Planned insider trades can still be illegal: SEC

A couple of Chinese tech executives are being sanctioned for insider trading alleged to have involved the establishment of an automated trading plan in an effort to avoid regulatory scrutiny.

The U.S. Securities and Exchange Commission (SEC) charged both the CEO and the former president of tech firm Cheetah Mobile Inc. with insider trading violations.  They sold securities in the firm —when they had inside information about declining ad revenues — under a purported trading plan that was intended to shield them from liability.

According to the SEC’s order, Cheetah Mobile CEO Sheng Fu and former president and chief technology officer Ming Xu established a so-called 10b5-1 trading plan — setting out planned insider trades in advance — after becoming aware that Cheetah Mobile was facing a significant drop in advertising revenues.

By selling securities under that plan, Fu and Xu avoided losses of approximately US$203,290 and US$100,127, respectively, the SEC alleged.

The regulator said 10b5-1 trading plans can only serve as a defence to insider trading allegations “if the plan is established in good faith at a time when the person establishing it is unaware of material nonpublic information.”

Without admitting or denying the SEC’s findings, Fu and Xu settled the case, agreeing to pay civil penalties of US$556,580 and US$200,254 respectively. They also agreed to cease-and-desist orders and undertakings about their future trading.

“This case serves as yet another example of the SEC’s resolve to hold executives accountable when they try to skirt federal securities laws to illegally trade on nonpublic information,” said Joseph Sansone, chief of the SEC enforcement division’s market abuse unit.

“While trading pursuant to 10b5-1 plans can shield employees from insider trading liability under certain circumstances, these executives’ plan did not comply with the securities laws because they were in possession of material nonpublic information when they entered into it,” he added.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.