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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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