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In what the agency says is the first prosecution of its type, the U.S. Department of Justice has brought criminal charges against Terren Peizer, the Executive Chairman of the healthcare company Ontrak, alleging that the executive improperly used Rule 10b5-1 trading plans to sell shares in the company ahead of the company’s disclosure of bad news. The SEC has separately brought a civil enforcement action against Peizer based on the same allegations. The government alleges that Peizer set up the plans while aware of the undisclosed bad news and that his stock sales allowed him to avoid more than $12.7 million in losses.

 A copy of the U.S. Department of Justice’s March 1, 2023 press release about Peizer’s prosecution can be found here, and the February 24, 2023 grand jury indictment of Peizer can be found here. The SEC’s March 1, 2023, press release can be found here, and its complaint against Peizer can be found here.Continue Reading First-Ever Criminal Action Charges Exec with Misuse of Rule10b5-1 Trading Plans

As I noted at the time, earlier this year SEC Chair Gary Gensler spoke publicly about the need for revisions to Rule 10b5-1, the regulatory provision that allows corporate executives, subject to certain requirements, to trade in their holdings of their companies’ securities. Rule 10b5-1 has long been criticized because of perceived abuses. On December 15, 2021, the SEC released proposed revisions to the Rule. Among other things, the proposed revisions strengthen the requirements to access the affirmative defenses afforded under the Rule, and also enhance disclosure requirements for companies whose executives enter into trading plans pursuant to the Rule. The proposed changes are subject to a 45-day comment period after the proposed amendments are published in the Federal Register.
Continue Reading SEC Proposes Amendments to Rule 10b5-1 Trading Plan Provisions

Since it was first instituted nearly 21 years ago, SEC Rule 10b5-1 has provided corporate executives with a way to trade in their company’s securities while avoiding potential liability under the federal securities laws. However, the Rule has been dogged by controversy and questions of potential abuse have been raised for years. Now, in remarks published earlier this week on the Wall Street Journal (here), SEC Chair Gary Gensler has said that the SEC is drafting a proposal to revise the Rule’s requirements to target some of the perceived abuses. The Cooley law firm’s PubCo blog has a detailed account of Gensler’s remarks in a June 8, 2021 post (here).
Continue Reading SEC to Revise Rule 10b5-1 Trading Plan Requirements

Seventeen years ago this month, the SEC instituted Rule 10b5-1 to permit company insiders – who often hold a significant portion of their wealth in company stock – to sell their shares without incurring liability under the federal securities laws. The Rule permits insiders who have traded in company shares to rebut the inference of scienter by showing that the trades were pre-scheduled and not suspicious. Over time, questions have been raised about the ways that some company executives have tried to use the plans. As discussed in an August 10, 2017 memo by the Simpson Thacher law firm on the CLS Blue Sky Blog entitled “Combatting Securities Fraud with 10b5-1 Trading Plans” (here), “sales made under 10b5-1 plans can substantially assist a company in getting such a claim dismissed by helping to rebut the inference of scienter that normally results when plaintiffs present evidence of insider stock sales during the class period.”

However, as discussed further below, while the plans can provide a substantial defensive boost, there are a number of steps companies should take in order to improve the likelihood that the existence of the plan will provide the intended protection.
Continue Reading Rule 10b5-1 and the Defense of Securities Fraud Claims

sec sealThe SEC promulgated Rule 10b5-1 nearly 16 years ago to allow executives (whose wealth often is entirely locked up in company shares) to trade in their company’s stock without incurring possible liability under the securities laws. The Rule provides an affirmative defense against allegations of improper trading. In many cases defendants have  relied on the existence of a Rule 10b5-1 trading plan in order to have the securities claims against them dismissed (for example,  here and here). However, the Rule has also been subject to criticism, and some have questioned whether corporate executives are abusing their plans in order to shield questionable trading.

A recent academic study corroborates the view that the plans “are being abused to hide more informed insider trading.” The study, by Gothenburg University Professor Taylan Mavruk and  University of Michigan Business School Professor H. Nejat Seyhun and entitled “Do SEC’s 10b5-1 Safe Harbor Rules Need to Be Rewritten?” (here) concludes that “safe harbor plans are being abused to hide profitable trades made while in possession of material non-public information.” The authors suggest a number of revisions to the Rule in order to “prevent further abuse.” The authors summarized their findings in a short June 2, 2016 post on the CLS Blue Sky Blog (here).
Continue Reading Does Rule 10b5-1 Need Revision to Prevent Improper Insider Trades?