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10 U.C. Davis Bus. L.J. 65 (2009-2010)
With Avarice Aforethought: Insider Trading and 10b5-1 Plans

handle is hein.journals/ucdbulj10 and id is 65 raw text is: WITH AVARICE AFORETHOUGHT:
INSIDER TRADING AND 10b5-1 PLANS
KARL T. MUTH*
ABSTRACT
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.
INTRODUCTION                                 ..................... ...................66
I.    THE ORIGINS OF 10B5-1 PLANS ..............................67
II.   (IL)LEGALITY           ...................................... .....68
III.  ON THE EDGE..............            ....................... .....70
A. Stop the Presses ... Until I Can Sell  ................. ..... 70
B. Engineering the Numbers         .......................... .....73
C. Massaging the Expectations....................            .........75
D. Temporal Camouflage          ........................... ......77
IV.   THE BEST-LAID 10B5-1 PLANS OF MICE AND MEN OFTEN Go AwRY....77
* C Karl T. Muth 2009. Visiting Graduate Student, The London School of Economics and
Political Science. I am indebted to The London School of Economics and Political Science for
their hospitality and support for my scholarship. Thanks to Professor Randal C. Picker of The
University of Chicago Law School for allowing me to explore some of these issues on his
blog. I am grateful to Michael Klausner at Stanford and Elizabeth M. Schutte in Chicago for
valuable conversations related to these issues and earlier drafts, respectively. Special thanks
to Professor David Kershaw for his advice and guidance during my time in London.

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