October 27, 2022

By Carol V. Gilden and Norhan Bassiouny
Shareholder Advocate, Fall 2022

In a significant holding for plaintiffs arguing scienter in shareholder lawsuits, the Tenth U.S. Circuit Court of Appeals said a lower court had erred when it found that Pluralsight, Inc. Defendants’ use of a predetermined trading plan automatically removed their motive to manipulate the company’s stock price. In its August 23, 2022 opinion reversing the District Court’s dismissal of the shareholder lawsuit1 , the Tenth Circuit held, among other things, that the existence of a 10b5-1 trading plan does “not per se rebut an inference of scienter where … a defendant was allegedly motivated to misrepresent or withhold material information to affect a stock price.”

Pluralsight is a startup software company that offers a cloud-based technology skills platform and sells subscriptions to its products and services. At the start of the class period in January 2019, the complaint alleged that Defendants misrepresented the size of the company’s salesforce—the primary driver of Pluralsight’s quarter-over-quarter billings growth, which was the key business metric by which Pluralsight attracted investors. In addition, the complaint alleged that the company and its CEO and CFO knew that Pluralsight misrepresented the size of the salesforce and intentionally withheld this pertinent information from investors. The Lead Plaintiffs appealed to the Tenth Circuit after the U.S. District Court for the District of Utah dismissed the amended complaint on August 2, 2021.

The Tenth Circuit reversed the dismissal in part, holding that the two Lead Plaintiffs—the Indiana Public Retirement System and the Public School Teachers’ Pension and Retirement Fund of Chicago—had plausibly alleged that Defendants made a false and misleading statement at the start of the class period. At that time, Pluralsight CFO James Budge had stated that the company had “about 250” quota-bearing sales representatives; however, it was later revealed that Pluralsight actually only had only “about 200” quota-bearing sales representatives at the time. The Tenth Circuit stated that this “strongly suggests Pluralsight could not have had ‘about 250′ quota-bearing sales representatives on January 16, 2019” and found that the information was “objectively verifiable.” The misstatement marked the beginning of the class period and was a key misrepresentation, the falsity of which was revealed in the third quarter of 2019, when the Company reported a dramatically decreased billings rate of growth, shocking analysts and investors alike. The stock price dropped nearly 40 percent.

In ruling for Lead Plaintiffs on the scienter element of a 10b-5 securities fraud claim, the Tenth Circuit found that Lead Plaintiffs had pled a compelling inference that Defendants knew overstating Pluralsight’s number of quotabearing sales representatives was likely to mislead investors. The Tenth Circuit performed a holistic review in reaching this conclusion, looking to multiple allegations. To begin with, the panel cited Defendants’ statements to analysts and investors on July 31, 2019 and in January 2020, which supported the inference that the CFO knew of the capacity gap but failed to admit it. The appellate court’s finding was bolstered by the fact that the CFO had repeatedly emphasized to analysts and investors that Pluralsight carefully monitored the data surrounding Pluralsight’s billing growth and that the size of the sales force was at the core of Defendants business model.

Moreover, the Tenth Circuit held that the CEO’s and CFO’s suspicious trading within the Class Period, both inside and outside of their 10b-5-1 trading plans, supported scienter. Importantly, the Tenth Circuit agreed with Lead Plaintiffs’ argument, supported by an Amici Curiae brief by former SEC Commissioners Robert J. Jackson and Luis A. Aguilar, former SEC Chief Accountant Lynn Turner and Columbia Law Professor Joshua Mitts, along with other prominent academics, that the “text and history of Rule 10b5-1 shows that such plans can be manipulated easily for personal financial gain and thus cannot rebut the inference that personal financial gain was a motive for Defendants’ material misrepresentations.” The Court noted that these plans do not prevent officers from “making false statements to artificially inflate the stock price to trigger those automatic trades—and that is what plaintiffs allege occurred here.” The Court then found that Lead Plaintiffs’ allegations raised a strong inference of scienter because the CEO and CFO allegedly profited from their stock sales, sold a significant portion of their holdings, and the volumes of sales were higher than outside the class period.

The Tenth Circuit also revived Plaintiffs’ claims under Section 20A of the Exchange Act, which provides a private right of action to contemporaneous purchasers against corporate insiders who purchase or sell a security while in possession of material inside information.

This case is an important holding for investors. It demonstrates that affirmatively misrepresenting facts or data that a company and it officers continuously report on and that form a “key metric” in attracting investor interest, presents a danger of misleading investors and will support a finding of scienter. Significantly, the Tenth Circuit’s holding also shows that 10b5-1 trading plans are not an automatic shield to fraud claims, or a “get out of jail free card.” Courts recognize that, regardless of when the plan is created, Defendants with a 10b5-1 plan could be motivated to make material misrepresentations affecting the stock price to their benefit before a scheduled sale or to trigger a sale at a particular price.


1. Indiana Public Retirement System, et. al. v. Pluralsight, Inc., 45 F.4th 1236 (10th Cir. 2022).