Lucky Breaks

SEC Rule 10b5-1 seemed like a win-win situation for executives and the investing public.

The commission adopted the rule in 2000 to give a safe harbor from insider trading charges to executives who create a plan to automatically buy or sell stock at routine intervals. So for instance, an executive who needs to liquidate $30,000 worth of stock holdings each August to pay a child's college tuition can set up a trust to sell a certain number of shares each year on July 15. The trades would not attract insider-trading charges--even if they occurred during a blackout period--because they were scheduled and planned for at a time when the executive didn't have material, non-public information that would prohibit him or her from making a trade. Thus, a 10b5-1 plan prevents insider trading while not overly restraining an executive's ability to liquidate his or her stock holdings. At least that's how the plans are supposed to work.

But a strange twist to this issue is that even if Mozilo did profit from amending his 10b5-1 plan, it's not clear whether he violated the SEC rule.

"10b5-1 is a relatively new rule and the courts and SEC haven't interpreted it," says Robert Plotkin, a partner at McGuireWoods. "There are a lot of ambiguities about it that haven't been tested."

"In-house counsel should review all 10b5-1 plans," Plotkin says. "They should approve the creation of plans at the outset and also approve any cancellations, modifications or new adoptions."

staff Writer

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