On September 21, 2022, the Securities and Exchange Commission announced settled insider trading charges against the CEO and the former President and Chief Technology Officer of Cheetah Mobile Inc. (the “Company”), a China-based mobile internet company.  The executives allegedly possessed material nonpublic information (“MNPI”) when they set up a trading plan under Rule 10b5-1 of the Securities Exchange Act.

According to the SEC’s order, Sheng Fu, the Company’s CEO, and Ming Xu, its then-President and Chief Technology Officer (“CTO”), possessed MNPI regarding a negative revenue trend concerning the Company’s primary advertising partner and set up a 10b5-1 plan to sell Company shares, thereby avoiding losses.  10b5-1 trading plans allow company insiders to trade in circumstances where they later come to possess MNPI, but they cannot establish plans while in possession of MNPI.  The case underscores that the SEC will scrutinize whether 10b5-1 plans are adopted in good faith, and provides some clues about proposed changes to the rules governing such plans.


Cheetah Mobile is a China-based mobile internet company with American Depositary Shares (“ADSs”) listed on the New York Stock Exchange.  As a foreign private issuer, the Company is required to file annual reports with the SEC on Form 20-F.  According to the SEC’s allegations, which were neither admitted nor denied, in the summer of 2015, the Company learned that its largest advertising partner would be making a change to its algorithm that could halve the revenues the advertising partner paid to the Company.  Once this change took effect, the Company’s revenues declined significantly from the third quarter of 2015 through the first quarter of 2016.  The CEO did not disclose the negative impact of the advertising partner’s algorithm change during a Q1 earnings call in March 2016, instead suggesting that “seasonality” was principally responsible for the Company’s “soft” revenue.  The Company also did not disclose the negative trend in its Form 20-F filing in April 2016, despite the SEC’s contention that Form 20-F required disclosure of such “known trends, uncertainties . . . or events” that are reasonably likely to have a material effect on the Company’s financial results, or that would cause its financial results “not necessarily to be indicative of future operating results or financial condition.”

In late March 2016, while allegedly in possession of MNPI regarding the negative revenue trend, the CEO and CTO set up a Rule 10b5-1 plan through a private, jointly-held British Virgin Islands entity to sell some of their holdings of the Company.  Rule 10b5-1 provides that if a person is aware of MNPI when the person trades, that is sufficient to establish a violation of the antifraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.  Rule 10b5-1 also provides, however, an affirmative defense if the trade is made under a 10b5-1 plan established when the trader was not aware of MNPI.  These plans effectively provide a safe harbor that allows executives, who frequently are in possession of MNPI, to benefit from trading in company stock by making periodic, pre-scheduled trades without running afoul of the securities laws.

In this case, the Company’s insider trading policy prohibited employees from trading in Company securities and from establishing 10b5-1 plans while in possession of MNPI.  According to the SEC, the CEO and CTO nonetheless established the plan, which quickly sold 96,000 Cheetah Mobile ADSs between late March 2016 and mid-May 2016, when the Company announced lower-than-expected financial results resulting from a decline in advertising revenues.  After the announcement, the price of Cheetah Mobile’s ADSs dropped approximately 18 percent.  By selling shares in the short period from establishing the 10b5-1 plan to the time of the May announcement, the CEO and CTO avoided losses of approximately $203,290 and $100,127, respectively.

Apart from the insider trading liability findings in relation to the CEO and CTO, the order also found that the CEO made materially misleading public statements about the Company’s revenue trends in violation of Sections 17(a)(2) and (3) of the Securities Act and caused the Company’s violations of issuer reporting requirements under Section 13(a) of the Exchange Act and Rule 13a-1 thereunder.


Without admitting or denying the SEC’s findings, the CEO and CTO agreed to cease-and-desist orders, undertakings relating to their future securities trading, and to pay civil penalties of $556,580 and $200,254, respectively.[1]  The CEO agreed to certain undertakings relating to his future securities trading for a five-year period, including:  (i) notifying the SEC of any trading in Company securities; (ii) notifying the SEC of the establishment or modification of 10b5-1 plans relating to Company securities; (iii) pre-clearing with the Company’s legal department any non-10b5-1 trading in Company securities; (iv) a cooling-off period of at least 120 days before a new or modified 10b5-1 plan relating to Company securities goes into effect; (v) maintaining no more than one Rule 10b5-1 plan with respect to Company securities at a time; and (vi) engaging in Company securities transactions only via brokerage accounts disclosed to the SEC.  The CTO, who by the time of the settlement was no longer with the Company, agreed to disclose his brokerage accounts to the SEC and engage in any trading in Company securities only through these accounts for a five-year period.

In late 2021, the SEC proposed changes to the rules governing 10b5-1 plans.  After a notice and comment period in 2022, the SEC is expected to take action on the proposed rule changes soon.  Two of the proposed rule changes are mirrored in the undertakings agreed to by the CEO:  (1) he agreed that he would not trade under a 10b5-1 plan until after a 120-day cooling-off period from the adoption of the plan, reflecting part of the proposed rules that would apply to director or officer plans; and (2) he agreed not to maintain more than one Rule 10b5-1 plan at a time with respect to Company securities, reflecting a proposed rule change that would prohibit any person, including issuers, from maintaining overlapping plans.


  • The primary message from this case is clear: do not set up 10b5-1 plans while arguably in possession of MNPI.  If subsequent trading draws scrutiny, the SEC will investigate the circumstances in which such plans were adopted to determine if they were set up in good faith and followed a legitimate process.
  • The SEC did not charge Cheetah Mobile with any wrongdoing, and the Order notes the Company had an insider trading policy that specifically prohibited trading or establishing a Rule 10b5-1 plan while in possession of MNPI. This underscores the importance of such policies in protecting companies from liability.
  • By ordering the CEO to observe a 120-day cooling-off period between the adoption or amendment of a Rule 10b5-1 plan and any trades thereunder, and to maintain only one plan at a time, the SEC may have tipped its hand that it will be adopting those rule changes as proposed; it would be odd to order relief that is inconsistent with soon-to-be-forthcoming rules.
  • The case underscores that the SEC can and will seek penalties for insider trading up to three times the trader’s gains or losses avoided in view of the Liu decision crimping the agency’s disgorgement authority.
  • The case is a reminder of the SEC’s ability to build insider trading cases in seemingly challenging circumstances:  the Company is incorporated in the Cayman Islands and headquartered in China, both defendants reside in China, and they conducted their trading through a British Virgin Islands company.  Although the Order does not detail how the SEC built its case, geography does not seem to have been a limitation.  The fact that the trading occurred in Cheetah Mobile ADSs also did not hinder the SEC, indicating the agency will not hesitate to enforce the insider trading laws in cases involving trading in only ADSs that reference a foreign company’s foreign shares.

[1] The penalty amounts are consistent with the SEC’s recent approach in insider trading cases of imposing penalties that are a multiple of the trader’s gains or losses avoided, rather than seeking disgorgement of the trader’s gains.  This is a result of Liu v. SEC, 591 U.S. ___ (2020), where the Supreme Court outlined the limits of the disgorgement remedy, which is for “the benefit of investors.”  Because specific harmed investors cannot be identified in insider trading cases, the SEC has shifted its focus to penalties, which in an insider trading case can be as much as three times the trader’s gains or losses avoided.  The SEC’s practice has often been to limit the penalty multiplier if the defendant agrees to settle.  Here, the CTO’s penalty was twice his alleged losses avoided.  Curiously, the CEO’s penalty was twice his alleged losses avoided, plus $150,000.