Opinion ID: 62908
Heading Depth: 2
Heading Rank: 4

Heading: Motive and Opportunity Allegations

Text: To buttress whatever other inferences of scienter might be drawn from their substantive allegations, the plaintiffs allege that Bernhard and Belk had both motive and opportunity to engage in the charged securities fraud. To demonstrate motive, plaintiffs must show concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged. Merely alleging facts that lead to a strained and tenuous inference of motive is insufficient to satisfy the pleading requirement. Phillips v. LCI Int'l, Inc., 190 F.3d 609, 621 (4th Cir.1999) (internal quotation marks and citation omitted). As high-ranking corporate officers, the defendants had an opportunity to commit fraudulent acts. The question here is whether plaintiffs sufficiently alleged as motives that the defendants sold their stock at inflated prices, earned bonuses during the class period, sought to use artificially inflated stock as currency for corporate acquisitions, and aimed to maintain the company's favorable credit rating. Because corporate executives are often paid in stock and stock options, they will naturally trade those securities in the normal course of events, and courts will not infer fraudulent intent from the mere fact that some officers sold stock. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1425 (3d Cir.1997) (Alito, J.). Insider stock sales may be probative of scienter, however, if they occur in suspicious amounts or at suspicious times. Abrams, 292 F.3d at 435. Suspicion may be generated if the sales are out of line with prior trading practices or [made] at times calculated to maximize personal profit. Central Laborers, 497 F.3d at 553 (quoting Abrams, 292 F.3d at 435). Pursuant to Tellabs, of course, both culpable and nonculpable explanations for stock sales, as revealed in the pleadings and associated documents, must be considered. During the first nine months of the class period, Bernhard and Belk sold large blocks of Shaw stock. Bernhard's sales occurred in January and July 2001, while Belk's sole large sale took place in January 2001. Plaintiffs assert that these sales were suspicious because they took place near the market peak for Shaw stock (if up to $20 below the market high is near the peak), and they far exceeded these defendants' previous trades in company stock. Placed in context, the allegations are overstated and innocuous. When Bernhard sold in January 2001, only a few days had passed after the expiration of his lock-up agreement not to sell shares for ninety days following Shaw's October 2000 equity offering. During the lock-up period, Shaw stock split two-for-one and doubled his holdings. See Shaw Group, Inc., Quarterly Report (Form 10-Q), at 7 n. 2 (Jan. 16, 2001). It is quite plausible that Bernhard sold stock in January to take a profit on some of his newly acquired shares. His July sale followed a positive earnings announcement by Shaw, but he missed the immediate price spike following the announcement. See Southland, 365 F.3d at 369 (stating that insider's stock sales were not suspicious, in part, because they did not come immediately after an allegedly misleading statement caused spike in share price). Plaintiffs allege that Belk sold fifty-seven percent of his Shaw stock immediately after the positive earnings announcement in January 2001, marking only his second sale of company shares. But plaintiffs tell only half the story. Shaw's SEC filings, referenced in the complaint, reveal that Belk had actually sold Shaw stock twice before the block sale in question, and a February 2000 sale disposed of approximately sixty-five percent of his holdings at that time. See Shaw Group, Inc., Statement of Change in Beneficial Ownership of Securities (Form 4) (Sept. 11, 2000); Shaw Group, Inc., Statement of Change in Beneficial Ownership of Securities (Form 4) (Feb. 25, 2000). Thus, the amount of his January sale was not out of line with his past actions or timing. Further, the sale allowed him to capitalize on the expiration of his own ninety-day lock-up period and the Shaw stock split. Insofar as their executive compensation packages were tied to company performance, and both men received bonuses during the class period, Bernhard and Belk are in no different position than the vast majority of corporate executives. Consequently, this court has held that incentive compensation can hardly be the basis on which an allegation of fraud is predicated. Tuchman, 14 F.3d at 1068 (internal quotation marks omitted); see also Abrams, 292 F.3d at 434. Incentive compensation packages may be considered in conjunction with other scienter allegations, Barrie, 397 F.3d at 264, but only in an extraordinary case is it probative. See MCI WorldCom, 340 F.3d at 250 (holding that compensation package was probative where MCI WorldCom CEO Bernard Ebbers had a unique pay package and stood to lose millions if WorldCom's stock price dropped significantly). Bernhard's and Belk's packages of bonus and stock options during the class period, while generous, were hardly extraordinary; as a motivation to fraud, they were minor. Plaintiffs wind up their general motive allegations by asserting that Bernhard and Belk wanted to maintain Shaw stock at artificially high prices to increase its value in acquiring companies like IT Group, Scott Sevin & Shaffer, and Technicomp during the class period, and they wanted to maintain its credit ratings. Scienter in a particular case may not be footed solely on motives universal to corporate executives. See Novak v. Kasaks, 216 F.3d 300, 307 (2d Cir.2000). The outlier to the acquisition proposition, however, is MCI WorldCom, whose need to complete a crucial $129 billion merger with Sprint gave the company a motive to inflate its financial results. MCI WorldCom, 340 F.3d at 242, 250. Shaw's acquisitions are comparatively modest. Plaintiffs also allege that defendants refused to write off impaired goodwill following the Stone & Webster and IT Group acquisitions because they feared an impact on Shaw's debt covenants and a consequent downgrade of its credit rating. The desire to maintain a high credit rating is universally held among corporations and their executives and consequently does not contribute significantly to an inference of scienter. Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 664 (8th Cir. 2001).