Is A Billion Dollars In Stock Sales Significant?

Insider stock sales are often used by plaintiffs to establish that the individual defendants had a motive to artificially inflate the company’s stock price. As a general matter, however, courts have held that insider stock sales cannot create an inference of fraudulent intent if the defendants only sold a small percentage of their overall holdings.

In its recent decision in Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226 (9th Cir. 2004), the Ninth Circuit purported to discover an exception to the rule. Larry Ellison, the CEO of Oracle, was alleged to have sold only 2.1% of his holdings during the class period, but that amounted to almost $900 million in proceeds. The court held that “where, as here, stock sales result in a truly astronomical figure, less weight should be given to the fact that they may represent a small portion of the defendant’s holdings.” But is that a sensible exception?

The Delaware Court of Chancery, which addressed the exact same stock sales in its recent summary judgment decision in In re Oracle Corp. Derivative Litigation, C.A. No. 18751 (Del. Ch. Dec. 2, 2004), appears to disagree. The court found that “however wealthy Ellison is and however envious that may make some, the fact remains that Ellison sold only 2% of his Oracle holdings. Ellison remained the person with more equity at stake in Oracle than anyone anywhere. Plaintiffs continually emphasize the nearly $1 billion that he made on the sale, but ignore the roughly $18.9 billion in equity that he lost in the ensuing share price collapse.” In other words, a billion dollars in stock sales may be significant for most people, but not necessarily for everyone.

Addition: The Delaware Court of Chancery’s decision can be found here. Thanks to Adam Savett for the link.

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