Corporate Governance

Nacchio and the Supreme Court: The Cert Petition (Officers Cannot Buy or Sell Shares "Ever")

By J. Robert Brown

The cert petition takes the position that, based upon the 10th Circuit's holding, insiders "cannot buy or sell company shares ever." 

This is another example of hyperbole masgarading as analysis.  The sentence is only potentially correct if in fact an insider always knows inside information and cannot disclose the inside information to the public. 

Nacchio was convicted of having inside information.  The information was internal data suggesting that the forecasts he had issued to the public were no longer valid.  Had Nacchio wanted to trade, he merely needed to tell this to the market.  Had he disclosed that there was doubt about the validity of the external forecasts, he likely would have been able to trade (assuming there was nothing else going on that qualified as material).

Moreover, once disclosure occurred, Nacchio would have been able to sell shares with impunity.  While insiders often come into contact with inside information that interferes with the ability to trade, the Commission has adopted addressed this by allowing insiders to put in place non-discretionary trading plans under Rule 10b5-1.  Had Nacchio disclosed that there was internal information suggesting the forecasts were no longer valid and then put in place a 10b5-1 plan, he would have been able to sell as many shares as the plan permitted.

Full post as published by The Race to the Bottom on March 28, 2009 (boomark / email).