Cell CEO sells stocks before big dive; company says trade was automatic

Cell Therapeutics Chief Executive James Bianco sold 37,500 shares of his company stock last Monday at some of its highest prices of the year, one day before the company released bad news that drove the stock down 16 percent.

The company says the insider sale was triggered by an automatic sales plan set up 10 months ago to pay taxes, but the transaction came on a day when the stock briefly popped up on good news.

Before markets opened that Monday, Cell Therapeutics announced it had signed a partnership with pharmaceutical giant Novartis potentially worth $285 million.

The stock shot up 18 percent at the opening bell, and Bianco's broker made the sales during the day at between $2.03 and $2.33 a share. It was the first day the stock closed above $2 since March.

The next morning, before markets opened, Cell Therapeutics had news that would send the stock back down: The company was raising $40 million in cash for its operations by selling 23 million new shares to select investors at a discounted $1.73 a share. That would significantly dilute the existing pool of 109 million shares, so the news erased all of the previous day's gains, driving the stock down to close at $1.75.

Shareholders on a message board fumed. One person wrote, "Great Timing. I guess it's easy if [you are] in-the-know."

The stock sales generated $80,000, about $15,000 more than if Bianco had sold the same shares a day later.

Disclosing Bianco's stock sale two days later in a filing with the Securities and Exchange Commission, Cell Therapeutics said the transaction was part of an automatic pre-set trading plan for insiders, called a 10b5-1 plan.

In this case, the stock sales were triggered because Bianco received a bonus of 125,000 shares the previous Friday from signing the partnership, and needed to sell some of the shares to pay taxes on the gain.

Jacob Frenkel, a former SEC enforcement lawyer now in private practice in Rockville, Md., said such insider stock-sale plans are supposed to provide a framework so that insiders can trade legally, without benefiting from their inside knowledge. The plans have formulas that specify trigger dates, prices and amounts ahead of time.

The executive can only start such a program at a time when he or she is unaware of market-moving inside information.

Even so, an insider sale before bad news could raise questions from regulators, Frenkel said.

After hearing the circumstances of Bianco's sale, Frenkel said, "On its face, there is no compelling indication of wrongdoing, but there certainly are questions here that warrant regulatory inquiry."

Frenkel said the SEC would likely want to know if the plan was properly implemented and used. He said regulators may want to know if a market-moving news event was structured around an insider-trading opportunity.

Cell Therapeutics would not disclose the specific terms of its insider stock-sale plan. Dan Eramian, the company's executive vice president of corporate communications, said the plan was started in December, and since then Bianco has had no control over the timing of trades.

"His shares were sold automatically for taxes; that was part of the plan," Eramian said. "He didn't get any of the money. It just went for taxes."

According to Eramian, the $40 million stock offering could not have been announced a day earlier, when Bianco's sales were occurring, because the financing wasn't done.

The registered offering of 23 million shares was assembled beginning at 5:30 p.m. Pacific time on Monday, and was completed shortly after 11 p.m. Monday, Eramian said. News of the offering, led by investment banks Rodman & Renshaw and Punk, Ziegel, was released before markets opened on Tuesday.

Dan Grant, a vice president with William Blair & Co. in Chicago, who designs and manages insider stock-sale programs for executives, said that since the SEC adopted rules on such plans in 2000, executives have more flexibility to legally make trades, while minimizing suspicions of shareholders.

Under the rule, a broker handles the sales according to pre-set instructions, leaving the insider with no discretion on when to buy or sell. The plans can provide an "affirmative defense" against accusations of illegal insider trading, Grant wrote in a May 2001 article in the Journal of Financial Planning.

But over time, Grant said, advocates of such plans, like himself, have found they have "shortcomings."

For example, because executives know in advance which days their stock sales are due to occur, Grant said, it is possible for them to arrange news events around those dates. Companies are not required to disclose to shareholders when they initiate a plan, or cancel one, but some choose to do it anyway, Grant said.

Grant said the SEC is aware of weaknesses in the rule, and is in discussions about what to do about it.

Stephen Graham, chairman of global corporate law with Orrick, Herrington & Sutcliffe in Seattle, said the best-designed insider sales plans have a "stop-trading" provision, which halts insider trades in connection with major news events that move stocks, like mergers or partnerships.

"If you want to be squeaky clean and be sure your actions are not suspect, or don't attract attention of SEC enforcement, that [stop-trading provision] is what you would do," he said.

Eramian said Bianco's plan contains no such provision.