Broker-Dealer Litigation - Greenberg Traurig LLP

to dismiss the complaint pursuant to Federal Rules of Civil Procedure Rule 12(b)(6) for failure to
state a claim. Defendant corporation argued it could not be held liable for the Vice President of
Finance’s embezzlement because the embezzlement was outside the scope of his employment.
While the court held that no vicarious liability through respondeat superior could be established
for that reason, the court found vicarious liability through apparent authority could be
established. The court held that because scienter of controlling officers of a corporation may be
attributed to the corporation itself to establish a primary violator under Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934, then the senior officers were acting within
the scope of their apparent authority. The court granted the corporation’s motion to dismiss in
part because the plaintiff-victims failed to plead facts ruling out an inference that the
corporation’s internal controls were reasonably effective, but denied the motion in part with
respect to respondeat superior.
In re St. Jude Med., Inc. Sec. Litig., 2011 WL 6755008 (D. Minn. Dec. 23, 2011).
Plaintiffs, a pension trust fund, sued a corporation and four officers for alleged violations
of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 for false statements of
material fact, as well as violation of Section 20(a) for control person liability. The trust fund
alleged the corporation engaged in “channel stuffing,” or seeking or pressuring its customers to
acquire large quantities of the corporation’s products at the end of a final quarter, so as to
artificially inflate the corporation’s revenues and earnings for a particular quarter. The trust fund
further alleged that the corporation indicated growing revenues to the public while in reality the
company’s revenues were slowing. Eventually the corporation had to disclose the loss.
Defendants moved for dismissal of the complaint. The court noted that liability under
respondeat superior is appropriate in securities fraud cases; however, to establish corporate
liability for a violation of Rule 10b-5 the court would have to find scienter by looking to the state
of mind of the individual corporate officer who made the statements. The court found that the
complaint alleged sufficient facts to support a strong inference of scienter with respect to at least
some of the individual corporate officers and that the requisite showing may be imputed to the
corporation itself. The court granted the motion to dismiss in part by dismissing the Rule 10b-5
claim against two of the four corporate officers. The court denied the remainder of the motion to
dismiss.
San Francisco Residence Club, Inc. v. Amado, 773 F. Supp. 2d 822 (N.D. Cal. 2011).
Plaintiffs are family enterprises whose real estate investment advisor claimed that he
acted as an independent contractor for the defendant broker-dealer. The plaintiffs alleged he was
an agent of the broker-dealer for purposes of establishing he was a statutory seller and violated
the Securities Act of 1933 and unfair competition laws. The real estate investment advisor was
required by agreement to funnel securities sales exclusively through the broker-dealer, to obtain
authorization from the broker-dealer prior to a sale, and to inform the firm prior to engaging in
outside business. The families alleged that the broker-dealer was vicariously liable for the
advisor’s representations through the doctrine of respondeat superior. Defendants, real estate
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