South-Western Legal Studies in Business

Suspicious Timing of Insider Sales and Release of Earnings Creates Needed Scienter
Description Appeals court held that a suit by stockholders against a company and its executives could proceed. Stockholders showed the possibility of deliberate recklessness in the timing of earnings releases and insider trades. Since the element of scienter could be present, plaintiffs' claims may be heard.
Topic Securities Law
Key Words Rule 10b-5; Scienter; Private Securities Litigation Reform Act
C A S E   S U M M A R Y
Facts Oracle, the second largest software company, released 11i Suite in 2000, which it touted as a major advance that would generate significant returns. Oracle originally claimed it earned 11 cents per share in the third quarter of 2000, when the earnings were in fact 23% lower than that. Late in 2000, still promoting 11i Suite, the company predicted sales and earnings projections that did not materialize. Soon after, Larry Ellison, CEO, sold almost one billion dollars worth of his stock in Oracle. The stock price fell soon after that. A group of investors sued, contending securities violation by Ellison and other executives at Oracle. The district court dismissed the suit. Plaintiffs appealed.
Decision

Reversed and remanded. Under the Private Securities Litigation Reform Act, plaintiffs must create a strong inference that defendants acted with deliberate or conscious recklessness to be able to show the scienter required for a suit to proceed. Given that the statements about revenue projections were made by defendants, the stock sale by Ellison was an insider trade and the timing is suspicious, and the lowered earnings statements were released after that sale, the plaintiffs have presented sufficient information to create an inference of scienter, so the litigation may proceed.

Citation Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226 (9th Cir., 2004)

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