a

1. William Gallagher Associates
INSIDER TRADING PLANS Phone: 888.261.8884
www.WGAins.com
Maximizing Value; Minimizing Litigation
Several leading asset managers have developed and introduced Insider Trading Richard A. Leavitt
Plans through which company insiders can now take greater advantage of the Richard A. Leavitt is a Principal at
benefits provided by Securities and Exchange Commission (SEC) Rule William Gallagher Associates and the
10b5-1, promulgated in October 2000. The primary benefits of utilizing leader of the Management Liability
such a plan are twofold; First, they maximize the value of insider stock, and Practice. William Gallagher Associates
second, they minimize the likelihood of being a target for securities litigation. is a leading provider of insurance
Additionally, an increasing number of insurers will discount their Directors’ & brokerage, risk management,
Officers’ Liability insurance premiums for companies who have adopted such executive and employee benefits
plans for their insiders. To provide appropriate context for the genesis and services to firms in selected
importance of Insider Trading Plans, this paper will address the following fast-growth industries including
questions: high technology, life sciences,
financial services, healthcare, energy,
¨ What is the impact of SEC Rule 10b5-1 on publicly traded companies and environmental services. WGA has
and their insiders? offices in Boston, MA; Atlanta, GA;
¨ Why is there such concern surrounding insider selling? Columbia, MD; Princeton, NJ;
¨ What are the methods by which insiders can sell their shares? and Paris, France.
THE IMPACT OF SEC RULE 10b5-1
Adopted by the Securities and Exchange Commission on October 23, 2000 in conjunction with Regulation FD, Rule
10b5-1 addresses the issue of when insider trading liability arises in connection with an insider’s “use” or “knowing
possession” of material non-public information. In essence, the rule clarifies that an insider is deemed to have traded on
the basis of material non-public information whenever that person buys or sells securities while aware of the information.
Hence, the threshold for insider trading liability is “awareness” verses “use” of material non-public information. While
this distinction may appear to be legal semantics, it considerably expands the potential liability of insiders who trade and,
therefore, has lowered the bar for plaintiffs’ attorneys to bring securities class actions alleging illegal insider trading against
both insiders and their companies. However, Rule 10b5-1 also provides insiders and their companies with an affirmative
defense by which they can mitigate insider trading liability. To take advantage of the affirmative defense, an insider must
establish three factors:
1. Before becoming aware of the material non-public information, an insider had already:
a. Entered into a binding contract to buy/sell securities; or
b. Provided written instructions to another person to execute the trade; or
c. Adopted a written plan for trading securities.
2. Whichever of the three options noted above is selected, an insider must demonstrate that:
a. The amount, price and date were expressly specified; or
b. There was a written formula/algorithm/computer program for determining amounts, prices and dates; or
c. The insider was NOT permitted to exercise any subsequent influence over how, when, or whether to
trigger buying or selling. Additionally (and very importantly), any other person who did exercise such
influence was NOT aware of the material non-public information when doing so.

2. 2 Insider Trading Plans...
3. The insider must demonstrate that the buying or selling that transpired was pursuant to the option selected for #1
above. If the insider alters or deviates from that prior contract instruction plan in any way, the insider is, effectively,
no longer in “compliance”.
In summary, the impact of SEC Rule 10b5-1 on publicly traded companies, and their directors/officers, is that the degree
of liability for insider trading has been “clarified” (read “expanded”). However, the rule has also provided companies/
directors/officers with an affirmative defense by which they may be able to mitigate their insider trading liability to the
smallest degree possible.
THE CONCERN OVER INSIDER SELLING
Insider selling is, far and away, the most common allegation against companies, and their directors/officers when they are
sued in securities class action litigation. While securities class actions typically contain multiple allegations of wrongdoing
by a company’s directors/officers, the allegation of Insider Trading/Stock Price Manipulation appears in over 90% of such
lawsuits. The chart below notes the gravity of this issue by showing both the number of such lawsuits filed annually as well
as their average cash settlement.
