Abbott Laboratories became a household name at the start of the pandemic after it quickly developed a rapid Covid-19 test. But now the company is drawing investor attention for another reason: insider stock sales.
At Abbott’s annual general meeting on Friday, investors will vote on a first-of-its-kind shareholder proposal, which asks the company to disclose more information about transactions conducted using so-called 10b5-1 plans.
These plans allow executives to divest shares according to a preset schedule filed with the US Securities Exchange Commission without falling foul of insider trading rules. But the SEC and some investors are worried that they are open to misuse.
According to the Abbott shareholder proposal, filed by New York City’s pension funds, its former chief executive Miles White set up a 10b5-1 plan on March 15 2019 and sold $47mn in stock the next business day.
Abbott’s share price fell more than 7 per cent in the 30 days following the sale, the funds said. More recently, two other Abbott executives made well-timed share sales, according to the pension funds’ shareholder proposal.
New York City’s comptroller wants the healthcare company to adopt a “cooling off period” of at least 120 days between an executive setting up a plan and being able to make trades under it, in addition to making more disclosures when a 10b5-1 is tweaked.
It is perfectly legal to sell stock quickly after setting up such a plan. But academic research has shown that executives have saved millions of dollars by selling large chunks of shares under 10b5-1 plan just before a stock started to underperform. The practice could soon be stamped out under the SEC’s proposed new rules.
Abbott, which is recommending investors vote against the New York City proposal, said the company follows SEC rules and has practices in place to “address concerns about the misuse of material non-public information”. White’s stock sale involved options that were about to expire, the company added.
New York City “has selectively chosen timeframes that obscure” Abbott’s stock performance over the past several years, the company said. Its total shareholder return increased 11 per cent from the date of the sale to the end of that year and is 64 per cent higher today, Abbott added.
White, who has retired from Abbott, could not be reached for comment.
“The issue is this type of short time between adopting a plan and selling is really contrary to the spirit of the 10b5-1 regulation,” said Ben Silverman, director of research at VerityData, which has identified examples of executives who have quickly sold shares after adopting 10b5-1 plans.
The world’s biggest shareholder advisory firms, Institutional Shareholder Services and Glass Lewis, have recommended Abbott investors vote for New York City’s proposal on Friday.
With the SEC working on new 10b5-1 rules, “we do not view a proactive adoption of these best practices as being especially problematic”, Glass Lewis said.
When it was adopted in 2000, the SEC’s 105b-1 rule was intended to give executives a “set-it-and-forget-it” method of liquidating their stock holdings without having to worry about the fact they are party to insider information.
But the SEC has grown increasingly wary of the plans. In 2006, academic research started to show that executives who traded using a 10b5-1 plan outperformed their peers who did not, the regulator said. The plans might be “being abused in various ways to facilitate trading based on inside information”, the agency’s enforcement director warned in 2007.
“If executives are in fact trading on inside information and using a plan for cover, they should expect the [plan] to provide no defence,” then-enforcement director Linda Chatman Thomsen said at the time. “We’re looking at this — hard.”
The SEC last year pointed to new research identifying well-timed insider stock sales blessed by 10b5-1 plans as a reason for proposing new rules. Like New York’s pension funds, the regulator is suggesting a 120-day pause before any stock sales can start under such a plan as well as requiring more public disclosures about how companies programme pre-arranged stock sales.
“10b5-1 plans were developed to help ensure executives don’t unfairly trade on inside information,” Democratic SEC commissioner Caroline Crenshaw said. “Experience and evidence suggest, however, that these plans are too often abused.”
Last year, SEC chair Gary Gensler said: “In my view, these plans have led to real cracks in our insider-trading regime . . . Right now, an executive can actually adopt a plan in the morning and sell shares in the afternoon. That doesn’t seem right.”
At Estée Lauder, chief executive Fabrizio Freda sold $4mn of company shares on September 3 and 4 2020, just days after adopting a 10b5-1 plan on August 31. In his case, the share price continued to increase during the 12 months following his stock sale as the economy recovered from the worst of the pandemic; he would have made more money if he had divested the stock at a later date.
But Silverman said the Estée Lauder CEO’s trade was still “very much an outlier for these larger market capitalisation companies”, which typically have a 30-day gap between adopting a 10b5-1 plan and selling shares.
Estée Lauder declined to comment.
Some companies are digging in to fight the SEC’s proposal, which could be finalised before the end of the year. Earlier this month, Chevron, Home Depot and other companies asked the SEC to scrap portions of the proposal.
While acknowledging “the need to prevent abusive practices”, Home Depot said 10b5-1 rules would be “significantly burdensome and costly on companies” while sending “potentially confusing and unintentional signals to investors”.
Home Depot and Chevron declined to comment beyond their SEC letters.
Dan Taylor, a professor at the University of Pennsylvania who published research in 2021 that the SEC referred to in its new proposals, dismissed claims the new rules would be unduly burdensome: “I found that to be patently ridiculous and borderline disingenuous.”
Corporate executives, sitting on millions of dollars in company shares can easily use them as collateral for loans from banks, he said.
“To say the cooling-off period is burdensome is patently absurd,” Taylor added, nothing the SEC’s two Republican commissioners had voted for rule changes along with the agency’s Democrats in a rare show of bipartisanship at the increasingly divided body.
“The data speaks for itself,” he said.
