In a memorandum released on April 18, 2016, the private blood-testing company Theranos – once valued at over $9 billion – announced that it is under investigation by the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Attorney’s Office for the Northern District of California, among other government agencies. The memorandum did not disclose the focus of the government investigations. Theranos’ announcement about the investigations comes on the heels of a series of October 2015 Wall Street Journal (“WSJ”) articles critical of the accuracy of the company’s blood-testing methods. The government investigations into Theranos are not surprising, particularly in light of recent remarks by SEC Chair Mary Jo White (“White”) at a March 31, 2016 address at Stanford University’s Rock Center for Corporate Governance, where White revealed the SEC’s focus on Silicon Valley’s privately held unicorns – private start-up companies with valuations exceeding $1 billion.
Rule 10b5-1, enacted in August 2000, codified the SEC’s position that trading while in possession of material non-public information is sufficient to establish liability for insider trading. The rule also provided an affirmative defense for individuals who could prove that the purchase or sale of stock was made pursuant to a pre-existing written plan executed before the individual became aware of the material non-public information. These so-called 10b5-1 plans have long been considered to be an efficient way to trade company stock without raising suspicion of insider trading or another improper motive.
However, recent news stories have reignited concerns that corporate insiders may be abusing 10b5-1 trading plans to trade on material non-public information. An April Wall Street Journal article reported that not only has the use of 10b5-1 plans by non-executive directors nearly doubled between 2006 and 2011, but a significant percentage of the plans were being used to unload all or a large percentage of the directors’ holdings in a short period of time. An earlier November 2012 Wall Street Journal article analyzing thousands of trades made by corporate executives found evidence that company insiders did statistically much better than expected in realizing trading profits. Together, these articles suggest that the lack of transparency and regulation of 10b5-1 trading plans has allowed them to be misused as vehicles to effectuate opportunistic trades.
The SEC came under scrutiny, including from U.S. Senator Charles Grassley, following an April 25, 2012 front page article in the Wall Street Journal which reported that the Agency had inadvertently revealed the identity of a whistleblower during an inquiry into his former employer.
The investigation involved Pipeline Trading Systems LLC, which runs stock trading platforms under its new name, Aritas Securities LLC. According to the article, an SEC Staff Attorney showed a notebook belonging to the whistleblower to a Pipeline executive during an interview. The executive recognized the handwriting regarding trades, meetings, and phone calls. Pipeline settled with the SEC on October 24, 2011. Read More