When Joseph Nacchio, former CEO of Qwest Communications International,
is sentenced in July for insider trading, he could get life. His time served may be
less, but still, at age 57, Nacchio will probably spend most of his remaining years
Central to his conviction were two trades Nacchio made within established
Rule 10b5-1 plans. These plans, which were approved by the Securities
and Exchange Commission in 2000, allow executives to establish regular intervals
for selling stock. Until recently, such sales were thought to be protected
from litigation as long as executives did not have insider information at the initial
setup. New research, however, calls that thinking into question.
Alan Jagolinzer, an assistant professor at Stanford University's Graduate
School of Business, analyzed the trading patterns of executives enrolled in 10b5-
1 plans over a five-year period. He found that the plans tended to sell after good
news and ahead of bad news. The upshot: a trading profit 6 percent better than
that of uninformed investors.
On average, Jagolinzer says, there is "evidence of 10b5-1 sale transactions
and subsequent underperformance of the stock." Does this mean executives are
manipulating 10b5-1? "My paper can only identify an empirical pattern," he says.
Jesse Fried, a law professor at the University
of California, Berkeley, goes further:
"Jagolinzer's paper shows that many executives
continue to sell stock on inside informationÂÂÂ [and] often choose to do so
through 10b5-1 plans." Stanford law professor
Joseph Grundfest adds that the paper "gives
the SEC reasons to ask tough questions."
Those questions are being asked.
"Recent studies suggest that the rule is being
abused," said Linda Chatman Thomsen, SEC
enforcement director, in a recent speech.
"We're looking at this — hard. We want to
make sure that people are not doing here
what they were doing with stock options."