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.
The impact of a Rule 10b5-1 trading plan on a court's scienter analysis depends largely on the overall facts and circumstances surrounding the trading. In Koplyay v. Cirrus Logic, Inc., 2013 WL 6233908, (S.D.N.Y. Dec. 2, 2013), the court considered allegations that during the class period the individual defendants sold 14%, 11%, 46% and 10% of their stock holdings (for profits ranging from less than $1m to $4m). In surveying the case law, the court found that this trading was not "suspicious" for the following reasons:
(1) The timing of the sales, which allegedly took place at the "height" of the class period, "actually weighs against a finding of scienter, as the majority of the sales were neither at the beginning of the Class Period, soon after the misleading statements, nor clustered at its end, when insiders theoretically would have rushed to cash out before the fraud was revealed and stock prices plummeted."
(2) The court declined to adopt a rule that an insider's sale of more than 10% of his holdings is suspicious. Instead, the court noted that "courts have found scienter based on sales similar to these only where the volume of sales and total profit is overwhelming or where some other factor, such as the timing of the sales, further tips the balance."
(3) The court found that all but one of the sales were made pursuant to Rule 10b5-1 trading plans that "were entered into months before the class period." Although the plaintiffs argued that the defendants could have "timed the release of good and bad news to maximize insider trading profits based on triggers in the plan," the court found that "this argument effectively reduced to a claim that Defendants had scienter because they were motivated to raise the price of Cirrus stock."
Holding: Motion to dismiss granted.
If the judge likens the events surrounding the collapse of your company to a "massive train wreck," is moving to dismiss the related securities class action worthwhile? That was the question facing the defendants in the MF Global Holdings case and the court did not like their answer.
In In re MF Global Holdings Ltd. Sec. Litig., 2013 WL 5996426 (S.D.N.Y. Nov. 12, 2013), the court started out by noting that its "train wreck" analogy "was meant as a hint giving a form of guidance." The case involved the alleged disappearance of $1.6 billion from customer accounts that was later found to have been "improperly commingled and used to cover questionable company transactions." Under these circumstances, the court believed that the parties would "turn to the search for relevant evidence," but instead was surprised to find that the defendants "seem convinced that no one named in this lawsuit could possibly have done anything wrong." Indeed, the defendants' contention that all twenty-three claims against them should be dismissed must mean that MF Global's collapse was "the fateful work of supernatural forces, or else that the explanation for a spectacular multi-billion dollar crash of a global corporate giant is simply that 'stuff happens.'"
The court went on to reject the motion to dismiss in its entirety. However, the court did make at least one legal ruling in favor of the defendants. A key issue in the case is whether MF Global's statements about its deferred tax assets were false or misleading. Deferred tax assets are losses, credits and other tax deductions that may be used to offset taxable income in the future, but they can only be recorded as assets on a company's balance sheet to the extent the company determines it is "more likely than not" they will be realized. The court found that under Second Circuit precedent, "statements about the realization of the DTA are statements of opinion, not of fact." Accordingly, the plaintiffs ultimately will need to prove that these statements were both false and not honestly believed at the time they were made.
Holding: Motion to dismiss denied.
Quote of note: "In evaluating the application of law that Defendants argue would allow the outcome that they seek at this stage of the litigation, the Court's assessment may be simply stated: It cannot be."