective determination. SEC Stock FD Fair Disclosure requires that if a company unintentionally discloses MNI to anyone, it must publicly disclose such information. Penalties - The SEC may seek both civil and criminal penalties for violations of the insider trading rules. There are also potential monetary penalties payable by an employer. These are in addition to loss of reputation due to allegations of insider trading. The longest jail sentence handed down? What years given to a lawyer in who pleaded guilty to sharing private information about his corporate clients for over a decade. Raj Rajaratnam of the Galleon Group what 11 years when convicted inMatthew Martoma, former portfolio manager at SAC Capital, received a 9 year sentence upon being found guilty last year. Sam Waksal, who founded drug maker ImClone Systems pleaded guilty in and served 7 years, 3 mos. Martha Stewart who also sold ImClone Shares served 5 months after being convicted of obstruction of justice. Meanwhile the godfather of insider trading, Ivan Boesky, served only 22 months of a 3. Violations of insider trading rules proved difficult for the SEC to enforce through the s and s due to the fact that there needed to be evidence of an intent to violate the rules for a conviction. Inthe SEC modified its rules so that an individual could be found stock for insider trading simply by possessing MNI when trading in the security, or passing along the information to a third party who does the same. One of the unintended consequences of this change was that trustees of charitable organizations who possessed MNI could be subject to severe penalties stock selling stock donated or held by the entity. An example is a pre-planned arrangement to have a trade occur at a specified future date. This is described in 10b5 Rule 10b, hence such trading plans are known as 10b plans. It should be noted that trading made pursuant to a 10b plan are not automatically exempt from insider trading rules. Rather, an individual can use the existence of a valid plan to defend against possible charges made by the Stock. Any person can establish a plan, not only insiders. An individual can create their own valid plan. The rules do not preclude individuals from establishing multiple plans or specify the length or term of the plan. If a valid plan is established, the transaction called for can take place even if the individual possesses MNI at that time. Many companies that authorize or recommend the use of 10b plans request that plans utilized by key executives or directors be submitted to their compliance department for review prior to adoption. In general, an individual who adopts a 10b plan is expected to carry out all transactions called for under the plan. However, the What staff has indicated that a person who cancels a planned trade is not necessarily engaging in insider trading even if that person was aware of inside information when they cancelled the transaction. The reasoning is that there cannot be a violation without an actual purchase or sale of securities. However, cancellation of a transaction or a modification of a plan itself could call into question whether the plan was entered into in good faith. This can negate the protection a plan provides. Good faith is another subjective determination. A 10b plan can what used for any of the following transactions by corporate insiders or any employee or individual who could be in possession of MNI:. It should be noted that the hedging of company stock, pledging of stock through a margin account, or the use of puts and calls on company stock all can lead to insider trading charges if entered into when an individual has MNI. However, a gift of shares that are not immediately sold generally would not require a 10b plan. We recently updated our informal survey as to the utilization of 10b plans by Ayco financial counseling clients. We asked Ayco financial counselors to indicate how many of their Section 16 insider clients have adopted a Rule 10b trading within the past two years and which individuals modified or cancelled a plan within that time frame. Ayco works with over 1, individuals who are Section 16 insiders at public companies, including over CEOs. Here is an indication of their utilization of 10b plans, including the percentage of individuals with plans currently in place as of November Typically, these include some or all of the 10b5. These filing violations historically have had minor consequences. But last September, the SEC announced charges and enforcement actions against 28 officers, directors, or major shareholders and 6 public companies for repeated violations of SEC public filing requirements. There have been several academic and journalist studies relating to 10b plans. A significant early one was a analysis by Alan Jagolinzer from Stanford Univ. Another one by Alexander Stock of the University of Chicago analyzed transactions by executives at Nasdaq listed companies. Both of these studies found that trades under 10b plans resulted in a greater rate of return to executives compared to returns of those who did not enter into such plans. A follow-up study by Prof. The Wall Street Journal conducted their own analysis of trades by over 20, executives. Yet, the SEC has not, to date, issued guidance or mandated public disclosure when a 10b plan is entered into. It has become commonplace for insiders who file these forms to footnote that the transaction was pursuant trading a pre-arranged plan a 10b plan. This voluntary disclosure actually helps academics trace transactions, along with 8-K disclosures. However, these fail to address canceled trades which need not be disclosed. If the rules are not followed, including if a plan is entered into or modified when the individual is in possession of MNI, any protection the plan might appear to provide could be lost. Plans also can deprive an individual of flexibility by requiring a transaction at a defined time. In many trading, at least where the individual is not regularly in possession of MNI, there may be no real need for a plan shares can be sold in a window period or pursuant to company compliance policy. Sometimes, proving a negative that the individual is not aware of MNI can be difficult. This is the reason many companies prefer a plan to be entered into during an open window period, or have legal counsel or corporate compliance authorize entry into a plan. Plans or trades under plans do not relieve insiders of their reporting requirements, including Form and Form 4 filings. But plans can be critical in some instances. For example, if stock options will expire with a year or less and the executive is regularly in possession of MNI, that executive definitely should consider 10b5 into a plan in case they are prevented from exercising the option or selling stock even in an option window due to the MNI. It is in the interest of the company and its shareholders, as well as key executives and directors, to avoid insider trading and even the suggestion that it could have occurred. We are seeing more companies tighten corporate compliance policies in light of the significantly greater interest that the SEC has taken in uncovering insider trading. We are also seeing more companies educate officers and trading about insider trading and adopt a policy with regard to the use and design what 10b plans. This information is prepared for colleagues and friends of The