Opinion ID: 4301416
Heading Depth: 3
Heading Rank: 2

Heading: Stock Sales (Motive)

Text: 25 These allegations quote and paraphrase liberally from the June 8-K, so the district court considered it incorporated into the complaint. This was appropriate, because “[w]hen deciding a motion to dismiss a claim for securities fraud on the pleadings, a court may consider the contents of relevant public disclosure documents which (1) are required to be filed with the SEC, and (2) are actually filed with the SEC,” but “only for the purpose of determining what statements the documents contain.” Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1018 (5th Cir. 1996). Further, a court must consider documents incorporated by reference into a securities fraud complaint. Tellabs, 551 U.S. at 322. The Fund has not contested that it implicitly incorporated the June 8-K into its complaint, and thus forfeited any objection on those grounds. 26 See Cent. Laborers’ Pension Fund v. Integrated Elec. Servs. Inc., 497 F.3d 546, 552 (5th Cir. 2007); Fine v. Am. Solar King Corp., 919 F.2d 290, 297 (5th Cir. 1990) (“[P]ublication of inaccurate accounting figures, or a failure to follow [Generally Accepted Accounting Principles], without more, does not establish scienter.”). 27 Owens, 789 F.3d at 541. 8 Case: 17-50162 Document: 00514587918 Page: 9 Date Filed: 08/06/2018 No. 17-50162 The next set of allegations concerns motive. The Fund contends that the individual defendants intended to inflate the price of Hanger’s stock so that they could sell their own stock at a high price. The TAC lists the individual defendants’ stock transactions, and asserts that they sold much more of their stock during the Class Period than before. “[A]ppropriate allegations of motive and opportunity may meaningfully enhance the strength of the inference of scienter.” 28 “However, this is true of insider trading ‘only’ when ‘in suspicious amounts or at suspicious times.’” 29 “‘Suspicious’ in this context generally means that the ‘sales are out of line with prior trading practices or at times calculated to maximize personal profit.’” 30 But, as with accounting restatements, “[i]nsider trading alone cannot create a strong inference of scienter.” 31 Defendants respond that these allegations do not support scienter because there is a “plausible, nonculpable explanation[]” 32 for the trades: The defendants sold the stock to cover tax expenses and pursuant to 10b5-1 trading plans. “A 10b5–1 plan is an agreement ‘which allows corporate insiders to set a schedule by which to sell shares’ over time, and which can ‘raise an inference that the sales were pre-scheduled and not suspicious.’” 33 Defendants support this alternate explanation with SEC Forms 4, the disclosures required when 28 Southland, 365 F.3d at 368 (quoting Nathenson v. Zonagen Inc., 267 F.3d 400, 412 (5th Cir. 2001)). 29 Id. (quoting Abrams, 292 F.3d at 435); see also Cent. Laborers, 497 F.3d at 552–53 (“Insider trading can be a strong indicator of scienter if the trading occurs at suspicious times or in suspicious amounts.”). 30 Cent. Laborers, 497 F.3d at 553 (quoting Abrams, 292 F.3d at 435). 31 Id.; see Local 731 I.B. of T. Excavators & Pavers Pension Tr. Fund v. Diodes, Inc., 810 F.3d 951, 957 (5th Cir. 2016) (“[M]otive and opportunity standing alone will not suffice [to allege scienter.]” (quoting Ind. Elec. Workers’ Pension Tr. Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527, 553 (5th Cir. 2008)). 32 Tellabs, 551 U.S. at 324. 33 Cent. Laborers, 497 F.3d at 554 n.4 (5th Cir. 2007) (quoting Wietschner v. Monterey Pasta Co., 294 F. Supp. 2d 1102, 1117 (N.D. Cal. 2003)). 9 Case: 17-50162 Document: 00514587918 Page: 10 Date Filed: 08/06/2018 No. 17-50162 particular corporate insiders trade corporate stock. The district court took judicial notice of these forms, explaining that they were the only possible source of the stock sales data in the TAC. The forms state that these transactions were made to cover taxes and pursuant to 10b5-1 trading plans. But the Fund argues that the court should not consider these forms because they require an inappropriate factual determination. This court has never explicitly stated whether we may look to a Form 4 for plausible explanations of potentially suspicious trades at the pleading stage. Although district courts are divided on this issue, 34 we may look to publically filed SEC documents implicitly incorporated into a complaint. 35 Looking to Forms 4 also seems congruent with the requirement that we consider plausible nonculpable explanations for the defendants’ conduct. 36 In Central Laborers’ Pension Fund v. Integrated Electrical Services Inc., the defendant offered a divorce decree and a 10b5-1 trading plan to explain 34 Compare In re ArthroCare Corp. Sec. Litig., 726 F. Supp. 2d 696, 722 (W.D. Tex. 2010) (“[W]hether or not the stocks in this case were sold pursuant to a 10b5–1 trading plan is irrelevant at this stage in the proceedings, as the existence of such a plan is an affirmative defense[.]”), and Freudenberg v. ETrade Fin. Corp., 712 F. Supp. 2d 171, 200 (S.D.N.Y. 2010) (“A Rule 10b5–l trading plan may give rise to an inference of scienter because a clever insider might maximize their gain from knowledge of an impending price drop over an extended amount of time, and seek to disguise their conduct with a 10b5–1 plan.” (citation and internal quotation marks omitted)), with Hopson v. MetroPCS Commc’ns, Inc., No. 3:09-CV-2392-G, 2011 WL 1119727, at  n.14 (N.D. Tex. Mar. 25, 2011) (“[T]he court may properly consider [the 10b5-1 trading] plans, and the relevant Form 4s, when weighing the competing inferences regarding the insider sales.”), and In re Sec. Litig. BMC Software, Inc., 183 F. Supp. 2d 860, 884 (S.D. Tex. 2001) (“Because Plaintiffs relied on these documents and because they are integral to determining whether Plaintiffs allegations give rise to a strong inference of scienter, they are incorporated by reference even though they are not mentioned in the amended complaint.”). 35 See Lovelace, 78 F.3d at 1018. 36 The Fund cites to Rubinstein v. Collins, in which this court declined to consider an argument that suspicious sales “were made in response to tax considerations,” because such a contention had no place at the pleading stage. 20 F.3d 160, 169 n.38 (5th Cir. 1994). But Rubenstein was decided before the Supreme Court, in Tellabs, required weighing the plausibility of alternate explanations. 10 Case: 17-50162 Document: 00514587918 Page: 11 Date Filed: 08/06/2018 No. 17-50162 suspicious trades. 37 The court explained that the decree was properly considered at the motion to dismiss stage because “the document’s written terms themselves indicate the reason [the defendant] had for selling the shares.” 38 But ultimately, neither document made another explanation more plausible because (1) it was “unclear whether the divorce decree actually created any financial obligations,” and (2) “[the defendant] entered into the [10b5-1] Plan during the Class Period.” 39 Central Laborers suggests that we may consider the Forms 4, but only in the course of weighing which explanation is more plausible. Selling shares to pay taxes weighs against a nefarious motive, but neither side has pointed to any information about when the defendants entered into the 10b5-1 trading plans. We therefore cannot say that the trading plans mitigate a suggestion of motive, even though that suggestion may be mitigated by a lengthy Class Period. 40 Thus, the trades contribute only slightly to an inference of scienter. 41 We emphasize that, even though we must weigh the plausibility of different explanations for the trades, we make no factual conclusions at this stage.