Rule 10b5-1 Plan Can Protect Against ‘Insider Trading’ Claims

Corporate Attorney Mark TaralloThe recent Gildan Activewear case is the latest example that a well drafted and properly adopted Rule 10b5-1 plan can protect insiders who wish to sell their shares.

By Mark J. Tarallo

Officers and directors of public companies have only narrow, limited windows in which to buy or sell shares of their own companies. In addition, even for trades made during these open windows, executives are subject to charges of “insider trading” if they buy or sell shares while they possess material information about the company that has not yet been made public. Rule 10b5-1 provides for an affirmative defense to such claims, and many “insiders” at public companies have adopted 10b5-1 trading plans to allow them to trade more regularly in the shares of their company. In general, these plans establish a regular, fixed schedule of buying or selling shares, and the person establishing the plan has no discretion to vary the scheduled transactions. The affirmative defense provided by Rule 10b5-1 plans has in the past survived attack by plaintiffs alleging insider trading, and in a recent class action case alleging securities fraud against certain officers of a publicly traded company, the existence of 10b5-1 trading plans served to severely undercut the claims of the plaintiffs.

In re Gildan Activewear, Inc., Securities Litigation, No. 8 Civ. 5048 (HB), 2009 BL 140830 (S.D.N.Y July 1, 2009), the plaintiffs filed a class action suit against the company’s CEO and CFO (both of whom were also on the company’s board of directors). The court granted the defendants’ motion to dismiss the complaint. The plaintiffs claimed that the executives had sold shares (at a profit) in violation of the insider trading prohibitions set forth in Rule 10b-5, based on their possession of material nonpublic information (the plaintiffs alleged that the defendants knew that the company was in financial difficultly and that the share price was likely to fall, thus inducing the defendants to sell their shares as soon as possible). The court rejected this claim, finding in part that “[such] sales, which comprise over 99% of the total [alleged] insider trading, both by volume and value, were made pursuant to a non-discretionary Rule 10b5-1 trading plan, which undermines any allegation that the timing or amounts of the trades were unusual or suspicious.”

For more information on crafting a 10b5-a plan, contact Mark Tarallo.

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