Opinion ID: 3169454
Heading Depth: 2
Heading Rank: 3

Heading: Insider Trading Allegation

Text: The Fund’s final allegation centers on Lu’s stock sales during the class period. It argues that his sales confirm Diodes’s misleading of stockholders because they occurred before the May 2011 announcement of the lingering labor shortage problem and were not plagued by the stock price decline following the May 2011 press release. Because corporate executives, whose compensation often includes company stock, “will trade those securities in the normal course of events,” In 11 Case: 14-41141 Document: 00513341407 Page: 12 Date Filed: 01/13/2016 No. 14-41141 re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1425 (3d Cir. 1997) (Alito, J.), insider trading, by itself, “cannot create a strong inference of scienter, but it may meaningfully enhance the strength of the inference of scienter.” Cent. Laborers’ Pension Fund v. Integrated Elec. Servs. Inc., 497 F.3d 546, 553 (5th Cir. 2007) (internal quotation omitted). Insider stock sales can enhance an inference of scienter if the trading occurs “at suspicious times or in suspicious amounts.” Cent. Laborers’, 497 F.3d at 552. A trade is suspicious if “sales are out of line with prior trading practices or at times calculated to maximize personal profit.” Id. at 553 (citing Abrams, 292 F.3d at 435). This court has repeatedly cautioned, however, that “even unusual sales by one insider do not give rise to scienter when other defendants do not sell some or all of their shares during the Class Period.” Abrams, 292 F.3d at 435; see also Southland Sec. Corp., 365 F.3d at 369 (“The fact that other defendants did not sell their shares during the relevant class period undermines plaintiffs’ claim that defendants delayed notifying the public so that they could sell their stock at a huge profit.”). Importantly, a court must consider “both culpable and nonculpable explanations for stock sales, as revealed in the pleadings and associated documents.” Indiana Elec., 537 F.3d at 543. Viewed in isolation, Lu’s sales during the class period might be considered suspicious. They are out of line with his prior trades, which were infrequent and in much smaller amounts. On the other hand, Lu sold only 12.1 percent of his Diodes shares, leaving 87.9 percent of his holdings, worth millions of dollars, invested in the company. Moreover, although other nondefendant insiders sold Diodes stock during the class period, there is no basis to infer that those trades were suspicious absent allegations about the individuals’ prior trading practices. The district court actually rejected any adverse inferences about White’s sales of a meager 1.7 percent of his stock during the class period, a conclusion not challenged by the Fund on appeal. 12 Case: 14-41141 Document: 00513341407 Page: 13 Date Filed: 01/13/2016 No. 14-41141 On the allegations before us, Lu’s significant stock sales alone will not support a strong inference that he either knew the importance to investors of the company-specific contributions to the labor shortage or was severely reckless in his ignorance. See Cent. Laborers, 497 F.3d at 553. The sales represented a small portion of his investment in the company, and there are many innocent reasons why an individual would sell stock at a given time. Thus, the nonculpable inferences that may be drawn from sales of stock are more cogent and compelling than the Fund’s contrary proposition.