Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

A Fourth Circuit case, Yates v. Municipal Mortgage & Equity, LLC (March 2014), recently examined the role of 10b5-1 plans in an alleged securities fraud case involving a financial statement restatement.  To prevail on a Rule 10b-5 claim, plaintiffs must prove scienter, amongst other things.  Evidence of insider trading is often advanced as motive, because allegations of personal financial gain may weigh heavily in favor of a scienter inference.

In the Yates case, the court examined trades made by defendants pursuant to two 10b5-1 plans in the context of a motion to dismiss.  The court noted that since the trades were made under non-discretionary Rule 10b5-1 plans, it weakens any inference of fraudulent purpose.  One plan was entered into well before the start of the putative class period.  The other was instituted after the start of the class period, but before the complaint alleges any officer of the issuer new about incorrect accounting.  No allegations were made that shares were traded outside the plan. The court stated the Rule 10b5-1 plan did not completely immunize the defendant from suspicion, but that the plan did mitigate any inference of improper motive surrounding the sales.


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