According to the SEC (55) and the Second Circuit, (56) trading while in knowing possession of material inside information is sufficient to give rise to a violation of Rule 10b-5.
A, I examine an alternative version of Rule 10b-5 under which an insider violates the rule only if she uses material inside information in her decision to trade, and I consider how this "use" standard changes the analysis.
C's analytical framework, suppose that CEO, lacking material inside information bearing on the value of ABC's shares, commits to selling shares according to a prearranged plan.
The SEC has ruled that terminating a trading plan while in possession of material inside information does not result in a loss of the safe harbor for past transactions, unless the plan termination indicates the person was not acting in good faith when he created the plan.
This Section concludes by explaining how the SEC's safe harbor could easily be modified to prevent insiders with prearranged trading plans from using material inside information to increase their trading profits.
From the time defendant Putnam first learned of the material inside information
through the close of the market on October 4, 2002, Schering stock plunged from $21.
Rule 10b5-1 allows corporate insiders to establish a prearranged written plan to buy or sell a specified number of company shares at a time when they are not in possession of material inside information
in order to gradually change their investment portfolio, to minimize the market effect of share sales or purchases by spreading them out over an extended period of time, and to avoid concerns about initiating transactions while in possession of material nonpublic information.
SEC Rule 10b5-1 allows corporate executives to establish, at a time when they are not aware of any material inside information
, pre-arranged plans to sell a specified number of shares of company stock over a pre-determined period of time.
Insiders may adopt such plans when they are not in possession of material inside information
in order to gradually increase their holdings or diversify their investment portfolio, with minimum effect on the market by spreading them out over an extended period of time and to avoid concerns about initiating stock transactions while in possession of material nonpublic information.
Under Rule 10b5-1, executive officers of Curis who are not then in possession of material inside information
may enter into a written plan to sell a fixed number or fixed dollar amount of shares of Curis stock on a prearranged basis.