Though Rule 10b5-1 trading plan abuses have figured in recent high profile cases (refer here), predetermined trading plans remain a good idea. A July 1, 2009 dismissal of a securities class action lawsuit pending in the Southern District of New York underscores the potential protective benefit that a trading plan can provide.


Gildan Activewear is a Canadian sportswear company based in Montreal. Its shares trade on both the NYSE and the Toronto Stock Exchange. Following the company’s April 2008 press release in which it announced a reduction in its earning guidance, its share price declined and litigation ensured. Background regarding the case can be found here.




On November 17, 2008, the lead plaintiff filed a Consolidated Amended Class Action Complaint (here), and on December 19, 2008, the defendants moved to dismiss.




In a July 1, 2009 opinion (here), Southern District of New York Judge Harold Baer, Jr., granted the defendants’ motion to dismiss, apparently with prejudice. Judge Baer granted the motion among other reasons on the grounds that plaintiff’s scienter allegations were insufficient to meet the PSLRA’s pleading requirements.



In attempting to establish scienter, the lead plaintiff had sought to rely on alleged insider trading by Gildan’s CEO, Glenn J. Chamandy, and by its CFO, Laurence G. Sellyn. Judge Baer noted that Chamandy’s sales, which comprised “over 99% of the total insider trading” alleged, were made pursuant to a non-discretionary Rule 10b5-1 trading plan, which, Judge Baer said, “undermines any allegation that the timing or amounts of the trades was [sic] unusual or suspicious.”



Judge Baer noted several other shortcomings regarding the plaintiff’s insider trading allegations. Among other things, he noted that though the plaintiff alleges that the defendants’ sales produced gross proceeds of $96 million, it fails to “allege any facts relating to the amount of profit” the defendants garnered by their sales. Judge Baer also found that the relatively low percentage of the sales compared to the defendants’ overall holdings, as well as the timing of the sales, in addition to the fact that the other officers and directors did not sell their shares, also militated against a finding of scienter.



Although Judge Baer’s discussion of Chamandy’s Rule 10b5-1 plan is relatively brief, it appears that the critical components of the plan were that Charmandy entered the plan in advance of his trades, the plan was non-discretionary, and the sales were pursuant to the plan. Judge Baer’s holding is yet another reminder that a well-constructed Rule 10b5-1 trading plan can provide substantial protection.



Judge Baer’s opinion cites the Eighth Circuit’s 2008 opinion in Elam v. Niedorff, which also found sales pursuant to a Rule 10b5-1 plan sufficient to rebut scienter allegations, and which is discussed in an earlier post, here.



Special thanks to Adam Savett of the Securities Litigation Watch for providing a copy of Judge Baer’s opinion.



Best Boards in America?: When Eric Jackson at set out to identify the best boards in America as part of his July 7, 2009 article (here), he found that it was easier to list companies with poor governance practice than the best. Part of the problem is that there is no universally accepted definition of good governance. In addition, past attempts to identify exemplary boards look dubious in retrospect, as the performance of many companies cited later slumped.



Jackson quotes University of Delaware Professor Charles Elson to the effect that board governance alone is no guarantee of success, but “good governance give you protection when things to wrong. It the long run, that will play out.”



In creating his best boards list, Jackson ultimately relied on two factors Elson identified: equity ownership of directors and independence of directors. Jackson added his at third criterion, which is that directors must actually have enough time to serve.



Based on these criteria, Jackson identified three companies as having the best boards: Berkshire Hathaway, Johnson & Johnson, and Of the three, Jackson judged as the best, saying it has “done things right on the important governance factors of equity ownership, independence and time,” as a result of which Jackson says Amazon is “far less likely to suffer a Lehman-like shock that could destabilize or kill the company.”



Securities Docket Mid-Year Litigation Update Webcast: On July 9, 2009, at 2:00 P.M. EDT, I will be participating in a Securities Docket webcast entitled “2009 Mid-Year Review: Securities Litigation and Enforcement.” The webcast will be moderated by Bruce Carton of Securities Docket and the panelists will also include Francine McKenna of the Re: The Auditors blog; Lyle Roberts of The 10b-5 Daily blog; and Tom Gorman of the SEC Actions blog. Further information and registration instructions can be found here.