"[5] The provision allows an affirmative defense to insider trading when the trade was made pursuant to a contract, instructions given to another, or a written plan that "[d]id not permit the person to exercise any subsequent influence over how, when, or whether to effect purchases or sales" (10b5-1(c)(1)(i)(B)(3)), and where the plan (or contract or instructions) was created before the person had inside information.
In March 2023, in the first-ever indictment for insider trading based on an executive's use of a Rule 10b5-1 plan, the Department of Justice charged Terren Peizer with one count of engaging in a securities fraud scheme and two counts of securities fraud for insider trading.
[6] The SEC, alleged that Peizer sold $20 million of Ontrak Inc. stock while he was in possession of material nonpublic negative information related to the company’s largest customer.
[12][7][10][13] On January 31, 2024, a superseding indictment was filed, 2024 charging Peizer with additional counts of securities fraud and insider trading.
A few academic commentators have written about this issue,[18] arguing that insiders can make systematically above-market profits by using 10b5-1 plans that they are still able to cancel.
One empirical study has found that insiders using 10b5-1 plans do in fact make above-market profits (the paper also alludes to other potential loopholes that might explain this result),[19] and another has found that the presence of publicly announced 10b5-1 plans has economic effects on securities markets that are generally associated with insider trading.
[24] The SEC sent a Wells Notice to Mozilo in May 2009, suggesting intent to pursue civil charges in relation to alleged illegal trades through his 10b5-1 plan.
[25][26] In particular, the staff followed the approach previously urged by some commentators[20] to clarify (1) that the cancellation of a 10b5-1 plan could call the good faith of other, executed plans into doubt and (2) that the Supreme Court's decision in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), did not affect the SEC's ability to bring an enforcement action against a would-be insider trader who canceled a trading plan and did not trade in a particular transaction because a subsequent decision, Merrill Lynch, Pierce, Fenner & Smith, Inc., v. Dabit, 547 U.S. 71 (2006), made clear that Blue Chip Stamps dealt only with the implied private right of action for violations of Rule 10b-5 and not the "in connection with" requirement for all Rule 10b-5 violations.