Guidant stock sales may fuel shareholder lawsuits: 4 insiders have cashed in more than $91M in shares

October 24, 2005

Top Guidant Corp. insiders have unloaded more than $100 million in company stock in recent months, a move that will blunt the financial impact they'll feel if the Indianapolis company and Johnson & Johnson renegotiate the terms of their $25.4 billion merger.

The sales also will serve as grist for class-action attorneys, who filed several lawsuits this summer charging insiders concealed from investors defects in the company's heart devices.

By not promptly disclosing defects publicly, one classaction suit filed in federal court in Indianapolis in June charges, six executives were able to sell $39 million in stock at inflated prices.

Since then, sales have continued. Four insiders-Chairman Jim Cornelius, CEO Ronald Dollens, Chief Financial Officer Keith Brauer and director J.B. King-have reaped more than $91 million from stock sales since Dec. 15, the date New Jersey-based J&J agreed to buy Guidant for $76 a share.

Many of the insider sales have been at $68 or more, substantially above the current price. The stock plunged 11 percent Oct. 18, the day a J&J executive cast doubt on the deal, fueling speculation it would seek a lower price. Guidant shares were trading on Oct. 20 at $63.68.

Guidant spokesman Steve Tragash did not respond to IBJ's requests for comment on the stock sales.

Trading records show the executives cashed in many of the shares immediately after exercising stock options to buy them, a common practice among U.S. executives. Some of the proceeds from the sales typically go toward paying capital gains taxes on profit.

In late July or early August, for instance, Cornelius spent nearly $29 million to exercise options to buy 550,000 shares at prices ranging from $51.25 to $53.98. He then sold most of those shares, collecting more than $32 million.

Cornelius also didn't control the timing of some sales. Under a Securities and Exchange Commission rule, executives can file a plan to sell a set number of shares within a set time period, while relinquishing authority on when to pull the trigger. Such programs are intended, in part, to protect executives from allegations they sold stock ahead of bad news.

Still, Henry Price, an Indianapolis classaction attorney who is not involved in Guidant litigation, said it's curious so many insiders decided to sell shares this year for less than they would have received had they just waited for the deal to close.

"That is a fact that, if left unexplained, leads to a reasonable inference that the executives who sold the stock did it on the basis of negative inside information," Price said.
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