SECURITIES CLASS ACTION TRENDS
av. cash settlement
375 $20
# of lawsuits
300 $15
225 $10
150 $5
75 $0
'97 '98 '99 '00 '01
# Filed
Average Settlement
NOTES:
1. IPO allocation (aka “laddering”) lawsuits are NOT included (307 in 2001).
2. The Cendant settlement in 1999 of $3.2B was capped at $490MM (next largest cash settlement) for this chart.
The fact that insider trading is such a significant issue should not come as a surprise. First, equity based compensation has
become increasingly popular over the past decade. When insiders have so much of their overall compensation and wealth
tied up in their company’s equity, what choice do they have but to sell that equity? Second, investors expect insiders to act
in the interest of all shareholders. When investors perceive that insiders have acted for their own benefit, and not that of all
shareholders, by profiting from their awareness of material information which has NOT been disclosed to all shareholders,
lawsuits are certain to follow.

3. Insider Trading Plans... 3
METHODS BY WHICH INSIDERS CAN TRADE
Very few insiders are aware of the four methods available to them for trading. The “right” method for any given company
and its insiders will depend upon their evaluation of five key criteria. We will provide you with a brief description of each
plan and criterion. To tie it all together, there is a matrix combining the plans and criteria to help crystallize the decision
making process.
Method #1 – Self Directed Sales Program
With this method, insiders make the decision regarding when and how much they want to trade. While most insiders will
only trade during designated window periods, with the approval of their company’s Section 16 Officer, experience has
clearly shown that many claims arise from either companies without designated window periods and/or insiders who may
“push the envelope” on trades.
Method #2 – Traditional Direct Sales Program
Virtually identical to the above except the trades are executed by a designated asset manager. Insiders still retain the ability
to decide on the timing and the amount of the trade. Arguably, an asset manager may adhere more strictly to designated
window periods and other facets of a company’s insider trading policy.
Method #3 – Rule 10b5-1 Sales Program
Insiders outline a strategic sales program with specific trading parameters which is then executed by a designated asset
manager. While insiders yield day-to-day trade decision making to a third party (the asset manager), they gain more days
on which trades can be made because the trades are being executed by a third party without “awareness” of material non-
public information. It will likely be necessary for a company to amend (by broadening) its insider trading policy if its
insiders select this method.
Method #4 – Rule 10b5-1 Blind Trust Program
With this method, insiders gain both the maximum advantage of Rule 10b5-1’s affirmative defense and the maximum
amount of days in which their shares can be traded. However, the insider’s control over trading is yielded to an asset
manager who strategically manages the program based on an initial goal statement which does NOT allow for the degree
of specific trading parameters under the prior method.
Here is an overview of the five key criteria for assessing the trading programs.
Criterion #1 – Access to Potential Trading Days
For many insiders, this is the single criterion which they believe is most responsible for their ability to maximize the value of
their shares. However, to maximize their potential trading days, insiders must remove themselves from having direct control
over day-to-day trading decisions. The key to access is “awareness” – the stronger the firewall between insiders and
their awareness of material non-public information; the greater is their access to potential trading days.
Criterion #2 - Direct Control Over Trading
See above. This is a sensitive issue for most insiders since they have been accustomed to having direct day-to-day control
over the trading of their shares. However, retaining the utmost control means that insiders are willing both to limit their
potential trading days and subject themselves, and their company, to the highest degree of liability.

4. 4 Insider Trading Plans...
Criterion #3 – Affirmative Defense of SEC Rule 10b5-1
Given the focus of outside investors, plaintiffs’ attorneys, and the media on insider trading, as well as the potential costs
associated with it, insiders, and their companies, are increasingly concerned about their liability in this area. As stated
above, the stronger the firewall between insiders and their awareness of material non-public information when trades are
made, the greater the ability of insiders, and their companies, to mitigate their liability via the affirmative defense provided
within SEC Rule 10b5-1.
Criterion #4 – Appearance of Insider Trading Impropriety
In addition to the issue of legal liability as noted above, there is also the issue of perception – primarily the perception of
Wall Street and other investors. Unfortunately, both Wall Street and investors of all shapes and sizes have taken an
increasingly jaundiced view of insider trading. To the extent that insiders are NOT pulling the trigger on the sales of their
shares, the less insiders need to be concerned about the appearance of insider trading impropriety.
