Better Plan Ahead

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 be split on this issue, with the answer often depending on the exact circumstances surrounding the plan’s formation and execution.

One recurring issue, which appellate courts have begun to weigh in on, is whether it makes a difference if the trading plan was entered into before or after the outset of the alleged class period (i.e., before or after the fraud allegedly began).  Last year, the Fourth Circuit held that because one of the trading plans relied on by a defendant was instituted during the class period, it did “less to shield [that defendant] from suspicion.”  The Second Circuit now has issued a more emphatic holding on this topic.

In Employees’ Retirement System of Govt. of the Virgin Islands v. Blanford, 2015 WL 4491319 (2d Cir. July 24, 2015), the defendants argued that their stock trading did not support any inference of scienter because it was done entirely pursuant to Rule 10b5-1 trading plans.  The court found that this argument “ignores that [the defendants] entered this trading plan in May after the second quarter investor call, long after the Complaint alleges that Green Mountain’s fraudulent growth scheme began.”  Indeed, “[w]hen executives enter into a trading plan during the Class Period and the Complaint sufficiently alleges that the purpose of the plan was to take advantage of an inflated stock price, the plan provides no defense to scienter allegations.”

Holding: Reversing dismissal of complaint and remanding for further proceedings.

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