June 30, 2022

Rule 10b5-1: WSJ Says Insiders Gain Outsized Profit for Sales Soon After Plan Adoption

Yesterday, the WSJ released an investigative report reviewing insider transactions under Rule 10b5-1 plans.  This excerpt says that one the Journal’s findings was that those insiders who trade shortly after adopting a plan do much better than those who wait:

A Wall Street Journal analysis of 75,000 prearranged stock sales by corporate insiders, using a comprehensive compilation of the data, shows that about a fifth of them occurred within 60 trading days of a plan’s adoption. The timing in aggregate made the trades more profitable: On average, those trades preceded a downturn in share price more often than when insiders waited longer to trade, the analysis found.

Collectively, insiders who sold within 60 days reaped $500 million more in profits than they would have if they sold three months later, according to the analysis, which examined trades from 2016 through 2021 and adjusted returns to remove the effect of sector-wide moves in the market.

What’s more interesting to me are that some of the report’s findings suggest that many companies are straying pretty far from best practices when it comes to allowing insiders to adopt & begin trading under Rule 10b5-1 plans. For example, the WSJ says that it found “scores of examples” where company insiders adopted a 10b5-1 plan near the end of a quarter and sold stock under the plan before results were announced.

Many companies impose a 30-day cooling off period for new plans, so it didn’t surprise me to learn that the WSJ found a “huge spike” in trades 30 days after adoption. However, the Journal report says that roughly 5% of the total trades it reviewed took place less than 30 days from plan adoption. Just under 2% of those trades took place less than 14 days after the plan was adopted, and some insiders traded the same day they adopted a plan. Yikes!

Adopting a plan near the end of the quarter & trading before that quarter’s earnings are released is asking for trouble, and while cooling off periods aren’t currently mandatory (although that will likely change soon), sales shortly after adopting a plan are a very bad look – as a bunch of executives and companies named in the WSJ report just discovered.

John Jenkins