The July 1, 2009 dismissal of the In re Gildan Activewear, Inc. Securities Litigation class action shows that Rule 10b5-1 trading plans can help defendants negate the inference that their sales of stock are suspicious.  This is important because suspicious stock sales can be used to show a strong inference of scienter on the part of a defendant, allowing plaintiffs to survive a motion to dismiss.

In Gildan, the court noted that “the sole facts on which Plaintiffs rely to allege motive are that Defendants Chamandy and Sellyn sold a substantial number of their shares in Gildan during or shortly before the Class Period.”  The court found, however, that such allegations failed to raise the requisite strong inference of scienter for at least three reasons:

(1) The value and volume of shares that the defendants sold as compared to their total holdings was not unusual.  The court stated that while defendants’ stock sales allegedly resulted in $96 million in gross proceeds during the Class Period, plaintiffs did not allege what defendants’ profits were from these sales. In addition, the sales were “only 22.5% and 4.9% of Chamandy’s and Sellyn’s holdings, respectively,” not enough to raise eyebrows.

(2) The insiders’ sales occurred on or before December 21, 2007, far in advance of a January 30 press release increasing the company’s earnings projections and an April 29 announcement allegedly revealing the “truth” about the company’s problems. Thus, the court found, the trades occurred well before the alleged misstatement, and many months before the release of any negative information that caused Gildan’s stock price to plummet.

(3) Finally, the court stated, 99% of the total alleged insider trading, both by volume and value, “occurred pursuant to a non-discretionary Rule 10b5-1 trading plan, which undermines any allegation that the timing or amounts of the trades was unusual or suspicious.”

A copy of the court’s ruling is available here, via The D&O Diary.