Client Alert

The SEC Targets 10b5-1 Plans Ten Things Executives and Boards Should Be Doing

December 04, 2007

William F. Sullivan, Peter M. Stone, Thomas A. Zaccaro and Morgan J. Miller

In striking similarity to the analysis that precipitated the option backdating cases, recent SEC attention is focused on reports of seemingly fortuitous returns generated by executives selling shares under automatic trading or Rule 10b5-1 Plans. The heightened scrutiny follows an earlier study by a Stanford University School of Business professor that suggested returns under Rule 10b5-1 trading plans were substantially better than would be expected if the trading were truly automatic. Without reaching any legal conclusions, the study hypothesized that the statistically abnormal returns possibly resulted from executives manipulating the creation or termination dates of trading plans based on the timing of upcoming corporate announcements that were expected to impact the companys stock price. The study also considered possible manipulation of corporate disclosures after trades had already been planned.

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