Using Stock As Currency

As noted in The 10b-5 Daily’s discussions of the Intergroup and NUI decisions, the idea that corporate acquisitions for stock are a sufficient motive for securities fraud is controversial. A contrary view can be found in the recent decision in In re Corning Sec. Litig., 2004 WL 1056063 (W.D.N.Y. April 9, 2004).

In the Corning case, the plaintiffs alleged that the defendants were motivated to artificially inflate the company’s stock price so that they could use it as currency for the acquisition of Tropel Corporation. The court found that “[p]aying a smaller price for the acquisition of Tropel [by using inflated stock] benefited Corning’s common shareholders.” Moreover, the desire to have a high stock price to be used in the purchase of Tropel “is a motive that could be attributed to virtually every company seeking to acquire another through the use of its own stock as part of the purchase.” As a result, the court held that the acquisition failed to create a strong inference of scienter.

Holding: Motion to dismiss granted.

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