SEC Trading Rule Gives Executives An Out Just Ahead of Bad News

Trex founders Anthony J. Cavanna, left, Roger A. Wittenberg, Robert G. Matheny and Andrew U. Ferrari each put up $500,000 of his own money and arranged financing to buy the Trex operation from parent company Exxon.
Trex founders Anthony J. Cavanna, left, Roger A. Wittenberg, Robert G. Matheny and Andrew U. Ferrari each put up $500,000 of his own money and arranged financing to buy the Trex operation from parent company Exxon. (By Tracy A. Woodward -- The Washington Post)

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By Jerry Knight
Monday, July 11, 2005

In the month before the Trex Co. revealed that slumping sales and rising raw materials costs are eroding profits, three top officials of the Virginia maker of composite deck boards cashed in a combined $2.75 million of their stock.

Trex stock plunged more than $10 a share the day after the earnings shortfall was announced June 22, costing stockholders roughly $150 million in the value of their shares.

By selling their shares before the problem was revealed, Trex chief executive Robert G. Matheny and directors Anthony J. Cavanna and Andrew U. Ferrari together got almost $1 million more for their stock than they would have if they had waited to sell after the announcement.

Insider trading records compiled by Thomson Financial show that in the first three weeks of June, Cavanna sold Trex stock worth $1.4 million, Matheny sold $968,000 and Ferrari sold $381,000.

Ordinarily, big insider sales just before bad news is announced would trigger outcries from shareholders and probably an investigation by the Securities and Exchange Commission.

That hasn't happened because the Trex officials acted under an SEC rule that allows corporate officers, directors and other insiders to sell stock at any time, under almost any circumstances, without running afoul of insider trading regulations -- so long as the sales are "pre-arranged."

Like many federal regulations, this one is known by a paragraph number from a rulebook: 10b5-1.

Drafted five years ago to clarify insider trading laws, the rule allows senior corporate executives and directors who are considered corporate insiders to set up the pre-arranged stock trading plans. Typically, the executive or board member notifies the SEC of the intent to sell a certain number of shares over a certain period of time, then turns over the task of actually making the trades to a stockbroker or another designated representative.

Trex, for example, served notice on May 13 that under "the rule 10b5-1 sales plan, Mr. Matheny may sell up to 260,000 shares of Common Stock through Nov. 16, 2005." That would have amounted to about $10 million worth of stock based on what Trex shares were selling for at the time, but considerably less than that since Trex stock dropped. Matheny's sales in June were made under that notice.

Matheny terminated the stock sales plan on June 23, the day after Trex announced its expected earnings shortfall, according to a Trex filing with the SEC.

Matheny has offered no public comment on his sales under the pre-arranged plan or on his decision to cancel it. Nor did company officials respond to calls seeking comment for this article to the offices of Matheny, Chief Financial Officer Paul D. Fletcher or the New York public relations firm that represents Trex.

Securities lawyers say pre-arranged sales plans are being used more often. Once such a sales plan is made and filed with the SEC, insiders can sell stock with impunity -- even if they learn some "inside information" that would otherwise disqualify them from selling, said lawyer Gregory S. Bruch, a former SEC staff member who is now a partner in the law firm of Foley & Lardner.


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© 2005 The Washington Post Company

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