Broker-Dealer Litigation - Greenberg Traurig LLP

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SEC v. Daifotis, 2011 U.S. Dist. LEXIS 116631 (N.D. Cal. Oct. 7, 2011).
In an enforcement action, the Securities and Exchange Commission brought numerous
claims alleging securities law violations by defendant executives of a registered broker-dealer in
their management of a particular fund. The SEC sought to amend their complaint to include
control person liability claims under Section 20(a) of the Securities Exchange Act of 1934
against one of the individual defendants. The defendant objected, claiming that the SEC did not
qualify as a “person” under the statute. The court noted that federal securities laws should be
construed “not technically and restrictively, but flexibly to effectuate [their] remedial purposes.”
Thus, the court found that to hold that the SEC, the very agency charged with enforcing federal
securities laws, could not allege control person liability contradicted the purpose of securities
laws. Further, a plain reading of the statute as it existed at the time of the misconduct—and as it
is interpreted by a majority of the circuits—was that the SEC was considered a “person” under
Section 20(a). Accordingly, the SEC’s motion to add this claim was granted.
Shepard v. S3 Partners, LLC, 2011 U.S. Dist. LEXIS 117957 (N.D. Cal. Oct. 12, 2011).
Plaintiffs claimed defendants were liable for federal securities fraud under Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 as well as securities fraud under several
California statutes. Defendants moved for summary judgment. With respect to the control
person allegations, the court found that several defendants could be proven liable for securities
fraud as direct violators or controlling entities. The court noted that the plaintiffs need not show
that a defendant was a culpable participant in the violation or that there was an exercise of actual
power, but also that the defendant may assert a good faith defense if he can show no scienter and
an effective lack of participation. The court found ample evidence that the moving defendants
were the principals and primary decision-makers of the company. The defendants each had an
equal ownership stake in the company and partook in numerous discussions about the
investments. Thus, the motion for summary judgment was denied.
Meram v. Citizens Title & Trust, Inc., 2011 U.S. Dist. LEXIS 1657 (S.D. Cal. Jan. 3, 2011).
Plaintiffs alleged that defendant and two non-parties ran a Ponzi scheme that caused
losses to plaintiffs. Plaintiffs alleged that two non-parties would not have been successful but for
the role defendant, an Arizona escrow company, played in the scheme. Plaintiffs alleged, inter
alia, causes of action against defendant for violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The court found there were no allegations that the defendant
exercised control over the two individual non-parties or any person or entity in an effort to
induce them to engage in acts that violated securities laws. Further, the allegations lacked the
times, dates, and places that such control allegedly occurred. The court held that the plaintiffs
failed to make any allegation regarding the defendant’s management responsibilities or direct or
indirect control over the outside parties to cause them to engage in the alleged conduct. For
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