Criterion #5 - Potential for Discounted D&O Premium
Since allegations of illegal Insider Trading are the number one driver of securities class action lawsuits and since most of the
expense for defending and settling these lawsuits falls on the shoulders of insurers underwriting Directors’ & Officers’
Liability insurance, it stands to reason that D&O insurers have a vested interest in minimizing the liability created by
allegations of illegal Insider Trading. To wit, more and more D&O insurers are willing to discount the premiums they assess
companies if all insiders above a certain level divest their control over day-to-day trading.
The final step in this section is the decision making matrix which incorporates both the plans and criteria noted above.
INSIDER TRADING MATRIX
SELF DIRECTED TRADITIONAL DIRECT RULE 10b5-1 RULE 10b5-1 BLIND
SALES PROGRAM SALES PROGRAM SALESPROGRAM TRUST PROGRAM
Direct control over trading Most Control Most Control Moderate Control Least Control
Access to potential trading days Minimal Access Minimal Access Moderate Access Maximum Access
Affirmative defense of Rule No Defense No Defense Moderate Defense Maximum Defense
10b5-1
Appearance of insider trading High High Moderate Low
impropriety
Potential for discounted D&O Virtually nil Virtually nil Moderate High
premium
SUMMARY
Given the “new” reality in which publicly held companies and their insiders must now operate – a reality created by: the
scope of insider trading liability created by SEC Rule 10b5-1; securities class action lawsuits; the focus of Wall Street,
investors, and the media on corporate governance; lack of trust in auditors and other “regulators”; and, volatile stock
markets – they must take a new look at corporate governance policies and procedures. They must then make active
decisions about the degree to which they should change their corporate governance, particularly in the lightning rod realm
of Insider Trading. Given the legal complexities surrounding this issue, it is imperative that insiders work closely with
attorneys and other experienced professional advisors in making these decisions and implementing changes. Fortunately,
for both insiders and their companies, tools now exist which allow insiders to have the best of both worlds; the opportunity
to maximize the value of their insider shares while minimizing their liability and exposure to shareholder litigation.

5. William Gallagher Associates
INSIDER TRADING PLANS 200 State Street
Boston, MA 02109-2694
www.WGAINS.com
Maximizing Value; Minimizing Litigation
Several leading asset managers have developed and introduced Insider Trading Richard A. Leavitt
Plans through which company insiders can now take greater advantage of the Richard A. Leavitt is a Principal at
benefits provided by Securities and Exchange Commission (SEC) Rule William Gallagher Associates and the
10b5-1, promulgated in October 2000. The primary benefits of utilizing leader of the Management Liability
such a plan are twofold; First, they maximize the value of insider stock, and Practice. William Gallagher Associates
second, they minimize the likelihood of being a target for securities litigation. is a leading provider of insurance
Additionally, an increasing number of insurers will discount their Directors’ & brokerage, risk management,
Officers’ Liability insurance premiums for companies who have adopted such executive and employee benefits
plans for their insiders. To provide appropriate context for the genesis and services to firms in selected
importance of Insider Trading Plans, this paper will address the following fast-growth industries including
questions: high technology, life sciences,
financial services, healthcare, energy,
¨ What is the impact of SEC Rule 10b5-1 on publicly traded companies and environmental services. WGA has
and their insiders? offices in Boston, MA; Atlanta, GA;
¨ Why is there such concern surrounding insider selling? Columbia, MD; Princeton, NJ;
¨ What are the methods by which insiders can sell their shares? and Paris, France.
THE IMPACT OF SEC RULE 10b5-1
Adopted by the Securities and Exchange Commission on October 23, 2000 in conjunction with Regulation FD, Rule
10b5-1 addresses the issue of when insider trading liability arises in connection with an insider’s “use” or “knowing
possession” of material non-public information. In essence, the rule clarifies that an insider is deemed to have traded on
the basis of material non-public information whenever that person buys or sells securities while aware of the information.
