A recent SEC enforcement action against the CEO and President/CTO of Cheetah Mobile may provide the agency with ammunition for its upcoming final rules limiting the use of 10b5-1 plans.
According to the enforcement order, the two executives (one of whom is no longer with the company) violated the rule that insiders must establish a 10b5-1 plan while acting in good faith and not in possession of MNPI (material nonpublic information). In addition, the CEO was charged with misleading statements and disclosure failures that deceived investors. Both executives were fined and subject to five-year limits on trading and 10b5-1 plan activity.
The important part to note about this case is that the executives were charged with misusing a 10b5-1 plan; that is, entering into a plan that did not comport with the requirements of 10b5-1. The plan itself worked as intended – it did not shelter the executives from the consequences of illegal insider trading. However, it will almost certainly be used to highlight the “dangers” of 10b5-1 plans, which provide an affirmative defense against accusations of insider trading.
A major objection from the Center and others to the SEC’s proposal to significantly limit and restrict the use of 10b5-1 plans was that the initiative seemed to be a “solution in search of a problem,” since limited evidence exists to suggest executives are misusing 10b5-1 plans. A prominent case like this could help bolster the SEC’s argument that more stringent rules are needed.
Meanwhile, somewhat ironically, House Democrats declined to vote on a bill that would have banned lawmakers or their family members from trading individual stocks. Opponents of the bill on the left said the inclusion of a blind trust was an unacceptable loophole, while others took umbrage at the very idea that they would “use their positions to make money on the side.” Congress had its own “poster child” moment when Sen. Richard Burr (R-N.C.), Chair of the Intelligence Committee at the time, was investigated by the DOJ after he sold more than a million dollars of stock a week before the 2020 COVID market crash. The DOJ has since dropped the investigation, and the status of a similar SEC investigation is unknown.