When Pfizer and German partner BioNTech announced on Monday that their Covid-19 vaccine was highly effective, global stocks soared. Shares in Pfizer rose 7 per cent and chief executive Albert Bourla sold $5.6m of stock at a whisker from the company’s all-time high.
This drew some negative attention. But Pfizer rolled out a tried-and-tested response. “The sale of these shares is part of Dr Bourla’s personal financial planning and a pre-established (10b5-1) plan, which allows, under SEC rules, major shareholders and insiders of exchange-listed corporations to trade a pre-determined number of shares at a pre-determined time,” Pfizer said.
All of which is correct. Executives usually cannot trade their company’s stock outside a short window that follows quarterly results. However, the Securities and Exchange Commission makes an exception for preprogrammed sales. The idea is that if you set up a trade to execute automatically in months or years ahead, you are unlikely to be unfairly abusing inside information.
Whenever executives are criticised for selling shares at an advantageous moment, they like to point to a 10b5-1 plan to suggest there is no problem. Yet the benefits of these plans are wildly overstated.
They help avoid the main type of insider trading abuse: buying or selling shares ahead of an announcement that will lift or depress the stock price.
But even if the timing of your trade is locked in, what happens if you control the timing of the announcement?
If Pfizer’s news had come on Tuesday, and Dr Bourla’s sale was programmed for Monday, the sale would have executed at a lower level. Assuming the stock was flat on the day, Dr Bourla would have raised only $4.8m rather than almost $5.6m.
There is no evidence the stock plan had any bearing on the timing of the announcement. The involvement of multiple people across two companies makes it unlikely.
There is also the possibility that the plan specified a certain price rather than a date — although the company’s statement did refer to a pre-determined time. But it all shows that planned sales can create question marks as well as remove them.
There are other problems that are less theoretical. The intent behind the plans is to allow executives to conduct regular, modest sales of company stock over an extended period of time. It is not, as Dr Bourla has done, to dump 62 per cent of your entire holdings within three months of putting the plan in place.
Dr Bourla is not the only pharma CEO to be cashing out this year. At Moderna, which also has a promising vaccine candidate, chief executive Stéphane Bancel has sold a whopping $49.8m of shares in the company, according to data from S&P Global. He, too, has explained his actions by pointing to a 10b5-1 plan. Although his share sales are much larger, the plan was at least established well before the pandemic — in December 2018 — and it is executing relatively small volumes at regular intervals. The dollar amounts are especially large because the company’s stock has quadrupled this year. Moreover, Mr Bancel retains most of his net worth in Moderna.
When Sandy Weill was building financial services group Travelers he made his top executives swear a “blood oath” that they would not sell any stock in the company until they left or retired. That extreme position certainly ensures that management is aligned with outside investors. To sell most of your holdings, absent a divorce or other unavoidable event, looks bad. That is especially true when public confidence in your company is a matter of life or death.