Broker-Dealer Litigation - Greenberg Traurig LLP

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Rafton v. Rydex Series Funds, 2011 WL 31114 (N.D. Cal. Jan. 5, 2011).
Plaintiff investors brought a putative class action against a mutual fund. Defendants
included entities and officers responsible for issuing, managing, and distributing shares of the
fund, and also individuals that were independent trustees of the fund. Plaintiffs alleged that the
defendants violated Sections 11, 12, and 15 of the Securities Act of 1933, by alleging misleading
disclosures by entities and officers of the fund as to who was an appropriate investor and other
potential risks associated with the fund. Section 15 of the Securities Act makes any person who
controls a person who violates certain sections of the Securities Act (11 or 12), liable jointly and
severally “with and to the same extent as the controlled person.” To state a claim under
Section 15, plaintiffs must establish: (1) a primary violation of the pertinent federal securities
laws; and (2) that defendants exercised actual power or control over the primary violator. The
defendants brought a motion to dismiss the claims against them. The court noted that “whether
the defendant is a controlling person is an intensely factual question, involving the scrutiny of the
defendant’s participation in the day-to-day affairs of the corporations and the defendant’s power
to control corporate actions.” The court found that the plaintiff satisfied the first prong by
establishing an underlying Section 11 and Section 12(a)(2) violation. Plaintiffs alleged that
defendants exercised control by virtue of their positions as high-level officers and the existence
of their signing registration statements. The court found that it was “plausible” that high-level
officers, such as the independent trust defendants who signed registration statements, would be
in a position to exercise control over the fund and its disclosures. Accordingly, the court denied
the independent trustee defendants’ motion to dismiss the Section 15 claim.
In re Verifone Holdings Inc. Securities Litigation, 2011 WL 1045120 (N.D. Cal. Mar. 8, 2011).
Plaintiffs filed a securities fraud class action against a major corporation and certain of its
officers and directors on behalf of purchasers of the corporation’s common stock. The company
released financial statements that were subsequently found to be incorrect, due to errors in
accounting. These accounting errors were caused by manual adjustments made by an individual
who was the company’s supply chain controller. Plaintiffs’ alleged a violation of Section 20(a)
of the Securities Exchange Act of 1934 for control person liability against the company’s officers
and directors. Defendants moved to dismiss on grounds that the allegations that they exercised
control over the controller were insufficient. The court noted that merely holding an executive
position within a company is insufficient for control person liability. Further, the court noted
that plaintiffs’ allegations relied upon a Securities and Exchange Commission complaint which
specifically stated that management did not review or approve the controller’s adjustments, and
that there was a lack of particularity in the pleading. In sum, the court found that the
Section 20(a) claims failed because the claims were meager and conclusory, and therefore,
insufficient to survive a motion to dismiss.
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