Plaintiffs, purchasers of the common stock of a sportswear manufacturing company, commenced a class action litigation against the company and two of its officers and directors, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs alleged that manufacturing difficulties in one of the company’s offshore facilities were not disclosed to investors, and that despite defendants’ knowledge of the difficulties, defendants continued to issue and reaffirm positive earnings guidance.
Defendants moved to dismiss the complaint, arguing that the complaint failed to allege scienter adequately. Plaintiffs had attempted to allege scienter by, among other things, pointing to the individual defendants’ insider stock sales in excess of a combined $96 million during the class period. Analyzing the complaint’s allegations under the standard set forth by the Supreme Court in Tellabs v. Makor Issues and Rights, Ltd., the court granted defendants’ motion because, among other things, plaintiffs failed to demonstrate that the stock sales were “unusual” or “suspicious.”
In particular, the court found that the volume and the value of the insider sales were not unusual, and “occurred weeks before the principal allegation of material misstatement, and many months before the release of any negative information that caused [the] stock price to plummet.” Moreover, only two insiders were alleged to have engaged in insider trading and the executives responsible for overseeing the troubled facility were not among those alleged to have made such trades. Further undercutting any inference of scienter, the trades by the defendant whose stock sales comprised over 99% of the total insider trading were made pursuant to a non-discretionary trading plan. (In re Gildan Activewear, Inc. Sec. Litig., 2009 WL 1919618 (S.D.N.Y. July 1, 2009))