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SEC pursues first-ever insider trading case based on Rule 10b5-1

On Behalf of | Mar 20, 2023 | Blog, Regulatory Issues (SEC & FINRA)

The Securities and Exchange Commission (SEC) creates and enforces rules intended to protect the economic stability of the United States and the legitimacy of many domestic markets. Oftentimes, the SEC creates new rules with the intention of benefiting the domestic economy, only to have people find ways to abuse those new systems.

That is essentially what has led to a groundbreaking case involving insider trading charges against a business owner. The misuse of Rule 10b5-1, an SEC rule created in 2000, is the basis for the recently announced prosecution of a healthcare company CEO.

What the SEC alleges occurred

Selling company stock can be a risky practice when someone has an active role in the company’s management. Still, many companies offer stock as a form of incentive pay. Rule 10b5-1 allows those who have an ownership or executive role at an established company to create a system to sell company stock.

The goal behind the creation of such 10b5-1 plans is to avoid accusations of insider trading after the completion of stock sales. However, the SEC maintains that trading plans implemented by the accused CEO were in fact instances of insider trading. The executive, aware of relationship issues between his employer and another company, implemented a 10b5-1 plan to sell off stock.

The SEC estimates that by using this insider information to start selling stock before the company announced certain issues, the CEO was able to avoid roughly $12.5 million in losses.

Trades to avoid losses are a concern just like trades for profit

Even when someone seemingly abides by the law, the SEC might determine that their actions violated insider trading rules. Buying stock due to having insider information is an unethical action that can lead to substantial profit for the people involved.

The decision to sell stock to avoid losses has similar repercussions for the economy and also violates insider trading laws through the use of non-public information to make financial decisions. Those hoping to put together a 10b5-1 plan to sell stocks will likely need support with that process to avoid allegations of misconduct.

Understanding what conduct the SEC currently prosecutes as insider trading can benefit those who are trying to make savvy money moves for themselves and the businesses that they operate or own. If you have questions about civil or criminal exposure in financial matters, please contact the attorneys at Ford O’Brien Landy LLP for insight and guidance.