Suspicious Trading

Motive is in the eye of the beholder. Many courts have found that the sale of stock by corporate insiders just before the announcement of bad news is “suspicious” and can contribute to an inference of scienter (i.e., fraudulent intent). In a decision from earlier this summer, however, a federal district court came to the exact opposite conclusion. The court’s apparent theory was that if the defendants had committed a fraud, they surely would have done it better.

In In re Hutchinson Technology Inc. Sec. Litig., 2007 WL 1620805 (D. Minn. June 4, 2007), three of the individual defendants sold stock a month before dramatically lowering the company’s finanical projections. The court found that “it would have been in [the defendants] interests to put off the disclosure of that bad news as long as possible, because the closer the release of the bad news followed on the heels of their stock sales, the more suspicious those sales would have appeared.” The fact that the defendants did not delay the release of the news, according the the court’s reasoning, removed any suspicion from the stock sales.

Holding: Motion to dismiss granted (with prejudice).

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