Hence, the threshold for insider trading liability is “awareness” verses “use” of material non-public information. While
this distinction may appear to be legal semantics, it considerably expands the potential liability of insiders who trade and,
therefore, has lowered the bar for plaintiffs’ attorneys to bring securities class actions alleging illegal insider trading against
both insiders and their companies. However, Rule 10b5-1 also provides insiders and their companies with an affirmative
defense by which they can mitigate insider trading liability. To take advantage of the affirmative defense, an insider must
establish three factors:
1. Before becoming aware of the material non-public information, an insider had already:
a. Entered into a binding contract to buy/sell securities; or
b. Provided written instructions to another person to execute the trade; or
c. Adopted a written plan for trading securities.
2. Whichever of the three options noted above is selected, an insider must demonstrate that:
a. The amount, price and date were expressly specified; or
b. There was a written formula/algorithm/computer program for determining amounts, prices and dates; or
c. The insider was NOT permitted to exercise any subsequent influence over how, when, or whether to
trigger buying or selling. Additionally (and very importantly), any other person who did exercise such
influence was NOT aware of the material non-public information when doing so.

6. 2 Insider Trading Plans...
3. The insider must demonstrate that the buying or selling that transpired was pursuant to the option selected for #1
above. If the insider alters or deviates from that prior contract instruction plan in any way, the insider is, effectively,
no longer in “compliance”.
In summary, the impact of SEC Rule 10b5-1 on publicly traded companies, and their directors/officers, is that the degree
of liability for insider trading has been “clarified” (read “expanded”). However, the rule has also provided companies/
directors/officers with an affirmative defense by which they may be able to mitigate their insider trading liability to the
smallest degree possible.
THE CONCERN OVER INSIDER SELLING
Insider selling is, far and away, the most common allegation against companies, and their directors/officers when they are
sued in securities class action litigation. While securities class actions typically contain multiple allegations of wrongdoing
by a company’s directors/officers, the allegation of Insider Trading/Stock Price Manipulation appears in over 90% of such
lawsuits. The chart below notes the gravity of this issue by showing both the number of such lawsuits filed annually as well
as their average cash settlement.
SECURITIES CLASS ACTION TRENDS
av. cash settlement
375 $20
# of lawsuits
300 $15
225 $10
150 $5
75 $0
'97 '98 '99 '00 '01
# Filed
Average Settlement
NOTES:
1. IPO allocation (aka “laddering”) lawsuits are NOT included (307 in 2001).
2. The Cendant settlement in 1999 of $3.2B was capped at $490MM (next largest cash settlement) for this chart.
The fact that insider trading is such a significant issue should not come as a surprise. First, equity based compensation has
become increasingly popular over the past decade. When insiders have so much of their overall compensation and wealth
tied up in their company’s equity, what choice do they have but to sell that equity? Second, investors expect insiders to act
in the interest of all shareholders. When investors perceive that insiders have acted for their own benefit, and not that of all
shareholders, by profiting from their awareness of material information which has NOT been disclosed to all shareholders,
lawsuits are certain to follow.

7. Insider Trading Plans... 3
METHODS BY WHICH INSIDERS CAN TRADE
Very few insiders are aware of the four methods available to them for trading. The “right” method for any given company
and its insiders will depend upon their evaluation of five key criteria. We will provide you with a brief description of each
plan and criterion. To tie it all together, there is a matrix combining the plans and criteria to help crystallize the decision
making process.
Method #1 – Self Directed Sales Program
With this method, insiders make the decision regarding when and how much they want to trade. While most insiders will
only trade during designated window periods, with the approval of their company’s Section 16 Officer, experience has
clearly shown that many claims arise from either companies without designated window periods and/or insiders who may
“push the envelope” on trades.
Method #2 – Traditional Direct Sales Program
Virtually identical to the above except the trades are executed by a designated asset manager. Insiders still retain the ability
to decide on the timing and the amount of the trade. Arguably, an asset manager may adhere more strictly to designated
window periods and other facets of a company’s insider trading policy.
Method #3 – Rule 10b5-1 Sales Program
Insiders outline a strategic sales program with specific trading parameters which is then executed by a designated asset
manager. While insiders yield day-to-day trade decision making to a third party (the asset manager), they gain more days
on which trades can be made because the trades are being executed by a third party without “awareness” of material non-
public information. It will likely be necessary for a company to amend (by broadening) its insider trading policy if its
insiders select this method.
