WITH AVARICE AFORETHOUGHT
INSIDER TRADING AND 10b5-1 PLANS

Karl Muth
Vol. 10
January 2010
Page
The 10b5-1 plan and its growing popularity creates a variety of governance problems and temptations for executives at publicly-traded corporations. The thought, in creating a safe harbor for such plans, was to allow insiders to diversify their individual holdings while in possession of nonpublic, material information. The 10b5-1 plan allows the actual liquidation transaction to occur while the plan participant is in possession of inside information, as long as the orders or instructions causing the trade were created as part of a "plan" that predates the insider's acquisition of the pertinent information. This creates a sort of time machine, where the success of a trading strategy rooted in the past can be changed by altering the market context near the time of execution. This would not be problematic but for the reality that the very people set to benefit from future changes are the ones creating the news and numbers that drive the stock's future price. This article seeks to address where, when, and why the system breaks down and how executives take advantage of the flawed premise and common misperception that a 10b5-1 plan is a freestanding apparatus that cannot be stopped once set in motion when, in fact, it can be transformed, manipulated, and destroyed.
Copyright
© Karl T. Muth 2009.