When does insider selling support a “strong inference” of fraud?

Griffin, Paul A.; Grundfest, Joseph A.

doi:10.1080/16081625.2002.10510608

Cited by 8 publications

(2 citation statements)

References 31 publications

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“…We conclude that plaintiffs' lawyers are paying more attention to establishing a motive for fraud in suits subject to the PSLRA, but that effort is not fully consistent with the established judicial doctrine, which would require that sales by insider be out of line with prior sales. This finding is consistent with that of Griffin and Grundfest (2002), who conclude that allegations of insider trading may be substantially overinclusive.…”

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confidence: 90%

Do the Merits Matter More? Class Actions under the Private Securities Litigation Reform Act

2002

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Congress passed the Private Securities Litigation Reform Act of 1995 in an attempt to discourage meritless securities fraud class actions. This paper uses damages, accounting, insider trading and governance variables to explain the incidence of securities fraud litigation both before and after the passage of the PSLRA. Using a matched sample of sued and non-sued firms from the computer hardware and software industries, we find that accounting and insider trading, which did not correlate with the incidence of litigation prior to the passage of the PSLRA, are significant after the passage of the PSLRA. This finding is confirmed by our analysis of allegations and outcomes. Our accounting variables do not explain the incidence of pre-PSLRA accounting allegations, but they become significant after the passage of the PSLRA. Similarly, insider trading variables do not explain insider trading allegations before the PSLRA, but net sales by insiders correlate with such allegations after its enactment. Finally, we find no correlation between lawsuit outcomes and our accounting variables before the PSLRA, but accounting variables are significant after its enactment. Abnormal insider sales correlate with outcomes before the PSLRA, but not after. Overall, we interpret our findings as evidence that the PSLRA has furthered Congress's goal of discouraging frivolous securities fraud lawsuits.

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