Expert Witness Helps CEO Beat Insider Trading Charges by Using Rule 10b5-1 Plan


This case involves the CEO of a company that had a projected total revenue for the year of $nearly $20 billion. The CEO set the company’s internal targets $500 million higher than the public prediction to encourage company employees to surpass public targets. Several employees expressed concern that the public and internal targets were too high and believed the company could only make $18.4 billion. The CEO received a “risk estimate” forecasting a potential shortfall in the yearly earnings. The estimate stated that earnings could end up nearly $900 million below the public projections. The CEO received a substantial portion of his salary in stock options. The CEO exercised his stock options at the same time that he received information that the company’s earnings were in danger of falling nearly one billion dollars short of projected revenue estimates. The CEO sold more than a million shares of his stock in the company during trading windows each quarter directly after the company announced its quarterly earnings. The CEO was indicted for insider trading and tried to defend himself by showing that he had committed in advance to a Rule 10b501 stock sale plan.

Question(s) For Expert Witness

  • 1. Can a CEO who is accused of insider trading use evidence of selling stock under a Rule 10b5-1 Plan to defend himself?

Expert Witness Response

Expert-ID:

A corporate CEO engages in illegal insider trading if he has material, nonpublic information upon which he trades his securities. Under Rule10b5-1, a corporate executive can have a written plan for trading securities if the plan was established in good faith at a time when the executive was unaware of material non-public information. This plan is an affirmative defense against charges of insider trading, even if actual trades made pursuant to the plan were executed at a time when the executive was aware of material, non-public information that would otherwise subject them to liability for insider trading. A corporate executive who receives a significant portion of his compensation in stock options may set up a Rule 10b5-1 plan to diversify his holdings. A Rule10b5-1 Plan can be used for the exercise of options and the subsequent sale of the shares received. A corporate executive can use a Rule 10b5-1 Plan shortly after the company announces its financial results because previously material non-public information about the company’s financial situation should have already been publicly disclosed. Usually, a corporate executive will submit a 105b-1 plan to their company’s compliance department for review prior to the plan being adopted. Rule 10b5-1 plans have certain safety measures that can be followed so that the plans don’t run afoul of SEC rules. If a corporate insider wants to use a Rule10b5-1 Plan they should: (1) make a decision to terminate the plan far in advance of news events; (2) not allow plan sales of securities to happen at the same time as certain pre-or post-earnings release dates; (3) not use the plan for large isolated trades and (4) make sure to space out the sales over several quarters so that there are no “good faith” issues to deal with later.

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