November 22, 2013

Stick To The Plan

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 question, with the answer often depending on the exact circumstances surrounding the plan's formation and execution.

In In re Questor Sec. Litig., 2013 WL 5486762 (C.D. Cal. Oct. 1, 2013), the court examined a plan that was created around the beginning of the class period and lead to periodic sales of 30,000 shares each until July 2012. When the plan terminated, however, the defendant "made two additional sales of 40,000, more than his usual 30,000 sales, in August and September 2012 [just prior to the end of the class period]." Based on this fact pattern, the court found that while the sales could have been innocent, it was "equally as plausible that, after observing the success of Questcor's aggressive and misleading marketing strategies, [the defendant] set up the plan to avoid the appearance of improper sales."

More generally, the decision contains an extensive analysis of the scienter implications of the defendants' stock trading. The court holds, inter alia, that (a) even where the percentage of stock sold is not suspicious, the sales can support an inference of scienter if the profits are "substantial," and (b) a company's implementation of a stock repurchase plan during the class period can be inconsistent with scienter, because it is illogical for a company to buy shares if it knows the price will fall.

Holding: Motion to dismiss denied.

Posted by Lyle Roberts at 2:18 PM | TrackBack

November 15, 2013

Supreme Court Grants Cert In Halliburton Case

The U.S. Supreme Court has granted certiorari in Halliburton v. Erica P. John Fund, setting up what could be the most important securities litigation decision in the last twenty-five years. At issue is the continued validity of the fraud-on-the market-theory, whereby reliance by investors on a misstatement is presumed if the company's shares were traded on an efficient market that would have incorporated the information into the stock price. The presumption is routinely invoked in securities class actions to justify the grant of class certification.

In its petition, Halliburton presented the following two questions:

1. Whether this Court should overrule or substantially modify the holding of Basic Inc. v. Levinson, 485 U.S. 224 (1988), to the extent that it recognizes a presumption of classwide reliance derived from the fraud-on-the-market theory.

2. Whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.

In granting review, the Court did not limit its consideration to either question. As a result, SCOTUSBlog notes that the Court presumably "at least will consider the broader plea to cast aside the prior ruling."

The case will be argued early next year. Reuters and Bloomberg have coverage of the cert grant. For more on the underlying case and the cert petition, see this recent blog post.

Quote of note (Bloomberg): "Four justices -- Antonin Scalia, Clarence Thomas, Anthony Kennedy and Samuel Alito -- suggested in a ruling in February that they might jettison the 'Basic presumption,' as it has become known. The outcome of the case may be in the hands of Chief Justice John Roberts, who usually joins that group in ideologically divisive cases."

Posted by Lyle Roberts at 11:54 PM | TrackBack