Finally obtained a copy of the entire Order in Wietschner v. Monterey Pasta Co., No. C 03-0632 (N.D. Cal. Nov. 4, 2003), a case recently dismissed without prejudice and discussed here previously. In that case, the Court found fact that the individual defendants' stock sales were not sufficiently unusual or suspicious to raise a strong inference of scienter, and observed that defendants "sold shares under individual SEC Rule 10b5-1 trading plans, which allows corporate insiders to set a schedule by which to sell shares over a twelve to fifteen month period. This could raise an inference that the sales were pre-scheduled and not suspicious."

Having now reviewed the Order, however, it is clear that my assumption--that the defendants were successful in getting the Court to consider a 10b5-1 trading plan that was outside the pleadings to demonstrate that certain trading was not suspicious--was incorrect. In fact, plaintiffs actually alleged in the complaint itself that the defendants sold shares under individual 10b5-1 trading plans. Thus, the Court did not need to rule on whether it could consider a trading plan that was outside the pleadings in deciding the motion to dismiss. The Order is available here.

Another recent decision in the Rayovac Corp. securities litigation (W.D. Wis., Oct. 17, 2003)(available here), however, indicates that a court may consider the existence of a contract restricting defendants' ability to sell their stock in deciding a motion to dismiss. In Rayovac, plaintiffs alleged that certain stock sales by defendants gave rise to a strong inference of scienter. Plaintiffs alleged that these sales were suspicious because the defendants had not sold any stock in a two year period prior to the sales. Defendants countered that no such inference could be drawn because, among other things, a contract specifically restricted their ability to sell stock in that two year period. Defendants attached a copy of the contract to their motion to dismiss, and argued that the court could consider the agreement even though it was not part of the pleadings because it was "publicly available" on the SEC's website and was filed as an exhibit to numerous reports Rayovac filed with the SEC. Plaintiffs disagreed, arguing that the court's consideration of the agreement was "limited to determining what it says rather than to prove the truth of its contents."

The Court stated that

Generally, a court cannot consider documents outside the pleadings in deciding a motion to dismiss; such documents do not become fair game unless they are attached to or at least referred to the complaint. However, there is an exception to this rule: a court may consider "documents contained in the public record" without converting the motion into one for summary judgment. Plaintiffs are correct that I may not rely on the contents of the contract to resolve a factual dispute. However, I may take judicial notice of the contract's existence and its terms.

After taking judicial notice of the contract's "existence and terms" (but not its content??), the Court concluded that it "agreed with defendants that the contract undermines plaintiffs' allegations regarding defendants' intent to deceive."

If there is a lesson in Rayovac for 10b5-1 trading plans, it may well be that such plans should be filed in some form with the SEC so that their "existence and terms" also can be considered at the motion to dismiss stage.