As quoted from their document: Rule 10b5-1 addresses challenges associated with Rule 144 requirements by offering flexibility in restricted stock sales
• This rule establishes broad “awareness” standards prohibiting insider trades on the basis of material nonpublic information if he/she is aware of the information at the time trade is made
• Establishes “affirmative defense” – no liability if, before becoming aware of the material nonpublic information, insider:
– entered into a binding contract to buy or sell, or
– gave instructions to another person to buy or sell for the insider’s account, or
– adopted a written plan for selling securities
• The contract, instructions, or plan must meet certain additional requirements
This is how the scheme program works...
1. An insider who has been solicited as a client transfers their restricted company stock into a JP Morgan Securities Inc. brokerage account (of course).
2. The JP Morgan rep then develops works with the insider and the specialized "10b5-1 team", to create a 'phased [in], pre-planned sales program to be executed at either market or specified prices'.
3. With the use, and of course contingent profitability of the information available to the insider (but of course not available to the public), the insider and new JP Morgan Private Bank client can decide whether to execute the sale or not. Since the sales were "pre-arranged" (wink, wink), they have sidestepped the perception (only by idiots of course) of a purposeful sale in avoidance of an occurrence that was not privy to the public investor. Notice how Mozillo, the Countrywide CEO, was able to sell tens of millions of dollars of stock and get away with it without being smacked for insider trading. He knew, as sure as I did, that Countrywide was a goner.
Remember, when dealing with the big investment banks, the house always wins! Remember my tutorial on Morgan Stanley/Goldman Sachs and the damn brutal beating and outright fiscal disembowelment investment services offered to their institutional clients? See The Conundrum of Commercial Real Estate Stocks: In a CRE “Near Depression”, Why Are REIT Shares Still So High and Which Ones to Short?
The afore-linked piece should be enough to make any institutional or retail investor shed tears. Alas, I digress...
Stanford University Graduate School of Business professor and academic, Alan D. Jagolinzer, researched of roughly 117,000 trades in 10b5-1 plans by 3,426 executives at 1,241 companies. Hold your breath now, this is going to be a shocker. The esteemed, yet totally flabbergasted professor calculated that trades inside the plans schemed engineered by banks like JP Morgan outperformed the broad market by 6% over six months. Go figure... This does effect the small retail investor and the institutional investor alike.
A BoomBustBlogger just posted this comment on the last fraud alert I posted just a few minutes ago (see A New Spin on Bank Fraud: Banks Defrauding Their Invesors, Auditors and Regulators, Which Also Helps Delinquent Mortgagees to join the discussion)...
As an investor who is trying to make money in this challenging market(back and forth), it is frustrating and difficult to know that this type of chicanery is going on. I would love to know what percentage of residential real estate in the shadow market is not properly accounted on banks balance sheets? From an investment perspective, going short with a longer term put option (LEAP) could be a costly proposition because companies and markets can appear to levitate on thin air for a very long time. In other words, you can understand the fundamentals on a company and still lose money because the books are being cooked!
A very sad state of affairs for investors.
Yes, a very sad state of affairs indeed. Reference BusinessWeek/Bloomberg reports:
A Closer Look At Trades By Top Brass November 13, 2006
Late last year, after a seven-month surge nearly tripled shares in Midway Games Inc. (), CEO David F. Zucker apparently decided it was time to lighten his load. So on ...
Not As Random As It Looks? November 06, 2006
John B. Blystone appeared bullish on the prospects of SPX Corp. () back in late 2003 and early 2004. In his role as chief executive of the Charlotte (N.C.) industrial ...
Insiders With A Curious Edge December 18, 2006
The confusion over corporate executives trading on inside information never seems to go away. In 2000 the Securities & Exchange Commission came up with a way to remove...
Registered BoomBustBlog users can download the entire scheme document here: JPM Restricted Stock scheme
I would be remiss in leaving you without posting one of our favorite JPM graphics, wouldn't I???
Those that don’t subscribe still have a lot of BoomBustBlog JPM opinion and analysis to chew on, including a free, condensed (but still about 15 pages) version of the forensic analysis above. You can find it below this pretty graphic from “An Unbiased Review of JP Morgan’s Q1 2010 Results Yields Less Roses Than the Mainstream Media Presents“…
Subscribers should also review our forensic valuation reports, which have (thus far) proven to be right on the money in terms of JP Morgan:
The JP Morgan Professional Level Forensic Report (subscription only)
The JP Morgan Retail Level Forensic Report (subscription only)
An Independent Look into JP Morgan (subscription content free preview!)