Around May 2013 I was made aware that the Securities and Exchange Commission is pilfering another rabbit hole for the purpose of overstuffing the agency’s coffers. That rabbit hole is the use of Rule 10b5-1 Trading Plans which have allowed certain public company executives the opportunity to enter into a prearranged plan for future stock trades. Although there have been no public allegations of wrongdoing, rest assured the SEC will search rock upon rock to mine investor cash.
Let’s get this out of the way first. This rule was adopted by the SEC in 2000 and provides affirmative defenses that a purchase or sale of a security was made on the basis of material nonpublic information about the security or its issuer. The plan itself must be entered into in good faith when the person does not possess any material nonpublic information about the security. If such plans, appropriately adopted, through the rule adopted by the SEC are perfectly acceptable, what is the issue?
First, any such rule poorly defined may be subject to heavy use of the benefits of that rule. There is little new regarding this phenomena and the federal government is more than willing (and does) punish the successful. Give any person the rope with no end tied to the gallows, persuade him to leap, and the federal authorities will be perfectly content to tie the rope prior to the subject’s feet hitting the ground.
Second (and more important) is the continuous and never-ending appetite of the federal government for the financial property of investors and taxpayers. In recent years, the SEC and the Department of Justice have developed sophisticated whitemail tactics in which the complaints ask for injunctions, disgorgement, fines and penalties through the filing of shotgun style complaints which are generally too poor to plead a cause of action upon which a remedy can be granted. But the point of such an ill-constructed complaint is the appearance to the litigant. This whitemail technique is used to impress upon the subjects of the complaint the wisdom of a negotiated settlement or plea bargain. The defendant, overwhelmed by the apparent difficulty of the task before him, folds. Other than disgorgements of ill-gotten gains, the shareholder pays the tab, the federal government gets the payday, and the politicians get the win.
Folding, however, is altogether unnecessary. If one believes the SEC and DOJ are full of genius attorneys with prodigious trial skills, try reading a few federal court trial transcripts for bedtime reading. Many attorneys will be ashamed they ever doubted themselves. The government is on a feeding frenzy and our clients are the main course. If you have any doubt as to the truth of this assertion, ask any man on the street if he owns the money in his pocket or whether the federal government just lets him borrow it for a while. It will be apparent that although they philosophically side with Thomas Jefferson’s belief in property being one of the natural rights of man has, it has been muddled out of the government’s consciousness.