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New SEC disclosures are giving investors edge. This episode, Ben shares how sweeping changes to rule 10b5-1 have played out in the last year, giving investors more data, context, and insights related to corporate insider activity. Learn material nuances of the rule change, what it means, and hear three real-world examples, including opportunistic activity from JPMorgan Chase (JPM) CEO Jaime Dimon, Rivian (RIVN) Founder RJ Scaringe, and Shockwave Medical (SWAV) CEO Doug Godshall.
Edited, mixed, and scored by Calvin Marty.
Edited, mixed, and scored by Calvin Marty.
Creators and Guests
Host
Ben Silverman
Ben oversees research for VerityData. He is a trusted resource for publications like Bloomberg, Wall Street Journal, and Financial Times.
What is Differentiated With Ben Silverman?
Veteran investment research analysts dive into insider data and demystify the signals that drive one-of-a-kind investment ideas.
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Speaker 2:Welcome to differentiated. I'm your host, Ben Silverman. Last year, the SEC implemented sweeping changes to rule 10 b five one. That's the regulation that governs stock trading plans that corporate insiders can use to buy and sell their own company stock and do so without worrying about being in possession of material nonpublic information. The SEC made two distinctive set of changes.
Speaker 2:The first set was aimed at how insiders utilize rule 10 b five one plans. It standardized a minimum ninety day cooling off period between plan adoption and first sale, and it eliminated the use of overlapping plans in most circumstances. The second set of changes was directed at how insiders and companies disclose rule 10 b five one plan usage and details. This second set of changes has provided investors with new intelligence and investment edge, and that's the focus of this episode of Differentiated. The SEC took aim at rule 10 b five one plans cause insiders have been using these devices to sell stock opportunistically for years.
Speaker 2:That wasn't the intent of rule 10 b five one. The intent was merely to provide insiders with a measure of legal safe harbor from illegal insider trading charges by allowing them to set up trading plans that predetermine the timing and purchases of their sales. A quick note here, by the way. Insiders cannot adopt or amend 10 b five one plans when in possession of material nonpublic information. That part of the rule has never changed, and we don't expect it to ever change.
Speaker 2:The SEC's intent with rule 10 b five one was good, but it wasn't well thought out. The rule ended up being poorly constructed. And for more than twenty years, experts like myself and academics who study the subject argued that the rule actually made it easier for insiders to opportunistically sell stock. Eventually, the SEC felt the same way. The updated rule 10b5-one has curbed some egregious behavior, including insiders adopting rule 10b5-one plans and using them as early as the day of adoption or allowing insiders to amend plans without any subsequent cooling off period.
Speaker 2:The updated rules have not stopped opportunistic selling under the trading plans. Insiders continue to embed price triggers and other mechanisms, allowing them, for example, to sell at high prices as stocks run up ahead of earnings, even on days when they're not otherwise allowed to do so. So while the new rules have changed insider behavior, insiders have adapted, and the actual behavior change has been subtle at best. The change in disclosure rules, however, has provided new insights into insider selling situations. It's given us key information that helps us better triangulate opportunistic selling and understand insider behavior.
Speaker 2:The most important change is that companies now have to make quarterly disclosures about insiders who adopt, amend, or terminate rule 10 b five one plans. And as part of that disclosure, they have to indicate how many shares an insider is going to be buying or selling under the plans and what the duration of the plan is. The disclosures are made in quarterly and annual reports and relate to the plans that were adopted, amended, or terminated in the period covered by the report. So for example, if you're looking at a company's 10 Q filed in May that relates to the first quarter, the information in the disclosures relates to trading plans adopted between January 1 and March 31. Previously, there was zero disclosure required about insiders even adopting rule 10 b five one plans.
Speaker 2:Some cases, we didn't even know they were using them. With this new information, however, and the new ninety day cooling off period, we can better understand how insider selling is unfolding and is supposed to unfold, and we can use that to make more informed investment decisions. A high profile example of how the new disclosure rules help us better understand insider selling occurred at JPMorgan Chase. Back in October 2023, the company filed its annual report or 10 k. In it, they disclosed that CEO Jamie Dimon would sell up to 1,000,000 shares beginning as early as January 2024 and ending as late as August 2024.
Speaker 2:The company said that Dimon was going to sell for a quote, unquote financial diversification and tax planning purposes. Now Diamond has an exceptional insider buying history. After twenty years of CEO of JPMorgan Chase, he had never sold stock. It made sense that Diamond finally generates some liquidity from his JPMorgan Chase shares. It also made sense to think that he might do so methodically.
Speaker 2:Diamond is one of the smartest people on Wall Street. He's well respected. Everything he says or does is closely watched. So the idea that he would dump a bunch of stock at once versus selling methodically, it made more sense for him to sell methodically. Well, in late February two thousand twenty four, we were actually able to really quickly understand whether Diamond was selling opportunistically or not.
Speaker 2:And surprise, it was opportunistic. Diamond sold about 822,000 of the 1,000,000 shares he intended to sell all in one day, and he did so about four weeks after the plan became effective. Most importantly, he did so as the stock was hitting a new all time high. This meant that Diamond simply wasn't going to sell stock over a long period at any price. The selling behavior instead suggested that Diamond was keen to sell at or above a certain price, in this case somewhere around $180 per share.
