Broker-Dealer Litigation - Greenberg Traurig LLP

Section 20(a) are roughly parallel control provisions of the Securities Act and the Securities
Exchange Act of 1934, respectively, it would extend the definition of “control” used with
Section 20(a) to Section 15. The court held that plaintiffs’ allegations of advice, feedback, and
guidance failed to raise a reasonable inference that the rating agencies had the power to direct
rather than to merely inform. The court noted that although Section 20(a) requires an additional
element of “culpable participation,” it did not need to address whether that requirement applied
to Section 15 because plaintiffs failed to plead the undisputed element of control. The appellate
court affirmed the district court’s dismissal of the control person liability claims.
Inter-Local Pension Fund GCC/IBT v. GE, 2011 U.S. App. LEXIS 19271 (2d Cir. Sept. 19,
2011).
Shareholders filed a class action suit against a corporation and its officers alleging
violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and control
person liability under Section 20(a). The district court dismissed the claims for failure to state a
claim and plaintiffs appealed. The Second Circuit held that plaintiffs failed to plead facts
creating a strong inference of scienter related to the alleged misstatements of quarterly earning
prospects. Finding that the complaint failed to state an underlying primary securities violation,
the Court of Appeals held that it also failed to state a claim for Section 20(a) control person
liability, thus affirming the district court’s dismissal.
Frank v. Dana Corp., 646 F.3d 954 (6th Cir. 2011).
Plaintiff investors brought a class action suit against a corporation and its executives for
securities fraud under Section 10(b) of the Securities Exchange Act of 1934 for allegedly making
false statements regarding the financial health of the corporation. Plaintiffs also alleged
violations of Section 20(a) control person liability by two individuals—the chief executive
officer and chief financial officer. The district court granted defendants’ motion to dismiss the
Section 10(b) claim for failure to meet the heightened pleading standard based on plaintiffs’
failure to plead facts from which scienter is the most plausible inference. The district court
dismissed the Section 20(a) claim stating that plaintiffs failed to allege that the individuals did
not act in good faith. On appeal, the court reversed the district court’s order granting dismissal
holding that the facts pleaded must show only that scienter was at least as plausible as another
non-culpable inferences. Further, the court held that the good faith defense to Section 20(a) is an
affirmative defense and plaintiffs need not plead that defendants acted without it.
SEC v. Todd, 642 F.3d 1207 (9th Cir. 2011).
The Securities and Exchange Commission filed suit against senior officers of a
corporation claiming it unlawfully misrepresented the corporation’s financial condition to meet
the earning and revenue expectations of financial analysts. The district court granted the former
president and CEO’s motion for summary judgment as to the alleged violations of Section 10(b)
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