Last Man Standing

The Gentiva securities class action is based on allegations that the company violated Medicare rules and artificially inflated the Medicare payments it received. In a previous post, The 10b-5 Daily discussed the motion to dismiss decision in the case, where the court found that the plaintiffs had adequately plead a strong inference of scienter against the company and two of its officers based solely on alleged suspicious insider trading. The defendants moved for reconsideration.

In In re Gentiva Sec. Litig., 2013 WL 6486326 (Dec. 10, 2013), the court reevaluated the trading and came to some different conclusions. As to the former CFO’s trading, the court found “that trades under a Rule 10b5-1 plan do not raise a strong inference of scienter.” If those type of trades were removed from the CFO’s trading, all that would remain was a sale of 20,000 shares (or 12% of his holdings) that “occured more than six months before the announcement of the government investigation.” Under these circumstances, the trading was not sufficiently suspicious and the court dismissed the securities fraud claim against the CFO.

But what did that mean for the two remaining defendants in the case – the former CEO and the company? As to the CEO, the court found that he sold 99% of his shares during the class period for approximately $2.14 millon and those sales were not made pursuant to a Rule 10b5-1 trading plan. The fact that no other officers were adequately alleged to have engaged in suspicious trading did not alter the court’s conclusion that the CEO’s trading created a strong inference of scienter as to him. When it came to the company, however, the court reversed field and found that the suspicious sale of stock by only one officer – as opposed to two officers – could not support a finding of corporate scienter and dismissed the securities fraud claim against the company.

So, after reconsideration, the case apparently will move forward against a single individual defendant – the former CEO.

Holding: Motion for partial reconsideration granted in part and denied in part.

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