Rule 10b-18 Stock Buyback Violations: A New Avenue for Whistleblower Tips?

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If pressure from Congressional leaders and politicians on stock buybacks continue, whistleblowers may find the SEC more receptive to information about violations of the voluntary safe harbor in Rule 10b-18.

SEC Rule 10b-18 allows companies to repurchase their stock without fear of rules against market manipulation. To qualify, they must satisfy four conditions on every buyback in a day. These include using a single broker or dealer, have specified the highest price to be paid, to limit the amount of common stock repurchased according to volume restrictions, and timing limitations to the period outside of the opening and the last thirty minutes of trading.

A letter from Senator Tammy Baldwin questioned SEC Chair Mary Jo White earlier this year on the potential use of share repurchases by executives to boost the value of their stock-based compensation. White’s response, according to a media report, is that the SEC doesn’t collect information that would allow them to discover violations of the rule and that even if it did, a rule violation is not necessarily evidence of market manipulation.

In an interview with the Boston Globe back in June, Senator Elizabeth Warren expressed concerns that corporations are using stock buybacks to boost their stock price in the short term and ignoring the long-term investments in their company that would allow them to actually improve shareholder value. As Warren detailed, prior to the adoption of Rule 10b-18 in 1982, the repurchase of large quantities of stock was considered manipulation. Warren wants to undo the SEC and treat buybacks as stock manipulation again.

Whistleblower tips are ultimately reliant on enforcement actions brought by the Securities & Exchange Commission for success. So if the SEC doesn’t see stock buybacks as manipulation, then it won’t be a fruitful area for whistleblowers to pursue. However, to the extent that Presidential Candidate Hillary Rodham Clinton, Senator Warren and others continue to make stock buybacks a priority issue, and the SEC is given information about a company that falls outside this safe harbor for market manipulation, it could very well be an area that the SEC decides to pursue.

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