Robert Walter, an attorney we respect, provided a very thought provoking comment on our Herbalife (HLF) report titled "Did Herbalife Repurchase Shares While in Possession of Material Non-Public Information".
Based upon Robert's comments, we realize that providing further information, to supplement our report, is necessary.
Robert's comment included:
Your post may not be correct. It is not clear whether HLF used a 10b5-1(C) plan to engage in the repurchases…. If HLF did use a 10b5-1 plan, the only requirement concerning non-public information is that HLF cannot have had possession of material, non-public information at the time the plan was adopted (July 30, 2012).
Robert's observations hit the nail on the head, especially as they pertain to the possibility that Herbalife repurchased its shares pursuant to a 10b5-1 Trading Plan.
In an effort to better inform our readers, we present the following.
Note: Source for the following is the Securities & Exchange Commission ("SEC").
10b5-1 Trading Plans: As adopted, paragraph (1)(I) sets forth an affirmative defense from the general rule, which applies both to individuals and entities that trade. To satisfy this provision, a person must establish several factors.
· First, the person must demonstrate that before becoming aware of the [material non-public information] information, he or she had entered into a binding contract to purchase or sell the security, provided instructions to another person to execute the trade for the instructing person's account, or adopted a written plan for trading securities.
· Second, the person must demonstrate that, with respect to the purchase or sale, the contract, instructions, or plan either: (1) expressly specified the amount, price, and date; (2) provided a written formula or algorithm, or computer program, for determining amounts, prices, and dates; or (3) did not permit the person to exercise any subsequent influence over how, when, or whether to effect purchases or sales; provided, in addition, that any other person who did exercise such influence was not aware of the material nonpublic information when doing so.
· Third, the person must demonstrate that the purchase or sale that occurred was pursuant to the prior contract, instruction, or plan. A purchase or sale is not pursuant to a contract, instruction, or plan if, among other things, the person who entered into the contract, instruction, or plan altered or deviated from the contract, instruction, or plan or entered into or altered a corresponding or hedging transaction or position with respect to those securities.
Section of Rule 10b5-1 can be used by a company to defend against allegations of repurchasing shares while in possession of material non-public information, but only if the company can prove:
(1) that it established the Rule 10b5-1 trading plan (governing the repurchase of its shares) at a time when it was not in possession of material non-public information; and,
(2) that the Rule 10b5-1 Plan met all the requisite requirements above, including, but not limited to, the second provision above which provides that the Rule 10b5-1 plan
"did not permit the person to exercise any subsequent influence over how, when, or whether to effect purchases or sales".
A Rule 10b5-1 Trading Plan is a written plan that extinguishes the ability of the company [repurchasing its shares] from determining, either at its discretion, based upon market events or any other reason or strategy, when it will repurchase its shares.
In short, the Rule 10b5-1 Trading Plan dictates the conditions under which the company can repurchase its shares.
DID HERBALIFE REPURCHASE ITS SHARES UNDER A RULE 10b5-1 TRADING PLAN?
THE SHORT ANSWER IS NO.
Herbalife's press release dated July 30, 2012 [announcing its $1 billion share repurchase authorization] gives us the facts we need to determine that Herbalife did not establish a 10b5-1 trading plan in connection with its $1 billion share repurchase.
The press release in pertinent part:
Share Repurchase Program Update. …the company's Board of Directors authorized a new $1 billion share repurchase authorization available to be utilized over the next 5 year period, expiring on June 30, 2017.
Herbalife's future share repurchases, if any, may take place from time to time at management's discretion based on market conditions, and shares may be purchased in open-market, privately negotiated or other transactions. (Emphasis added)
The facts as we have presented seem to support the proposition that Herbalife did not repurchase its shares under a 10b5-1 trading plan. Therefore, Herbalife repurchased its shares while in possession of material non-public information.
Disclosure: I am short HLF.