How not to respond to a subpoena by the SEC

Take a trip with me, back to early 2006.

On January 7, Jordan Goldstein, general counsel of, pronounced that company co-founder Jim Cramer had never sold a single share of TSCM stock.

Exactly one month later, Jim Cramer announces, via the adoption of a rule 10b5-1 plan, his intention to exercise 150,000 stock options over the course of one year.

In the announcement, the plan’s purpose is expressed as being:

“…designed to avoid any real or perceived conflict of interest in connection with the trading of company securities. The program is established at a time when the executive does not have material inside information.

“…It is Mr. Cramer’s intention to provide an orderly liquidation of these options through this plan, which provides for the sale of approximately 12,500 shares on a monthly basis.”

cramer-tscm-sales1.gifSuch an orderly liquidation, as outlined in the plan, would have looked like the chart to the right (click to enlarge).

cramer-tscm-sales2.gifIn reality, the record reflects a very different selling pattern by Mr. Cramer; one which looks like the chart to the left (click to enlarge).

You’ll note that 112,500 (exactly 75%) of the options expected to be exercised in an orderly manner over the course of 12 months were actually exercised within two weeks.

What could account for such a deviation from Cramer’s 10b5-1 plan?

A little historical context might add some clarity.

What was not mentioned in the 10b5-1 plan was the fact that just days beforehand, Jim Cramer had received a subpoena by the SEC…something that might be considered by some to be material inside information.

cramer-tscm-sales3.gifThat subpoena would not be disclosed by Cramer until February 27, by which time 100,000 options had already been exercised. Adding this information to Cramer’s TSCM selling chart would tend to raise serious questions relating to insider trading on Cramer’s part, and the low regard Cramer would appear to have for his company’s investors.

NOTE: Thanks to Evren Karpak and another un-named supporter of market reform for their time in handling key portions of the research on this topic.

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