Improper Use

Does the fact that an individual defendant’s stock trading took place pursuant to a pre-determined Rule 10b5-1 trading plan undermine any inference that the trades were “suspicious”? Courts continue to grapple with this issue in evaluating the existence of scienter (i.e., fraudulent intent) in securities fraud cases.

(1) In In re Novatel Wireless Sec. Litig,, 2011 WL 5873113 (S.D. Cal. Nov. 23, 2011), the court reviewed insider trading claims brought as a part of a securities class action. Defendants argued that several of the challenged trades were inactionable because they had been made pursuant to Rule 10b5-1 trading plans. The court noted, however, that “each defendant entered new or amended 10b5-1 plans . . . that contained accelerator clauses that called for immediate sales.” Because the “improper use of 10b5-1 trading is evidence of scienter,” the court found that a genuine issue of material fact precluded summary judgment on the insider trading claims.

(2) In The Mannkind Sec. Actions, 2011 WL 6327089 (C.D. Cal. Dec. 16, 2011), the court evaluated whether the plaintiffs had adequately pled motive based on a “suspicious” stock sale by one of the individual defendants. The defendant pointed out that the sale was only 10.5% of his holdings and “was made pursuant to a pre-determined 10b5-1 trading plan, and was identical to another 10b5-1 trading sale made 11 months earlier.” The court concluded that the timing of the sale “appears suspicious.” The plaintiffs’ failure to rebut the contention that the sale had been made pursuant to a Rule 10b5-1 trading plan, however, meant that the sale could not “provide support for Plaintiffs’ pleading of scienter.”

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