Speaker 2:That type of price target is important to recognize because it speaks to the valuation that Diamond was comfortable selling at. Now absent the required disclosure of the number of shares covered by the plan and the duration of the rule 10 b five one plan, we wouldn't have known how much Stockdive was gonna sell. We would not have known whether the 822,000 shares was a small percentage or a large percentage of what he intended to sell. And we would not know whether he frontloaded his plan with most of the sales occurring soon after the plan was allowed to sell or whether he was going to wait and draw out the sales. So the required disclosure really was helpful for investors who wanted to understand whether Jamie Dimon was selling simply to generate some liquidity for tax planning purposes, for financial diversification as the company said, or perhaps whether he wanted to sell at a certain price.
Speaker 2:An insider selling under a rule 10 v five one plan doesn't actually need to commence in order for us to gain intelligence. RJ Skarinj, the founder and CEO of electric vehicle maker Rivian, adopted a rule 10 v five one plan in March 2024. The company disclosed that plan adoption in its May 2024 quarterly report. The reason the disclosure was important is because Skaringa never sold stock before. So not only do we get an indicator that he's going to sell stock, well, we know when he might do it, and we know how many shares he's gonna sell.
Speaker 2:Skaringa's plan calls for the sale of up to 4,000,000 shares. Now Scaringe owns about 11,000,000 shares outright, so 4,000,000 of 11,000,000 is a very big percentage. But once we started digging deeper into Scaringe's holdings, we found out something very important. Scaringe holds options for 8,700,000.0 shares at $2.63. Those options expire in June 2029.
Speaker 2:Rivian shares are trading at about $10.25 when Scaringe adopted its plan. So we're comfortable theorizing that Skirinj will start working down his big cheap tranche of options as opposed to selling stock that he's actually owns outright. If Skirinj starts selling those options and he sells 4,000,000 of the 8,700,000.0, that generates him significant liquidity, but it's less negative selling behavior than if Skaringa actually sold the shares that he held in his pocket. So the quarterly disclosure of the 10b5-one plan adoption here provides us important insight into what his future sales might look like. And by knowing the number of shares that he's gonna sell and being able to take a deep look at his holdings, we can start to understand the makeup of his equity and which equity that he might be selling.
Speaker 2:That's important because not all equity is created equal. In this example, we'd rather Skirin just sell cheap options than stock that he actually bought in the IPO or that he's held for years. While the main goal of tracking rule 10 b five one disclosure information is to better understand insider selling, it can also be used to understand a lack of selling. In the case of Rivian, the CEO's 10 v five one selling is still not commenced three weeks after the plan was eligible to sell. That's a positive valuation indicator.
Speaker 2:It suggests that the stock was not trading at the CEO's minimum sale price threshold. That's essentially his line in the sand of where he's willing to generate some liquidity. Another potential positive valuation indicator is when an insider stops selling via their 10 b five one plan. This was the case at Shockwave Medical. Shockwave CEO Doug Godshall adopted a rule 10b5-one plan in May 2023.
Speaker 2:The plan was disclosed in the company's August 2023 quarterly report, and selling under the plan actually commenced that month. Through February 2024, Godschall sold monthly. Looking at his run of sales, we were able to fair it out that he had a minimum sale price threshold. There was prices that he accelerated his sales at. There's even times when a full sale didn't go off, he caught up with the sale.
Speaker 2:When March 2024 rolled around, there was no sale. This was despite the stock being well above the minimum sale price threshold that we had gleaned from Godchil's prior sales. Why didn't he sell? It was odd. It was bizarre that he was supposed to sell and had not sold.
Speaker 2:And we knew he was supposed to sell because we knew his pattern, and we knew because of the quarterly disclosure of the plan that the company had made the prior year that Godchill still likely had 11 more sales lined up. He was going to be selling for almost another year. So what happened? Well, we found out pretty quickly because in early April twenty twenty four, Shockwave announced it was being acquired by Johnson and Johnson. That announcement and the lack of the scheduled March sale suggested Godshall actually canceled his 10b5-one plan.
Speaker 2:We were then able to confirm this in May 2024 when Shockwave filed its quarterly report and made the required disclosure that Godshall had indeed canceled his 10b5-one plan in March. And he'd canceled it just days before his scheduled sale and while the company was in talks with Johnson and Johnson. Without the required disclosure, the number of shares to be sold under the plan would not have known that Godshall had intended to sell more stock and that something had made him change his mind. And that something was a big positive for investors who were able to get cashed out at a premium by Johnson and Johnson. The changes the SEC made to rule 10 v five one in 2023 weren't all perfect.
Speaker 2:Some of them weren't even that helpful. However, the new regulations requiring quarterly disclosures of rule 10 b five one plan adoptions, amendments, and terminations by insiders, and the details of those plans is providing investors with powerful new intelligence. Using that information along with an insider's actual transaction history or a lack of transactions can provide a differentiated investment edge.
Speaker 1:This episode of Differentiated with Ben Silverman was brought to you by Verity. Verity designs software that helps over three sixty asset managers discover one of a kind insights, streamline research workflows, and manage fund research productively. To learn more or begin a free trial, visit verityplatform.com. This episode of Differentiated with Ben Silverman was edited, mixed, scored by Calvin Marty.