In In re Gentiva Securities Litigation, 10 CV 5064 (E.D.N.Y. Dec. 10, 2013), two individual defendants and the defendant corporation moved for reconsideration of Judge Arthur D. Spatt’s order denying their motion to dismiss federal securities claims. The case is a class action alleging that Gentiva, a health care provider, artificially inflated its stock price through a scheme that involved ordering unnecessary medical care for clients, and then billing the federal government for these illegitimate expenses. At issue was whether the plaintiff class had properly pleaded scienter.
One of the individuals, Potapchuck, asserted that the claims against him did not meet Section 10(b)’s scienter requirement because he sold his shares pursuant to a “10b5-1 plan,” under which shares are divested at predetermined times. Potapchuck pointed out that he sold only 12% of his shares, if the 10b5-1 trades were disregarded. That fact made the difference on reconsideration. After commenting that “Defendants should have specifically quantified the number of 10b5-1 [trades] in their prior motions to dismiss, rather than relying on the Court to comb through the Defendants’ financial records,” the Court found that the relatively small amounts at issue—just 12% of Potapchuck’s shares, resulting in $300,000 in net profits—did not support an inference of scienter. The Court reached a different result regarding the other individual defendant, Malone, who sold 99% of his shares during the class period for approximately $2.14 million (and none pursuant to 10b5-1 plans). Those trades were sufficient to plead scienter against Malone.
The fact that only one corporate insider engaged in allegedly suspicious sales caused the Court to change its mind about the Section 10(b) claim against Gentiva as well, which was dismissed on the ground that an inference of its fraudulent intent could not be shown. Thus, the Court reversed course on reconsideration and dismissed two of the three defendants, while upholding claims against the third.