The United States District Court for the Southern District of New York refused to dismiss an insider trading action that the Securities and Exchange Commission filed against a member of the Board of Directors of a publicly traded company who allegedly disclosed material non-public information to his co-defendant friend. The defendant board member, who received the company’s quarterly financial results showing a 12 percent decline in net income two days prior to their release, allegedly conveyed this non-public information to his friend who then sold his entire position, short-sold an additional 40,000 shares, and engaged in other transactions in the company’s securities prior to the public earnings announcement. When the company disclosed its financial results, its share price dropped 20 percent.

The defendant board member moved to dismiss the complaint on the grounds that (i) it failed to allege with particularity the material information allegedly disclosed and, (ii) in any event, any information that may have been disclosed was immaterial as a matter of law. The Court denied the motion. First, the Court ruled that the complaint was “crystal clear” as to the information conveyed and that such information was not known to the public. The Court then rejected the defendant’s materiality argument, stating that not only is materiality ordinarily a question of fact that is not susceptible to resolution on the pleadings, but also the Second Circuit has repeatedly found earnings reports to be material. The Court further determined that it was at least plausible that a factfinder would infer that the actual reported numbers were material in light of the 20% decline in the stock price following their disclosure. (Securities and Exchange Commission v. Gad, No. 07 Civ. 8385 (GEL), 2007 WL 4437230 (S.D.N.Y. Dec. 17, 2007))