InterDigital Inc (IDCC)

[sinnet14]

http://en.wikipedia.org/wiki/SEC_Rule_10b5-1

A possible loophole: canceling plans

After Rule 10b5-1 was enacted, the SEC staff publicly took the position that canceling a planned trade made under the safe harbor does not constitute insider trading, even if the person was aware of the inside information when canceling the trade. The SEC stated that, despite the fact that 10b5-1(c) requires trades to be irrevocable, there can be no liability for insider trading under Rule 10b-5 without an actual securities transaction, based on the U.S. Supreme Court's holding in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).

This staff interpretation raises the possibility that executives can exploit this safe harbor by entering into 10b5-1 trading plans before they have inside information while retaining the option to later cancel those plans based on inside information. Although paragraph (c)(1)(i)(C) does deny the affirmative defense to offsetting or hedged transactions, in that case there would still be an actual trade (whichever of the offsetting trades was not canceled) that could constitute insider trading and violate Rule 10b-5. The SEC's position is that there can be no insider trading without a trade, so that a person could cancel a planned trade based on inside information and avoid liability. Although technically any plan that is cancelable does not come under the 10b5-1 safe harbor, proving that an executed trade was hypothetically cancelable might be very difficult.

A few academic commentators have written about this issue, arguing that insiders can make systematically above-market profits by using 10b5-1 plans that they are still able to cancel. One empirical study has found that insiders using 10b5-1 plans do in fact make above-market profits (the paper also alludes to other potential loopholes that might explain this result), and another has found that the presence of publicly-announced 10b5-1 plans has economic effects on securities markets that are generally associated with insider trading.