SEC examining stock-sale plans
WASHINGTON --Federal regulators are looking at possible widespread abuse of a special type of stock sale, commonly used by company executives and now figuring in the insider-trading trial of former Qwest Communications Chief Executive Joe Nacchio.
Executives often sell shares of company stock under special programs called 10b5-1 plans, after the rule allowing them that was adopted by the Securities and Exchange Commission in 2000. Corporate executives are allowed to devise a plan, at a time when they do not possess inside information, under which they will make pre-arranged stock sales at specified prices or dates in the future.
That way, the regulators' reasoning goes, executives have a chance to sell off their holdings -- to pay their children's college tuition, for example -- without risking being unfairly accused of illegal insider trading if they happen to obtain inside information before the sales are made.
However, there is recent evidence in some academic studies suggesting that the plans are being abused, according to SEC officials.
"The difference seems to be that executives with plans sell more frequently and more strategically ahead of announcements of bad news," Linda Thomsen, the agency's enforcement director, said in a speech last month. "This raises the possibility that plans are being abused in various ways to facilitate trading based on inside information."
"We're looking at this -- hard," said Thomsen.
The SEC's interest in the subject was reported in Wednesday's editions of The Wall Street Journal.
Nacchio, who resigned under pressure from telecom giant Qwest Communications International Inc. in 2002, is accused of 42 criminal counts of insider trading for $101 million in stock sales in the first five months of 2001. Federal prosecutors allege that he based his sales on non-public information that Qwest could be at financial risk because it relied on one-time fiber-optic sales to help meet financial targets.
His defense attorneys maintain that Nacchio was forced to exercise stock options under terms of his contract, but that he was optimistic about the company's future because he anticipated lucrative contracts with clandestine government agencies.
Some of Nacchio's stock sales were made under 10b5-1 plans, and the prosecutors say he was in possession of inside information at the time he drew up two of them.
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