Last Friday, the Seventh Circuit issued an opinion overturning the lower court’s dismissal of a lawsuit brought against Hofer, an employee of AnchorBank, alleging  that, along with two other employees, Hofer engaged in a collusive trading scheme in violation of Sections 9(a) and 10(b) of the Securities Exchange Act of 1934 (“1934 Act”).  The two other employees settled with AnchorBank before the lawsuit was filed.

In its second amended complaint, AnchorBank alleged that Hofer and his two co-conspirators coordinated their purchase and sale of units in the AnchorBank Unitized Fund (“Fund”), which was an investment option in the AnchorBank 401(k) plan that held cash and company stock.  The alleged scheme involved the coordination of the sale of Fund units, triggering a payout from the Fund’s cash reserves to the suspected co-conspirators.  Since the trustee was required to maintain a particular cash-to-stock ratio in the Fund, it was then forced to sell AnchorBank stock on the open market to replenish the Fund’s cash reserves.  This heightened trading activity by the alleged co-conspirators caused the volume of AnchorBank stock on the market to be relatively high as compared to normal trading and, given the large volume of AnchorBank stock being sold at or around the same time, AnchorBank’s stock price declined.