TheCorporateCounsel.net

This CLS Blue Sky blog from Wachtell discusses a late June jury verdict in United States v. Peizer, which the DOJ is calling the “first insider trading prosecution based exclusively on the use of a trading plan.” As Liz blogged when the charges were announced, the facts were in the DOJ’s favor. Peizer, CEO & Chair of a healthcare company, entered into two 10b5-1 trading plans shortly after learning bad news about a relationship with the company’s largest customer and refused to use any cooling-off period despite warnings from two brokers. In fact, he “shopped” for a broker who wouldn’t require one.

While the DOJ warned that this would not be its last 10b5-1 plan prosecution, the blog notes that the facts of this case are unlikely to recur — at least for plans entered into in compliance with Rule 10b5-1 in its current form.

[T]he trading in Peizer pre-dated the SEC’s amendments to Rule 10b5-1 (discussed here), which now require a 90-day minimum “cooling-off” period for directors and Section 16 officers following adoption of a 10b5-1 plan before trading may begin.

That being said, the blog continues:

Although the current version of Rule 10b5-1 would not allow the conduct at issue in Peizer (i.e., trading immediately following the implementation of a plan), the Peizer verdict nevertheless serves as an important reminder of law enforcement’s increased scrutiny of trading conducted pursuant to 10b5-1 plans.

[…] A 10b5-1 plan can provide protection only when an executive does not possess material nonpublic information at the time of implementing the plan.  Moreover, a plan must be implemented and operated in good faith rather than as part of an effort to evade the prohibitions of Rule 10b5-1.

Although Peizer concerned the pre-amendment version of Rule 10b5-1, we expect the DOJ and the SEC to search for violations of the tightened standards.  Indeed, echoing previous comments by the SEC, DOJ has announced that the Peizer indictment was the result of deploying “a data-driven initiative led by the Criminal Division’s Fraud Section to identify executive abuses of 10b5-1 trading plans.”

– Meredith Ervine