District Court Finds That Amendments to 10b5-1 Plan Are Probative of Scienter
 
June 2, 2008
 

On May 14, 2008, the U.S. District Court for the Central District of California issued an order on the Motion to Dismiss In re Countrywide Financial Corp. Derivative Litigation. As part of the review of the various claims asserted in the complaint, Judge Mariana Pfaelzer evaluated the plaintiffs’ allegations regarding insider sales by certain executive officers and directors. With respect to large trades conducted by certain officers and directors around the time of the announcement of the company’s stock repurchase programs in November 2006 and May 2007, the judge noted that while the trades appear to be suspicious, she didn’t find sufficient detail in the complaint for a strong inference of scienter. However, Judge Pfaelzer found that the sales made by the CEO under a 10b5-1 plan were probative of scienter. Noting that the CEO actively amended and modified his 10b5-1 plans, Judge Pfaelzer states “[his] actions appear to defeat the very purpose of 10b5-1 plans, which were created to allow corporate insiders to ‘passively’ sell their stock based on triggers, such as specified dates and prices, without direct involvement … [a]ccordingly, his amendments of 10b5-1 plans at the height of the market does not support the inference ‘that the sales were pre-scheduled and not suspicious.’” The judge rejected claims that inferences of scienter were mitigated by the fact that the trades involved amounts of stock that represented only a small proportion of the CEO’s substantial holdings. In Re. Countrywide Financial Corp. Derivative Litigation, 07-6923, U.S. District Court, Central District of California (Los Angeles)