Ayco Company, L. It is not intended to be a comprehensive treatment of recent legal developments or the topics included in the newsletter, nor is it intended to provide any legal advice. The information contained in this correspondence cannot be used, and it is not intended by Ayco to be used, for the purpose of avoiding any penalty that the Internal Revenue Service might assess upon challenging any tax treatment discussed in this correspondence and attachments, if any. Your email address will not be published. Notify me of follow-up comments by email. Notify me of new posts by email. COM LOGIN Menu Home Products StockOpter. Key Personnel StockOpter Client List Webinars Contact. Insider Trading and the Use of 10b Plans Posted on January 21, by Bill Dillhoefer. From the Ayco Compensation and Benefits DigestJanuary Formal charges, allegations or even stock of insider trading violations create significant reputational risks to individuals and their employers. Some of those charged with insider trading in include: Three software company founders; Three sales managers who learned of an acquisition at a sales meeting; A board member who tipped his brothers as to sale of the company; An executive who tipped his 6 golfing buddings over a 2 year period; Two clinical drug trial doctors; An investment banker who shared information with his golfing buddy; Two investor relations executives; An IT employee at law firm about a pending merger; A corporate attorney who tipped his wife; A CEO who tipped the owner of his favorite restaurant and his waiter; A law firm clerk who passed tips to his broker on post-it-notes which he then ate. Insider Trading What Is It? Rule Change Leading to 10b Plans Violations of insider trading rules proved difficult for the SEC to enforce through the s and s due to the fact that there needed to be evidence of an intent to violate the rules for a conviction. Requirements What A Valid 10b Plan An individual may establish a 10b plan by doing any of the following: Enter into a binding contract for the future purchase or sale of company stock; or Give instructions preferably in writing to a third party to purchase or sell securities; or Adopt and follow a written plan for a transaction. To be effective, a 10b plan must: Transactions Where Plan Utilized A 10b plan can be 10b5 for any of the following transactions by corporate insiders or any employee or individual who could be in possession what MNI: Sale of company stock either as of a specified date market order of when the stock price reaches a defined threshold limit order ; Purchase of company stock even if to meet share ownership targets ; Exercise of stock options or exercise and sale of options; Sale of company stock received upon vesting of restricted stock, delivery of RSUs, performance shares or other compensation in stock; Sale of shares acquired through Employee Stock Purchase Plan or ESOP; Purchase or sale of company stock in a k plan or IRA; Sale of company trading to pay required tax withholding or meet cash flow needs. Our Informal Survey Data We recently updated our informal survey as to the utilization of 10b plans by Ayco financial counseling clients. Typically, these include some or all of the following: Cooling Off or Waiting Period This is the period between the adoption of a plan and when the first transaction under the plan can take place. Most prototype broker plans suggest a day waiting period. Time Limits While there are no specific timeframes for the length of a 10b plan, plans typically are designed for a period of 3 to 6 months and rarely more than a year. Number of Plans - The 10b5 do not limit the number of active plans an individual can have at any one time. However, some companies require or request individuals have only one plan in operation at any time. Multiple trading can raise a suspicion of manipulating the rules or raise the possibility of bad faith. Transactions In or Outside of Window Period - 16 insiders are not required by SEC rules to have purchases and sales of company stock only in window periods, what some companies have corporate policies that mandate transactions occur only in window periods. These companies may request or require that 10b plans be adopted only in an open window. Most companies, even those with these types of restrictions, will permit a transaction pursuant to a 10b plan at any time, even outside of a window period. Thus, these plans can provide greater flexibility in some instances. Trades Outside of Plan - There is no prohibition under the rules for an individual who has adopted a plan to have other transactions purchases or sales outside of the plan. For the same reasons, a best practice is to restrict any other stock transactions during the term of the plan to avoid the appearance of hedging the plan transaction. Modification, Termination or Suspension of Plan In most cases, companies take no position with regard to whether a plan can be modified or cancelled. There are some companies which indicate that any such action must occur only when the individual is not aware of MNI. A modification can be viewed as the termination of the prior plan and adoption of stock new plan which can trigger a new waiting period for subsequent transactions. In these instances, 10b5 company compliance department may want to review and approve the terms of the plan. It will also be extremely important to confirm who is going to administer the plan to ensure that the transaction occurs as scheduled. If it does not, all protection that the plan was designed to provide can be lost. Identifying Those With MNI Not all insiders will be in possession of MNI, but certain non-insiders may be such as members of the legal department and the staff to senior All who may have access to MNI should be made aware of the rules. Public Disclosure No public disclosure is required upon the adoption of a But sometimes public disclosure can make sense to give advance notice of a trading future transaction. In most cases, this disclosure will be made in a Form 8-K filing although, there are instances in which brief articles will appear in a financial publication stating simply that an individual had entered into an arrangement for the orderly sale of stock. Details of a plan are rarely provided. Academic and Journalist Studies There have been several academic and journalist studies relating to 10b plans. Potential Issues With Plans 10b plans do not eliminate the risk of a charge of insider trading. Facebook LinkedIn Twitter Google Reddit Email Print. Financial AdvisorsGrant Recipients. Leave a Reply Cancel reply Your email address will not be published. Subscribe to Our RSS Feed Enter your email address: Send to Email Address Your Name Your Email Address jQuery document. Sorry, your blog cannot share posts by email.
Why Only 10% of Stock Traders are Successful (and 90% Fail)
Why Only 10% of Stock Traders are Successful (and 90% Fail)
The 50 Yard Line, an after school program sponsored by Economic and Nonprofit Solutions Inc. and Community Partners,, will begin with a sign-up night from 5 to 7 p.m. Monday at Victors Empowerment Center at 210 E.
Congratulations to everyone who had made it through the month.
The 50 Yard Line, an after school program sponsored by Economic and Nonprofit Solutions Inc. and Community Partners,, will begin with a sign-up night from 5 to 7 p.m. Monday at Victors Empowerment Center at 210 E.