Abstract
This essay examines the intersection of (1) the strong inference of scienter pleading standard that applies in private civil securities fraud cases and (2) insiders’ stock sales, purportedly pursuant to a plan satisfying the Rule 10b5-1(c) affirmative defense to a claim of illegal insider trading. Insider sales that are suspicious or unusual are indicative of a defendant’s motive to fraudulently inflate stock prices, thus supporting an inference of the defendant’s scienter. If insiders’ sales were purportedly pursuant to a pre-arranged 10b5-1 plan, however, most courts discount those sales when assessing the inference of scienter.
I argue that an insider’s purported reliance on a 10b5-1 plan when engaging in insider trading neither rebuts nor undercuts any inference of scienter arising from the trades, particularly in light of the Securities and Exchange Commission’s 2022 amendments to the Rule 10b5-1(c) affirmative defense. In other words, I argue that, at the pleading stage, scienter and 10b5-1 plans are apples and oranges.