September 22, 2022

Enforcement: SEC Finds a Couple of 10b5-1 Plan Poster Children

Yesterday, the SEC announced settled enforcement proceedings involving alleged insider trading by Cheetah Mobile’s CEO and its former president. Insider trading cases are a dime a dozen, but this one has given the Division of Enforcement something it has coveted for quite some time – an insider trading case involving senior executives allegedly misusing a Rule 10b5-1 plan.  Here’s an excerpt from the SEC’s press release:

The Securities and Exchange Commission today charged the CEO of Cheetah Mobile Inc. and the company’s former President with insider trading for selling Cheetah Mobile’s securities, pursuant to a purported 10b5-1 trading plan, while in possession of material nonpublic information. The SEC’s order finds that Sheng Fu, the company’s CEO, and Ming Xu, its then-President and Chief Technology Officer, jointly established a purported 10b5-1 trading plan after becoming aware of a significant drop-off in advertising revenues from the company’s largest advertising partner.

According to the SEC’s order, in 2016, Sheng Fu and Ming Xu sold 96,000 Cheetah Mobile American Depository Shares under the trading plan and avoided losses of approximately $203,290 and $100,127, respectively. Cheetah Mobile is based in China and offers various technology products, including mobile games and other applications.

“This case serves as yet another example of the SEC’s resolve to hold executives accountable when they try to skirt federal securities laws to illegally trade on nonpublic information,” said Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit. “While trading pursuant to 10b5-1 plans can shield employees from insider trading liability under certain circumstances, these executives’ plan did not comply with the securities laws because they were in possession of material nonpublic information when they entered into it.”

Under the terms of the SEC’s order, the defendants, without admitting or denying the agency’s allegations, agreed to cease and desist from future violations of the antifraud provisions of the federal securities laws & to provide advance notice of any transactions in Cheetah Mobile securities to the Director of the Market Abuse Unit in the Division of Enforcement. They also agreed to pay civil penalties.

As everyone reading this knows, the SEC has proposed changes to Rule 10b5-1 that will impose significant additional conditions and limitations on its use.  One of the criticisms of that proposal has been the absence of any enforcement proceedings directed at 10b5-1 plans.  Now the SEC has one.

John Jenkins