Method #4 – Rule 10b5-1 Blind Trust Program
With this method, insiders gain both the maximum advantage of Rule 10b5-1’s affirmative defense and the maximum
amount of days in which their shares can be traded. However, the insider’s control over trading is yielded to an asset
manager who strategically manages the program based on an initial goal statement which does NOT allow for the degree
of specific trading parameters under the prior method.
Here is an overview of the five key criteria for assessing the trading programs.
Criterion #1 – Access to Potential Trading Days
For many insiders, this is the single criterion which they believe is most responsible for their ability to maximize the value of
their shares. However, to maximize their potential trading days, insiders must remove themselves from having direct control
over day-to-day trading decisions. The key to access is “awareness” – the stronger the firewall between insiders and
their awareness of material non-public information; the greater is their access to potential trading days.
Criterion #2 - Direct Control Over Trading
See above. This is a sensitive issue for most insiders since they have been accustomed to having direct day-to-day control
over the trading of their shares. However, retaining the utmost control means that insiders are willing both to limit their
potential trading days and subject themselves, and their company, to the highest degree of liability.

8. 4 Insider Trading Plans...
Criterion #3 – Affirmative Defense of SEC Rule 10b5-1
Given the focus of outside investors, plaintiffs’ attorneys, and the media on insider trading, as well as the potential costs
associated with it, insiders, and their companies, are increasingly concerned about their liability in this area. As stated
above, the stronger the firewall between insiders and their awareness of material non-public information when trades are
made, the greater the ability of insiders, and their companies, to mitigate their liability via the affirmative defense provided
within SEC Rule 10b5-1.
Criterion #4 – Appearance of Insider Trading Impropriety
In addition to the issue of legal liability as noted above, there is also the issue of perception – primarily the perception of
Wall Street and other investors. Unfortunately, both Wall Street and investors of all shapes and sizes have taken an
increasingly jaundiced view of insider trading. To the extent that insiders are NOT pulling the trigger on the sales of their
shares, the less insiders need to be concerned about the appearance of insider trading impropriety.
Criterion #5 - Potential for Discounted D&O Premium
Since allegations of illegal Insider Trading are the number one driver of securities class action lawsuits and since most of the
expense for defending and settling these lawsuits falls on the shoulders of insurers underwriting Directors’ & Officers’
Liability insurance, it stands to reason that D&O insurers have a vested interest in minimizing the liability created by
allegations of illegal Insider Trading. To wit, more and more D&O insurers are willing to discount the premiums they assess
companies if all insiders above a certain level divest their control over day-to-day trading.
The final step in this section is the decision making matrix which incorporates both the plans and criteria noted above.
INSIDER TRADING MATRIX
SELF DIRECTED TRADITIONAL DIRECT RULE 10b5-1 RULE 10b5-1 BLIND
SALES PROGRAM SALES PROGRAM SALESPROGRAM TRUST PROGRAM
Direct control over trading Most Control Most Control Moderate Control Least Control
Access to potential trading days Minimal Access Minimal Access Moderate Access Maximum Access
Affirmative defense of Rule No Defense No Defense Moderate Defense Maximum Defense
10b5-1
Appearance of insider trading High High Moderate Low
impropriety
Potential for discounted D&O Virtually nil Virtually nil Moderate High
premium
SUMMARY
Given the “new” reality in which publicly held companies and their insiders must now operate – a reality created by: the
scope of insider trading liability created by SEC Rule 10b5-1; securities class action lawsuits; the focus of Wall Street,
investors, and the media on corporate governance; lack of trust in auditors and other “regulators”; and, volatile stock
markets – they must take a new look at corporate governance policies and procedures. They must then make active
decisions about the degree to which they should change their corporate governance, particularly in the lightning rod realm
of Insider Trading. Given the legal complexities surrounding this issue, it is imperative that insiders work closely with
attorneys and other experienced professional advisors in making these decisions and implementing changes. Fortunately,
for both insiders and their companies, tools now exist which allow insiders to have the best of both worlds; the opportunity
to maximize the value of their insider shares while minimizing their liability and exposure to shareholder litigation.