WASHINGTON -- Federally regulated stock trading plans are
supposed to assure investor that company insiders aren't trading
stock based on nonpublic information, but that doesn't mean
that sales under such plans are useless as an indicator of
In fact, trading plans actually permit executives to use inside
information to make one kind of trading decision -- the decision
not to sell.
"There are loopholes here you could drive a truck through,"
said , a Northwestern University law professor and
financial planner who has written trading plans for executives.
In October 2000, the Securities and Exchange Commission instituted
a rule that allows insiders to trade company stock even when
they have material nonpublic information - as long as the
decision to sell the stock was made in accordance with a defined
plan created before the executive got the inside information.
Under these so-called 10b5-1 plans, an executive can make
financial plans without having to worry about later coming
into possession of information that would prohibit stock sales.
Jonathan Moreland, director of research for Insiderinsights.com,
said that executives and investor relations departments tend
to portray planned sales as meaningless for investors. Mr.
Moreland disagrees. "Investors should use the same rules
analyzing the data [on planned sales] that they would with
nonplan sales," said Mr. Moreland.
Lon Gerber, director of insider research for Thomson Financial,
said that in compiling data, "We consider a sale a sale,
whether it's part of a plan or not."
According to Thomson Financial's data and regulatory filings,
Red Hat Inc. Chief Operating Officer Timothy Buckley sold
538,000 shares for $3.8 million after instituting a sales
plan Dec. 21, 2001. He holds 336,300 shares after his most
recent sale of 6,000 shares yesterday, according to an SEC
Sales by Mr. Buckley have been an excellent future indicator,
whether or not they were made under a plan, said Mr. Gerber.
"Over time, the average six-month return is minus-20%"
after Mr. Buckley sells, said Mr. Gerber, giving Mr. Buckley
a rating of 96 on Thomson Financial's 1-to-100 insider stock
sales rating system.
A Red Hat spokesman said the company, which develops and
provides open source software and services, doesn't comment
on insider stock transactions.
Northwestern University's Prof. said because SEC-regulated sales
plans don't have to be made public and they can be revoked
or changed at will, executives can alter plans using inside
The rule was designed to keep executives from trading on
material, nonpublic information, but it permits an executive
to cancel a planned sale if that executive gets material,
nonpublic information that makes a sale seem like a bad idea.
"An officer can terminate a plan whenever he wants to,
even if he is in possession of material, nonpublic information,"
said Mr. . "How would we know? An executive
did not sell 5,000 shares last month. There's no reporting
of a nonsale."