Intel CEO Brian Krzanich’s massive stock sale last fall — which came as the company was privately trying to contend with a major security vulnerability in its chips — could spark a mess of legal trouble for the company.
Institutional investors are already consulting with lawyers about filing a shareholder suit against the company related to the stock sale, according to a person familiar with the talks. Meanwhile, Intel could also contend with an inquiry by the Securities and Exchange Commission, legal experts said.
“I certainly think it would be intriguing to the SEC and theoretically to the US Attorney’s office,” said Joshua Robbins, a white-collar defense attorney at Greenberg Gross and a former federal prosecutor. If the SEC does launch an inquiry, he continued, “it’s going to want to know what did [Krzanich] know and when did he know it.”
The SEC declined to say whether it is investigating Krzanich’s stock sale. An Intel representative told Business Insider last week that Krzanich’s stock sale was “unrelated” to the high-profile security vulnerability which affects chips made by Intel as well as those of rival chipmakers AMD and ARM. But the Intel spokesperson declined on Monday to comment any further on the matter, including whether the company’s board of directors is reviewing the stock transactions.
Krzanich saw a $24 million windfall in late November through a combination of exercising stock options and selling shares that he owned outright. The move raised eyebrows at the time, because he essentially sold all of the stock he could; he kept only the minimum 250,000 shares he’s required to hold under his contract with Intel.
But the stock sale garnered new attention last week after Intel publicly acknowledged a security vulnerability that has plagued nearly all of its chips dating back to 1995. Intel said it had known about the vulnerability, which could allow a hacker to gain access to passwords and other secret information on a computer, since June — months before it came to the public’s attention and months before Krzanich’s stock sales.
That timeline has raised questions about the motivation behind, the timing of, and the size of Krzanich’s stock sale. Although Intel’s CEO made the sales through a pre-arranged “10b5-1” plan that automatically sells shares on a set date, he didn’t put that plan into place until the end of October, nearly five months after Intel first learned about the vulnerability.
“These are bad facts for him,” said Mercer Bullard, a securities law professor at the University of Mississippi’s School of Law.
The SEC has generally given corporate insiders wide latitude to buy and sell their companies’ stock under 10b5-1 plans. Those plans typically buy or sell a certain number of shares automatically on an executive’s behalf on a recurring, regular basis. That pre-scheduled, regular nature of 10b5-1 plans is designed to insulate corporate insiders from the charge that they are making trades based on non-public information.
But they don’t provide an absolute immunity to insider trading charges. Although insiders are generally allowed to change or replace their 10b5-1 plans, they’re forbidden from putting such plans in place or changing them when they are already in possession of material, or substantive, non-public information.
That’s why it’s going to be important to know when exactly Krzanich knew about the security vulnerability and how serious Intel believed it to be at the time. An Intel representative declined to comment on when Krzanich became aware of the vulnerability.
According to a Bloomberg story, security researchers have for years been looking for the type of vulnerability that was found in Intel’s chips and those of other chipmakers. They’ve also known for years — and publicized in research papers and at security conferences — just how dangerous such a vulnerability could be.
“You lose a lot of protections if you amend a [trading] plan when in possession of material non-public information,” said Robert Bartlett, a professor of law at the University of California-Berkeley’s School of Law.
The SEC has limited resources, doesn’t investigate every suspicious transaction, and is operating under the auspices of a pro-business, antiregulatory Trump administration. But the agency has indicated that it plans to make insider trading a priority. And Krzanich’s stock sale could make a tempting target for an investigation, especially because if the agency took action against such a high-profile figure, it could potentially serve as an object lesson for other executives, securities law experts said.
“I would anticipate given the attention this may receive that the government would feel compelled to analyze the factual data,” said Ron Geffner, a partner at Sadis & Goldberg, and a former SEC enforcement attorney.
Regardless of whether the SEC decides to take a closer look, Krzanich’s sale is already getting scrutinized by institutional investors, and that could lead to shareholder suits. The person familiar with the matter told Business Insider that there have been “multiple” inquiries to law firms from concerned investors about the CEO’s transactions, though no lawsuits have yet been filed.
If suits are filed, among the things that plaintiffs lawyers are going to look at closely is not only when Krzanich found out about the vulnerability, but whether he and Intel delayed public disclosure of it and whether there’s any evidence that such a delay was done to allow him to put his plan in place and sell his shares, said Greenberg Gross’ Joshua Robbins.
“I think investors are legitimately concerned in light of the timing,” said Darren Robbins, a partner at Robbins Geller Rudman & Dowd, a firm that represents plaintiffs in securities class action lawsuits. But even before shareholders’ attorneys or the SEC get involved, Intel’s board of directors is likely to give Krzanich’s stock sale a closer look, experts said. Boards are charged with overseeing corporate executives and frequently take the lead when questions are raised about executive actions and company management. They also can often investigate such matters and deal with them more quickly than could be done through shareholder lawsuits or through an SEC inquiry. Indeed, the SEC may well wait to see what Intel’s directors do before launching its own inquiry, experts said.
“The first question is what is the board going to do, because the board will get to this faster than the SEC,” the University of Mississippi’s Bullard said.