Insider Trading at Lordstown Motors

This does not look good

When I was in law school at the University of Chicago, back in the early years of the first Reagan administration, my securities law professor was a young academic who had served in the Solicitor General’s office under Robert Bork and who subsequently was appointed by President Reagan to the US Court of Appeals for the 7th Circuit, where he still serves today. Suffice it to say he was “conservative” in a provocative intellectual libertarian sort of a way. What I remember most about his course, other than my poor grade, was the professor’s argument that insider trading should not be treated as a violation of the securities laws and in fact should be encouraged as a way to incentivize the creation of a more ruthlessly efficient stock market. Being young and impressionable, and still in my William F. Buckley phase, I was inclined to go along with this argument. But now, forty years later and with the benefit of experience as a corporate lawyer, investment banker and public company director, I have my doubts.

But wholly apart from what one thinks generally about the treatment of insider trading under the federal securities laws, or the role of the SEC in enforcing these laws, I think that even died-in-the-wool Reganites might be concerned by the recent stock sale activity of several senior executives and directors at Lordstown Motors, a troubled early-stage EV truck manufacturer (or would be manufacturer, if it ever gets its first product off the ground).

Today’s WSJ ran this article by Ben Foldy, which reviews the facts and timeline of the various executive share sale transactions: https://www.wsj.com/articles/lordstown-motors-executives-sold-stock-ahead-of-reporting-results-and-before-troubles-came-to-light-11624273380?mod=hp_lead_pos2

I had to read this article and the timeline a few times to make sure I wasn’t missing something, because this story is truly beyond belief. Five very senior executives and directors at Lordstown allegedly sold large portions of their personal shares in the company shortly after the company went public (via a SPAC merger), while in possession of non-public knowledge of serious operational issues at the company, and prior to the release of the company’s first publicly reported financial results (which were not good, and had to be subsequently restated to include a “going concern’ qualification from the auditors).

If the facts as stated are true, I suspect that each of these executives and members of the Lordstown’s board of directors will face serious legal challenges from the SEC as well as from disgruntled shareholders, including those who purchased shares around the time of these transactions. Lordstown is already facing class-action lawsuits for other alleged securities law violations and it looks like the plaintiffs’ case just got stronger. [See link below.]

There are so many things wrong with the alleged executive stock sales that I really don’t know where to begin, but let me start (and end) with the company’s board of directors and especially its independent (non-employee) directors. It is not clear to me when the Lordstown board first obtained knowledge of these share sales, which began back in December 2020, but the board appears not to have taken any formal action on the matter until very recently, when it issued the following statement as part of a press release primarily focused on other matters:

“Each of those transactions [the stock sales] were made for reasons unrelated to the performance of the company or viability of the Endurance [a prototype truck], and each such director and executive retained substantial Lordstown Motors equity holdings in the form of shares and options following the sales and transfers described in the Company’s public filings.” [See the link below for the full release.]

I am no longer a practicing lawyer and have not been for decades, but I do sit on a public company board of directors and I personally would not have agreed to issue this statement. In my view it is largely irrelevant why the executives (some of whom were also directors) sold their shares. One executive apparently sold his shares to fund a new turkey farm, but are we supposed to believe this somehow makes his actions ok? It’s been a long time since I graduated law school but I do not recall the “turkey farm” exception to the insider trading laws; perhaps it is new.

I am also not reassured by the board’s statement that the executives who sold their shares “retained substantial Lordstown holdings in the form of shares and options following the sales”. If the facts as stated in the article are correct, several of these executives sold virtually all of their vested shares (the only ones they owned and could legally transfer). The fact that they still had other unvested equity interests in the company, even large ones, does not make their share sales defensible in my view.

These executives sold millions of dollars of stock to unsuspecting investors and allegedly did so while in possession of material non-public information and at times which at most companies would be considered “blackout” periods during which executives are prohibited from selling shares (eg before the release of financial results or prior to the public announcement of material adverse events). The SEC has published guidance on these matters pursuant to Rule 10b-5 of the Securities and Exchange Act of 1934, and has adopted Rule 10b5-1 to provide companies with a “safe harbor” to defend themselves against insider trading allegations relating to executive stock sales. [See link below]

It is possible that I have got something wrong here, and if I do please correct me and I will publicize my correction. I am particularly interested to hear from those of you now in law school or practicing law. So please email me.

In the meantime, check out the following links and watch this space. It seems to me this story is far from over.

Links:

Lordstown Motors Executives Sell Stock Ahead of Results and Before Troubles Came to Light, WSJ: https://www.wsj.com/articles/lordstown-motors-executives-sold-stock-ahead-of-reporting-results-and-before-troubles-came-to-light-11624273380?mod=hp_lead_pos2

Lordstown Hit with Fifth Class Action Lawsuit, WFMJ, May 14, 2021: https://www.wfmj.com/story/43887382/fifth-classaction-lawsuit-filed-against-lordstown-motors

Lordstown Special Committee Reports Results of Investigation, Company website: https://investor.lordstownmotors.com/news-releases/news-release-details/lordstown-motors-reports-results-special-committee-investigation

A Guide to Corporate 10b5-1 Plans, Harvard Law School: https://corpgov.law.harvard.edu/2016/03/24/a-guide-to-rule-10b5-1-plans/