Net: The 10b5-1 "loophole" regarding cancellation of plans, apparently was based on a Supreme Court decision that there had to be an actual transaction before a person could be charged with an insider trading violation. However, as explained below, based on a subsequent decision, the SEC ruled that they could still take action even if a plan is canceled and there was no transaction. In regard to Kiernan, It would be very suspicious if he canceled his plan just before the earnings announcement and then exercised/sold the stock within the next month prior to option expiration.
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. [edit] SEC reaction
Noted in a speech by Linda Chatman Thomsen, the SEC chief enforcement officer, the SEC is now investigating why 10b5-1 trades appear to outperform the market. Allegations of improper 10b5-1 trades were noted during the insider trading trial of Joseph Nacchio, former Qwest CEO. There are also preliminary investigations into 10b5-1 trades by Angelo Mozilo, from Countrywide. The SEC sent a Wells Notice to Mozilo in May 2009, suggesting intent to pursue civil charges in relation to alleged illegal trade through his 10b5-1 plan.
On March 25, 2009, the SEC staff revised its interpretative guidance regarding the circumstances under which the affirmative defense in Rule 10b5-1(c) is available. In particular, the staff followed the approach previously urged by some commentators to clarify (1) that the cancellation of a 10b5-1 plan could call the good faith of other, executed plans into doubt and (2) that the Supreme Court's decision in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), did not affect the SEC's ability to bring an enforcement action against a would-be insider trader who canceled a trading plan and did not trade in a particular transaction because a subsequent decision, Merrill Lynch, Pierce, Fenner & Smith, Inc., v. Dabit, 547 U.S. 71 (2006), made clear that Blue Chip Stamps dealt only with the implied private right of action for violations of Rule 10b-5 and not the "in connection with" requirement for all Rule 10b-5 violations.
The sale while itself is insignificant I'd like to start seeing the company listen to the two top supporters more. I guess we will find out more this week.
Tom Carpenter has been writing about how he would like to see some insider buying. The percentage ownership of insiders is not high. A few token buys with a temporary halt to all sells including 10-B1's would do wonders for the perception of the company. I'd like to see if the new COB can convince other corporate executives to keep shares until after a nokia settlement.
It will also be interesting to see what response the company has if any to Bill Naz's posion pill removal proposal. A volentary removal of the pill by the compay will be worth upwards of 5 points. That would be a nice gift to the stock holders. Also if they won't announce a new buyback I'd love to see the current one move at a quicker pace.
While the best move they can make would be a Nokia settlement or a Sony/Ericsson license, they can certainlyhelp get the share price past 30 with some very easy to execute steps.
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