June 11, 2012
The Curious Timing Of Those Vertex Stock Sales
By: Ed Silverman
Last week, US Senator Chuck Grassley asked the US Securities and Exchange Commission to probe various stock sales made by Vertex Pharmaceuticals executives and a board member during a three-week stretch in May during which positive study results were disclosed and then unexpectedly revised. Interim results of a Phase II study of a combination of cystic fibrosis treatments were mistakenly overstated and blamed on a contract research organization.
A Vertex spokesman consistently defended the sales by saying most shares sold after the interim results were reported on May 7 were part of 10b5-1 plans, which allow stock to be sold at regular intervals or when pre-specified prices are reached. Some other shares were sold outside the plans, but purportedly followed an internal stock trading policy. Grassley, however, worries Vertex execs “potentially took advantage” of the spike in the stock price, which jumped 73 percent before the May 29 announcement about the revision (here is the letter).
The episode, as a result, casts a light on 10b5-1 plans, which are used by numerous executives who must pledge they do not possess any inside information at the time their plans are created. The idea is that the plan would act like a shield against insider trading charges – if trading occurs as part of a plan that predates knowledge of inside information, an exec can point to the plan as a defense. But are these bullet proof?
There have been few such instances in which the SEC has pursued executives for somehow violating such a plan, according to Allan Horwich, a senior lecturer at Northwestern University School of Law, who has written about 105b-1 plans (see this). However, one notable cased involved Countrywide Financial ceo Angelo Mozilo, who allegedly established four 10b5-1 plans in 2006 while he was aware of material, non-public information concerning an increasing credit risk (read here). He paid a $22.5 million fine two years ago for misleading investors.
So what might the SEC probe in response to the Grassley missive? This remains unclear, but there is the issue of timing when it comes to not only selling stock as part of a 105b-1 plan, but also disseminating news, according to experts. Although the existence of these plans can be used as a defense when insider information is held, theoretically, the release of bad news could be delayed until after stock is to be sold on a pre-specified date.
“The rule may provide participants the opportunity to manipulate the timing or content of disclosure related to material information obtained subsequent to faithful plan initiation. This is because the rule does not require an insider to abstain from trade if she obtains material nonpublic information after she has initiated her trading plan,” wrote Alan Jagolinzer, director of the PhD program in accounting at the Leeds School of Business at the University of Colorado in Management Science. “Therefore, insiders with existing plans can disclose subsequently obtained material, non-public information when it maximizes planned trade profits” (here is the abstract).
As for Vertex, more than two dozen stock sales involving shares held by a 105b-1 plan were made by six different Vertex execs and a board member between May 7, when the stock rose 55 percent on the disclosure of the interim study results, and May 29, when the revision was announced. The largest number of shares – more than 365,300 in total – were sold on May 7, May 8 and May 14 by Nancy Wysenski, the chief commercial officer at prices ranging from $59.19 to $64.27 a share, according to SEC filings. In fact, Wysenski has now decided to retire, according to a statement released late last Friday, by the drugmaker (see this).
Other Vertex execs who sold stock as part of a 105b-1 plan included Peter Mueller, executive vp of global R&D – 86,000 shares between $52.13 and $65.50; Amit Sachdev, senior vp of corporate affairs and public policy – 58,700 share at $52.13; Paul Silva, senior vp and corporate controller – 56,400 shares at between $60.85 and $61.08; Lisa Kelly, senior vp of human resources – more than 43,200 shares at between $52.13 and $63.84; and Josh Boger, a director and co-founder, more than 11,300 at between $60.59 and $63.65.
And whatever happened to Vertex shares? The stock fell more than 10 percent on May 29 and has yet to recover.