I’ve previously posted about problems in how courts determine whether a complaint pleads scienter under the standards of the PSLRA; last summer, I talked about courts’ unduly narrow use of evidence of insider trading, namely, to consider it only as a pecuniary motive for fraud, rather than as evidence of knowledge of a problem.  Which is why I was very pleased to see the decision in Gelt Trading Ltd. v. Co-Diagnostics Inc., 2022 WL 716653 (D. Utah Mar. 9, 2022).

The claim is that Co-Diagnostics overstated the accuracy of its covid-19 tests, and its stock price fell when the truth was revealed.  The complaint only alleged two false statements; the court dismissed claims based on one, but permitted claims based on a false press release – which was mostly attributed to the company, but also quoted Dr. Satterfield, the company founder/chief science officer – to proceed.

In evaluating the allegations of scienter, the court considered, among other things, that although Dr. Satterfield had not sold stock, others had.  As the court put it:

multiple board members sold significant amounts of stock just as news outlets began to question the accuracy of Co-Diagnostics’ test. This suggests that at least some individuals within the company knew that the statements were misleading that the artificially propped up stock could soon crash. If other corporate officials knew this fact, presumably Satterfield—the company’s Chief Science Officer—would have known the same.

That’s exactly the analysis I’d hoped courts would undertake.  As I mentioned in my prior post, a desire to sell stock at inflated prices might be a cause of fraud, but it is also result of it, as insiders scramble to cash out before their wealth is destroyed.  Even a non-defendant’s trades can tell us something about the kind of information that was available within the company, and thus can shed light on what the actual defendants knew when they spoke.