10b5-1 Plans: Mortgaging a Defense Against Insider Trading

Posted: 3 Oct 2009

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business

Brian Tayan

Stanford University - Graduate School of Business

Date Written: November 9, 2007

Abstract

In 2006, David Zucker, chief executive officer of Midway Games, came under fire for selling a significant amount of Midway stock just weeks before a precipitous decline in the company’s share price. One year later, Angelo Mozilo, chairman and chief executive officer of Countrywide Financial, also increased the pace of his stock sales in the months before troubles in the U.S. mortgage lending market led to a similar drop off in Countrywide’s share price. Both executives placed their trades through prearranged programs known as 10b5-1 plans. 10b5-1 plans, named after the Securities and Exchange Commission rule which led to their creation, provided a systematic method for corporate executives who were routinely in the possession of material nonpublic information to engage in the sale of company stock. When implemented appropriately, 10b5-1 plans provided a safe haven that shielded these individuals from liability under insider trading laws by demonstrating that certain safeguard conditions were in place at the time the trades were executed. However, the circumstances under which both executives carried out their programs led to an outcry from shareholders that the programs were being abused. Regulators and shareholders were left to decide whether the two men executed their 10b5-1 plans in good faith as required or whether their actions amounted to a sophisticated form of illegal insider trading.

Keywords: Executive Compensation, Board of Directors, insider trading, Corporate Governance, stock options

JEL Classification: G3

Suggested Citation

Larcker, David F. and Tayan, Brian, 10b5-1 Plans: Mortgaging a Defense Against Insider Trading (November 9, 2007). Rock Center for Corporate Governance at Stanford University Teaching Case No. CG -10. Available at SSRN: https://ssrn.com/abstract=1482072

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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