The SEC is investigating misuse of a 10b5-1 trading plan by Countrywide Financial Corp CEO, Angelo Mozilo, and securities experts continue to predict that such misuse will be the next big securities scandal.
10b5-1 trading plans allow executives to trade stock without worrying about trading on material, nonpublic information, also known as insider trading. The plans are filed with the SEC and specify in advance when stock in an executive’s company will be bought and sold and at what price. The plans cannot be entered at a time when an executive has material, nonpublic information, the idea being that executives should not be able to influence when plans make purchases or sales if the executive has inside information.
Much like option backdating was exposed by an academic study that found option grants tend to occur at optimum times (which suggests insider trading), misuse of 10b5-1 plans has been suggested by a Stanford study that found such plans beat other trades by as much as 6 percent.
Examples of plan manipulation include:
- Starting a plan while aware of insider information;
- Disclosing insider information before a planned trade to maximize profits; and
- Rewriting a plan before upcoming changes in company performance.
These types of manipulation are already illegal, which could mean any impending scandal may need to be solved with better detection of wrongdoing, as opposed to new rules.