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May 27, 2008


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This really takes me back 40 years. Our third year moot court case involved the purchase of control in a Denver newspaper. Beard and Cook for the defense and Samuelson and Gottshalk for the plaintiffs. Gaubatz had selected the case largely because he was from Colorado.

I remember arguing that 10b5 only required the disclosure of material affecting value and not my "client's" evil plans for the newspaper. Perhaps we were actually right.


From the USA Today article:

"Also, [Henderson] says, the plans provide a kind of free insurance against a falling stock price because executives can terminate plans without selling if the bad news doesn't come."

If I understand this correctly, it pretty much eviscerates the disclosure requirement. An insider can simply disclose at time t that he or she will sell stock at time t+1. Then, when t+1 rolls around, it's a simple matter of trading on insider information - if the insider information indicates that it is a good time to sell, then sell. If insider information indicates otherwise, then don't sell (terminate the plan). The information might not exist until time t+1, but that doesn't prevent the insider from profiting while enjoying the protection of a plan disclosed at time t.

To put it another way, the disclosure only works if the insider must commit to make the sale regardless of information that arises in the interim.


minderbender, I think an insider can still "win" by terminating if he/she discloses some information at time t, but doesn't disclose enough details at time t to allow for regular investors to know why the sale(s) never occurred at time t+1. Maybe a limit order never triggered? If the plan details aren't disclosed, then there is no way to unwind this fully.

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