Quietly this month, Cisco filed a Form 8-K with the U.S. Securities and Exchange Commission:
"On June 22, 2012, John T. Chambers, Chairman and Chief Executive Officer of Cisco Systems, Inc. ('Cisco'), adopted a pre-arranged stock trading plan to exercise Cisco stock options originally granted in 2004 and 2005 and set to expire between August 2013 and September 2014, and to sell the acquired shares of Cisco stock.
"Under the plan, Mr. Chambers may sell up to 2,150,000 shares of Cisco stock.
"The plan is scheduled to terminate in September 2013."
For comparison purposes, 2.15 million Cisco shares would equate to 89.8% of Chambers' direct Cisco shareholdings as of February 13, 2012.
Cisco CEO John Chambers will be selling 2.15 million Cisco shares pursuant to a Rule 10b5-1 plan, adopted by him on June 22, 2012.
Stanford University's President, John L. Hennessy, has been a member of Cisco's Board of Directors for 10-years.
So the following 32-page Stanford University Graduate School of Business study is quite revealing, at least in my opinion:
Here are the results of the above Stanford University study:
"The SEC enacted Rule 10b5-1 to deter insiders from trading with private information, yet also protect insiders' preplanned, non-information-based trades from litigation.
"Despite its requirement that insiders plan trades when not privately informed, the Rule appears to enable strategic trade."
"Participating insiders' sales systematically follow positive and precede negative firm performance, generating abnormal forward-looking returns larger than those earned by non-participating colleagues."
"There is evidence, however, that a substantive proportion of randomly drawn plan initiations are associated with pending adverse news disclosures."
"There is also evidence that early sales plan terminations are associated with pending positive performance shifts, reducing the likelihood that insiders' sales execute at low prices."
"Collectively, this suggests that, on average, trading within the Rule does not solely reflect uninformed diversification."
"Evidence suggests there is an association between Rule 10b5-1 participation and abnormal trade returns, indicating that trading within the Rule does not solely reflect uninformed diversification. Specifically, participants' sales, the bulk of Rule 10b5-1 trade, tend to follow price increases and precede price declines generating statistically significant forward-looking abnormal returns.
"There is also evidence that 10b5-1 plan initiations are associated with subsequent adverse news disclosure and that early sales plan termination is associated with positive firm performance."
"The observed association between 10b5-1 sales and negative future returns does not appear to be due to a number of alternative explanations. Abnormal returns on participants' trades are significantly larger than abnormal returns on trades by nonparticipants at the same firms, suggesting that these returns are not the result of omitted firm-, industry-, or market-level factors."
"Collectively, results suggest that trade within Rule 10b5-1 does not reflect pure diversification and indicates that some insiders may avail themselves of unintended strategic loopholes. This strategic trade potential highlights the difficulty in designing regulation that mitigates insiders' information advantage when trading."
"Results also suggest that participants' trade predicts future market performance. Outside investors, therefore, might consider 10b5-1 trade signals as a means to develop profitable trading strategies. Finally, results suggest a predictable relationship exists between regulation that lowers insiders' trade risk and their trade behavior."
"The evidence documented in this study collectively points to some level of general strategic trade by participants in Rule 10b5-1. There is evidence that participants' sales, on average, generate abnormal trade returns, that a substantive proportion of selected 10b5-1 plan initiations are associated with pending adverse news disclosure, and that participants terminate sales plans before positive shifts in firm returns."
"This study leaves open the question of how 10b5-1 participants are able to generate abnormal trade returns. There is some evidence that suggests participants terminate plans before price increases, which provides a partial explanation for the association between observed sales and future price declines. However, abnormal returns could also result if participants plan trade when they possess nonpublic information or if participants alter the timing or content of disclosures once trades have already been planned. Given current disclosure rules, it is not possible to empirically disentangle these potential strategies."
