Broker-Dealer Litigation - Greenberg Traurig LLP

Act of 1934 alleging it made false statements in a mutual fund prospectus which affected the
price of the corporation’s stock. Defendants filed a motion to dismiss. The subsidiary was the
investment advisor and administrator for an investment fund. Although the corporation made the
statements at issue, plaintiff sought to hold the subsidiary liable as a control person under
Section 20(a) of the Exchange Act for statements made by the corporation. The court held that
for purposes of Rule 10b-5, the maker of a statement is the person or entity with the ultimate
authority over the statement, including its content and how to communicate it and refused to
expand liability beyond the person or entity that has ultimate authority over a false statement.
Though the court noted that the relationship influence between the subsidiary and the investment
fund resembled the liability imposed by Congress for control, it noted that to find that the
subsidiary was a control person for the purpose of Section 20(a) liability would broaden the
application of Section 20(a). The court declined to do so, and granted the motion to dismiss.
In re Lehman Bros. Mortgage-Backed Sec. Litig., 650 F.3d 167 (2d Cir. 2011).
Plaintiff investors alleged that defendant rating agencies were statutory underwriters
because they helped structure securities transactions to achieve desired ratings and because rating
agencies provided advice and direction to primary actors and violators of the Securities Act of
1933. As such, plaintiff investors alleged that defendant rating agencies were liable for control
person liability under Section 15 of the Securities Act. The defendant rating agencies’ motion to
dismiss was granted. Plaintiff investors appealed. The appellate court held that to qualify as an
underwriter and be liable as a control person, the rating agency must have either participated
directly or indirectly in the purchase of securities with a view toward distribution or participated
in the sale or offer of securities in connection with a distribution. Because defendant rating
agencies’ provision of advice and guidance regarding transaction structures was insufficient to
permit an inference that they had the power to direct the management or policies of alleged
primary violators, the Section 15 control person claims were properly dismissed.
Wyo. State Treasurer v. Moody’s Investors Serv., 2011 Fed. Sec. L. Rep. (CCH) 96,310 (2d
Cir. May 11, 2011).
Plaintiff pension funds brought three separate suits against defendant rating agencies as
underwriters alleging violations of Sections 11 and 15 of the Securities Act of 1933 based on
misstatements or omissions of material facts in securities offering documents. Plaintiffs also
alleged that defendants were liable as control persons because they provided advice and direction
to primary violators regarding transaction structures. The district court dismissed the three
separate complaints. Because all three appeals raised common questions of law, the court
disposed of them in one opinion. The court held that because there was no dispute as to primary
Section 11 violations, the only question was whether the defendants controlled the primary
violators. The court noted that it had previously defined “control” for the purpose of
Section 20(a) of the Securities Exchange Act of 1934 as the power to direct or cause the
direction of the management and policies of the primary violators whether through the ownership
of voting securities by contract or otherwise. The court explained that because Section 15 and
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