Most of the focus on Rule 10b5-1 plans lately has been on possible abuses (refer, for example here). Indeed, one of the reasons the court cited in the dismissal motion denial in the Countrywide derivative lawsuit pending in California was concern about Angelo Mozillo’s possible manipulation of his 10b5-1 plan (refer here).
However, an October 16, 2008 Eighth Circuit opinion in Elam v. Neidorff (here) confirms that corporate officials’ proper use of Rule 10b5-1 plans can still afford a substantial securities lawsuit defense.
As discussed more fully here, on July 28, 2006, plaintiffs had initiated a securities class action lawsuit against Centene Corporation and certain of its directors and officers. On June 29, 2007, Judge Catherine D. Perry of the Eastern District of Missouri granted the defendants’ motion to dismiss, on the grounds that "plaintiffs have not met the heavy pleading standard required" by the PSLRA. Judge Perry’s opinion can be found here. The plaintiffs appealed.
The Eighth Circuit, in an opinion written by Judge Bobby E. Shepherd, affirmed the district court’s ruling on two grounds. First, the Court held that "the district court properly found that plaintiffs have not adequately pled that defendants’ … statements were false when made." Second, the Eight Circuit held that "the district court properly found that plaintiffs have not met the PSLRA’s standard for pleading scienter."
In ruling that the plaintiffs had not adequately pled scienter, the Eighth Circuit considered among other things, the fact that the individual defendants’ stock sales on which the plaintiffs sought to rely had been made pursuant to a Rule 10b5-1 trading plan.
The Court’s opinion stated (citations and internal quotations omitted):
Neidorff and Witty each sold a portion of their personal holdings of Centene stock in April 2006 pursuant to Rule 10b5-1 trading plans, in place since December 2005. The sales constituted 5.3 percent of Neidorff’s unrestricted holdings and 2.4 percent of Witty’s unrestricted holdings. Stock sales pursuant to Rule 10b5-1 trading plans can raise an inference that the sales were prescheduled and not suspicious. This is particularly true where, as here, the stock sales at issue represent only a small portion of each seller’s overall holdings. Accordingly, no inference of scienter arises from Neidorff’s and Witty’s April 2006 stock sales.
The Eighth Circuit’s opinion is a reminder that, notwithstanding the concerns that recently have been raised about possible Rule 10b5-1 plan abuses, proper trading plans can afford substantial protection and can permit company officials to trade in their shares in company stock without fear that the trades might later serve as the basis of liability under the federal securities laws.
As examples of trading plans that successfully averted any scienter inference, the Centene officials’ plans merit a closer look.
The Eighth Circuit stated that the individual defendants’ trading plans "lay out in advance the dates at which the trade will be made in advance and give control of the trades to a broker." The District Court’s dismissal opinion stated further that the plaints "provided for automatic sales on certain dates if the stock price was above $25." The only sales made under the plans, which were instituted in December 2005, were two in February and April 2006. "There were no later sales, not because defendants halted the program, but because the stock price never reached the $25 mark."
The critical aspects of the plan appear to have been, first, that the officials entered the plan in advance; second, that the plan specified the trading dates, but subject further to a specified trading price: three, that the trading on those dates, if the price criterion was met, was automatic; and fourth, that a broker controlled the trades. It does not seem to have mattered that the officials did not trade regularly under their plans, because of the minimum share price requirement.
It is probably important to note that the plan lacked many of the attributes that recently have drawn negative attention to these kinds of plans. That is, the Centene officials’ plans were not changed, nor were the plans stopped and started; and the individuals were not running multiple plans.
Amidst the negative publicity that recently has surrounded Rule 10b5-1 plans, the Eighth Circuit’s opinion is a useful reminder that Rule 10b5-1 plans can and should be a part of a coordinated securities litigation loss prevention program. A comprehensive (although now slightly dated)overview of securities litigation loss prevention in general can be found here.
Not Exactly Lou Gehrig’s Farewell Speech, But Still Entertaining: If you have not yet seen the October 17, 2008 farewell letter from Andrew Lahde of Lahde Capital Management, you will want to refer here. Lahde, one of whose funds returned 870 percent last year by betting against subprime mortgages, decided to close down his funds and return money to investors after concluding that the danger of losing money from a bank collapse was too high.
Lahde claims that he wrote his farewell letter "not to gloat" — but darned if his letter nevertheless doesn’t sound an awful lot like gloating (except for the part where he is advocating the legalization of marijuana). The letter is worth reading in full for its entertainment value, but among the highlights is the following single-finger salute to his now-former competitors and counterparties:
The low hanging fruit, i.e., idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.
Lahde also suggests the institution of a forum (perhaps to be funded by George Soros) to "create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and the brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. The forum could be similar to the one used to create the operating system, Linux."
Special thanks to Peter Schwartz of the Wired Mosaic blog (here) for bringing Lahde’s letter to my attention.