Bench submitted a sale plan in January, months before any legal action against IBM was contemplated, McBride said. His agreement called for the sales to begin on March 8. He planned to sell 5,000 shares a month for the next 12 months, according to the plan.

Rule 10b-5 -- Employment of Manipulative and Deceptive Devices

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

a. To employ any device, scheme, or artifice to defraud,

b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

c. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."

Subject to paragraph (c)(1)(ii) of this section, a person's purchase or sale is not "on the basis of" material nonpublic information if the person making the purchase or sale demonstrates that:

Before becoming aware of the information, the person had:

Entered into a binding contract to purchase or sell the security,

Instructed another person to purchase or sell the security for the instructing person's account, or

Adopted a written plan for trading securities; . . .

Rule 10b5-1 addresses the issue of when insider trading liability arises in connection with a trader's "use" or "knowing possession" of material nonpublic information. This rule provides that a person trades "on the basis of" material nonpublic information when the person purchases or sells securities while aware of the information. However, the rule also sets forth several affirmative defenses, which we have modified in response to comments, to permit persons to trade in certain circumstances where it is clear that the information was not a factor in the decision to trade.

Benefits -- Rule 10b5-1's affirmative defenses are intended to provide relief, as they effectively serve as a safe harbor from Rule 10b5-1 liability. The Rule 10b5-1 Sales Plan sets forth a written contract for the sale of securities, based on a systematic plan/formula set forth by the executive. With a Rule 10b5-1 Sales Plan in place, insiders will now have the ability to sell or buy pursuant to the written plan, even if they have material nonpublic information.

Rule 10b5-1 (entitled "Trading 'on the Basis of' Material Nonpublic Information in Insider Trading Cases") provides that a person trades on the basis of material nonpublic information if a trader is "aware" of the material nonpublic information when making the purchase or sale. The rule also sets forth several affirmative defenses or exceptions to liability. The rule permits persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith.

"Insider trading" is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct. The legal version is when corporate insiders -- officers, directors, and employees -- buy and sell stock in their own companies. . . .

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. . . .

Rule 10b5-1 provides that a person trades on the basis of material nonpublic information if a trader is "aware" of the material nonpublic information when making the purchase or sale. The rule also sets forth several affirmative defenses or exceptions to liability. The rule permits persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith.

The most important requirement is that the trading plan be entered into at a time when the person was not aware of material nonpublic information about the security or issuer in question. Equally important is that the trading plan be "entered into in good faith, and not part of a plan or scheme to evade the prohibitions" against insider trading. . . . .

The Rule does not require a company to disclose the existence or contents of its executives' trading plans. At the extreme -- but only at the extreme -- the adoption of a trading plan by a significant shareholder might itself constitute an event for which disclosure is required. Other than at that point, disclosure is discretionary. . . .

Disclosure in an SEC filing also may increase the probability that in a private securities lawsuit, a court would take judicial notice of a trading plan.

Under Delaware corporate law -- which should apply to all Delaware corporations, even in lawsuits based in other States -- there should not be any difficulty with trades made pursuant to a trading plan. This is because the few reported Delaware decisions rely on the theory that an insider should not use information garnered in her position as a corporate insider for her own private profit by making a sale on the basis of that information. As one Delaware court explained, an insider trading plaintiff "must allege a 'causal link' between specific inside information and each stock sale by each defendant by presenting specific facts showing each sale was entered into and completed on the basis of and because of non-public information." By definition, under a good faith trading plan, an insider's sales are not made on the basis of information garnered in her position as a corporate insider. Rather, trades are made pursuant to a trading plan adopted before the insider was aware of any material nonpublic information.