Insider Trading & 10b5-1 Plans January 26, 2017 Ignacio Salceda Litigation Mike Nordtvedt Corporate The materials in this presentation, and the opinions expressed in this webinar, are those of the authors and speakers, respectively, and do not necessarily reflect the opinions of the companies or institutions with which such authors or speakers are affiliated. In addition, neither these materials nor the views expressed in this webinar are intended to constitute legal advice as to any particular situation. 1
Why is this topic important? Insider trading is a high priority area for the SEC & DOJ SEC has pursued hundreds of insider trading cases Increasing cooperation between SEC & DOJ Civil and criminal penalties Civil: Fine of up to greater of $1 million or 3x the illegal profit (or loss avoided) Criminal: Fine of up to $5 million and up to 20 years in prison Stock exchanges/sros use sophisticated computer programs to detect unusual trading patterns Many SEC enforcement and DOJ criminal actions stem from SRO referrals Insider stock sales main vehicle to claim there was a motive to defraud in a securities class action Insider trading prohibited by company insider trading policies 2
Insider trading basics Purchase or sale of a security on the basis of material, non-public information (MNPI) in breach of fiduciary duty or relationship of trust On the basis of In possession of information Irrelevant if decision was not motivated by information Material Information that a reasonable investor would consider important in deciding whether, and at what price, to buy, sell or hold securities Non-public Information that has not been disseminated to investors generally (Fiduciary relationship / relationship of trust Officer, director or employee (and their family members) Constructive insiders (e.g., lawyer, accountant, banker) Contractual relationship may be sufficient 3
Insider trading basics Tipper liability Person who tips inside information in breach of fiduciary relationship or confidentiality obligation may be liable for insider trading if he or she receives a benefit for the tip Benefit does not have to be financial Tippee liability Person who receives the tip is liable if she or he knows, or should know, of the breach of duty by the tipper or by the ultimate sources of the information 4
Typical insider trading policy provisions Basics No trading when in possession of MNPI Do not disclose MNPI or respond to inquiries about MNPI Typical prohibited transactions (even if trading window is open): Short sales Transactions involving derivative securities or hedging Use of company securities as collateral for a loan Holding company securities in a margin account Blackout periods Quarterly blackout periods Special blackout periods may be implemented from time to time Applicability within organizations vary Preclearance requirements 5
What is a 10b5-1 trading plan? Affirmative defense to insider trading Can be used by anyone, but particularly useful for insiders who regularly possesses material nonpublic information When properly implemented, Rule 10b5-1 plans: Reduce litigation and enforcement risk Provide greater certainty to insiders in planning stock sales or purchases Provide potentially more opportunities to sell shares sales under plan can be made during blackout periods and open windows Help avoid public relations issues posed by insider sales 6 6
10b5-1 trading plan requirements Written Must be adopted when not in possession MNPI Can only adopt it in an open trading window Provision of the lock-up for IPO no sales until after expiration of lockup To extent that the broker has any discretion, you cannot communicate any MNPI Must be entered into in good faith and not in an attempt to evade the securities laws Company will require you to get approval of a plan before implementation 7
Trading plan best practices A cooling off period between plan adoption and first trade No sales outside of plan other than very limited exceptions No short-term plans or frequent changes, cancellations No entering into multiple plans and then cancelling some Use a different broker for plan than for other investments to avoid even appearance of leaks Plan ahead! 8
Trading plan misconceptions I thought I was bullet-proof If the broker says it is OK, it is OK Everybody should have one It s like chicken soup for a cold : there are no drawbacks to having a Plan Plan means that other rules (such as Rule 144 or Section 16) don t apply 9
Pros and cons of 10b5-1 trading plans PROS Reduces insider trading liability risk Addresses frequent blackout problems Facilitates diversification and liquidity Allows insiders to focus energy on matters other than stock sales/windows CONS Requires insiders to plan trades and/or finances in advance Deviating from the plan can expose insiders to risks Securities plaintiffs could allege plan gives motive to inflate stock price 10
Key takeaways Be extremely careful when trading or sharing information regarding your company Always ask how your actions may be perceived (or misconstrued) when viewed in hindsight Consider ways to mitigate your risk (e.g., 10b5-1 trading plans) If in doubt, ask questions of legal before taking action 11
Thank you! Ignacio Salceda Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304 isalceda@wsgr.com Office: (650) 320-4908 Mike Nordtvedt Wilson Sonsini Goodrich & Rosati 701 Fifth Avenue, Suite 5100 Seattle, WA 98104 mnordtvedt@wsgr.com Office: (206) 883-2524 12