Broker-Dealer Litigation - Greenberg Traurig LLP

(1) directly participated in the corporation’s management and had the power to influence and
control; (2) were directly involved in the corporation’s day-to-day operations at the highest level;
(3) were privy to confidential proprietary information concerning the corporation’s business and
operations; (4) were involved in the drafting, producing, reviewing, and/or dissemination of the
allegedly false and misleading statements; and (5) approved or ratified the allegedly false and
misleading statements. Defendants moved to dismiss. The court found the allegations to be
sufficient to support an inference that the individual defendants controlled the corporation and its
operations. Finally, the court held that a plaintiff need not show that a defendant was a culpable
participant in the wrongful conduct or exercised actual power to be derivatively liable under
Section 20(a). Thus, the court denied the individual defendants’ motion to dismiss plaintiffs’
Section 20(a) claim.
Dean v. China Agritech, Inc., 2011 U.S. Dist. LEXIS 124264 (C.D. Cal. Oct. 27, 2011).
Investors brought suit against a corporation and members of its executive management
team and board of directors for violations of Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934 against the company and the individual defendants, Section 20(a) of the
Exchange Act against the individual defendants, Section 11 of the Securities Act of 1933 against
all defendants, and Section 15 of the Securities Act against the individual defendants. Based on
the allegations of each individual’s title and position with the company, the court found that the
individual defendants were actively involved in the day-to-day operations of the company such
that there was a reasonable inference that they were controlling persons involved with the
creation and approval of the fraudulent financial statements at issue. Therefore, the court found
that the plaintiffs had adequately pleaded that the individual defendants had control over the
company for purposes of liability under Section 20(a). Thus, the individual defendants’ motion
to dismiss was denied.
Mannkind Sec. Actions, 2011 WL 6327089 (C.D. Cal. Dec. 16, 2011).
Plaintiff shareholders brought a securities fraud class action against a corporation and a
number of its senior officers alleging that defendants serially misrepresented to investors facts
relating to the existence and likelihood of FDA approval for a new drug. Defendants moved to
dismiss. Plaintiff shareholders alleged that defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 by making various untrue statements of material facts and by
omitting to state material facts with the intent to deceive the investing public and artificially
inflate and maintain the market price of stock. The court found that the Section 10(b) claim was
adequately pleaded and therefore denied the motion to dismiss. The court further found that
plaintiffs adequately pleaded a Section 20(a) cause of action because plaintiffs pleaded a primary
violation of federal securities laws under Section 10(b) and alleged that defendants were
controlling persons within the meaning of the Exchange Act. Further, because defendants made
no showing of good faith to rebut the prima facie case of control person liability, defendants’
motion to dismiss plaintiffs’ cause of action under Section 20(a) was denied.
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