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October 2013


From the editors of CCH Federal Securities Law Reporter, CCH Blue Sky Law Reporter and the securities publications of Aspen Publishers, this update describes important developments covered in these publications, as well as timely topics of interest generally to federal and state securities practitioners. This update includes a preview of IPO Vital Signs, an advanced IPO research analysis tool, for IPO professionals and pre-IPO companies and a preview of RBsource, a new all-in-one online securities law resource, powered by the Securities Redbook. Finally, please see the “Hot Topic of the Month,” for research tips and references to CCH and Aspen source material on point.

 To view past issues of the Securities Update, please visit

 If you have questions or comments concerning the information provided below, please contact me at


Securities Regulation Daily

The law changes every day. The tools you use need to change with it. Introducing Wolters Kluwer Securities Regulation Daily — a daily news service created by attorneys for attorneys — providing same-day coverage of breaking news and developments for federal and state securities — including the latest securities-related rulemaking, no-action letters, SEC staff comment letters, updates on litigation, and a wealth of other SEC activity, plus a complete report of the daily securities law news that affects your world.

Securities Regulation Daily subscribers get special copyright permissions to forward information to colleagues or clients; the option to customize your daily email by topic and/or jurisdiction; the ability to receive breaking news email alerts; time-saving mobile apps for iPhone®, iPad®, BlackBerry®, or Android®; access to all links to cases and other referenced primary source content without being prompted for user name and password; and a searchable archival database.


Financial Reform Resources



CCH Federal Securities Law Reporter

SEC adopts muni adviser registration regime, proposes pay ratio rule. The SEC commissioners have unanimously approved a rule to establish a registration regime for municipal advisers and, in a three-to-two vote, approved the issuance of a proposal to require public companies to disclose the ratio of the compensation of their CEOs to the median compensation of all employees. Both initiatives were required under the Dodd-Frank Act

The Dodd-Frank Act directed the SEC to amend its rules to require companies to disclose the median of the annual total compensation of all of their employees and the ratio of that median to the annual total compensation of their CEO. The SEC’s proposal does not specify a particular methodology for identifying the median employee in terms of total compensation for all employees. The disclosure would be included in registration statements, proxy and information statements, and annual reports that include executive compensation information under Item 402 of Regulation S-X. The rule would not apply to emerging growth companies, as provided by the JOBS Act, or to smaller reporting companies or foreign private issuers.

The final rule establish a registration regime for municipal advisers clarifies who will be deemed a municipal adviser and provides guidance on when a person is providing advice under the municipal adviser definition. The SEC narrowed the application of the term "investment strategies" to apply only to the investment of proceeds from the sale of municipal securities rather than to all public funds, and exempted employees and appointed officials from registration. Rather than require individuals who are associated with registered municipal advisory firms to register separately, the final rule requires the firms to furnish information about those individuals. Brokers, dealers and municipal securities dealers that serve as underwriters will not have to register if their advisory activities involve the structure, timing, and terms of an issuance of municipal securities. Registered investment advisers and associated persons will not have to register if they provide advice regarding the investment of the proceeds of municipal securities or municipal escrow investments. The rule also provides exemptions for registered commodity trading advisers, attorneys, engineers, banks, accountants, and swap dealers, under certain conditions. Release No. 33-9452 (pay ratios) is reported at ¶80,356, and Release No. 34-70462 (registration) will be reported at ¶80,362.

SEC reopens comment period on proposed amendments to Reg. D, Form D and Rule 156. The SEC is reopening the comment period for its proposed amendments to Regulation D, Form D and Rule 156 (Rel. No. 33-9458). The comment period will remain open for 30 days after publication in the Federal Register. The intent of the proposal is to assist the SEC in evaluating the development of practices in Rule 506 offerings and to address concerns that may arise in connection with new rules that permit issuers to engage in general solicitation and general advertising under Rule 506. The SEC issued the proposal for comment on July 10, 2013 and reported that it has generated a large amount of public interest. By providing additional time for comment, the SEC said the public would be able to thoroughly consider the matters addressed by the release and submit comprehensive comments to assist the SEC in its consideration of final rules. Release No. 33-9458 will be reported at ¶80,368.

Plaintiffs need not plead compliance with Securities Act statute of limitations. A Securities Act plaintiff need not plead compliance with Section 13 of the Securities Act, and the timeliness of claims filed under Securities Act 11, 12(a)(2), and 15 should be measured against a discovery standard, not an inquiry standard, the Third Circuit has held in a matter of first impression. The questions arose in a lawsuit filed by investors against UBS Securities, LLC for misleading statements allegedly made in the offering of mortgage-backed securities.

The securities at issue in this case were mortgage backed-securities known as “MASTR Pass-Through Certificates” (certificates), sold by UBS Real Estate Securities, Inc., and underwritten by UBS Securities, LLC. A pension fund representing operating engineers bought the securities on September 18, 2007, but did not file suit until February 22, 2010.

The investors alleged that the offering documents for the securities made numerous false and misleading representations, including statements that the availability of loans was limited to those borrowers whose creditworthiness was within accepted limits, that the collateral for the loans was appraised pursuant to GAAP, and that certain quantities of the loans were within specific ranges of loan-to-value ratios. Based on these guarantees and others, two credit ratings agencies provided the certificates a AAA rating in September 2007, the same month the investors purchased them.

Investors filed suit asserting claims under Securities Act Sections 11, 12(a)(2), and 15 on February 22, 2010, one year after Moody’s downgraded the credit rating on the certificates. They filed an amended complaint on December 13, 2010 that named UBS Americas Incorporated. UBS then successfully moved to dismiss the second amended complaint in the district court after the court found, using an inquiry notice standard, that the claims were barred by the one year statute of limitations set forth in Securities Act Section 13. The investors appealed, arguing that they should not have been required to plead compliance with the statute of limitations, and that their claims should have been evaluated under a discovery standard, not an inquiry notice standard.

The court first addressed an issue of first impression for the Third Circuit—whether a Securities Act plaintiff is required to plead compliance with Section 13. The court first ruled that it had jurisdiction to decide the issue over the objections of UBS, which argued that the issue was out of scope because the investors’ notice of appeal specified that they were appealing only from the dismissal of the second amended complaint. The court disagreed, finding that it had jurisdiction over the issue because the investors also expressly indicated that the appeal encompassed “all prior rulings made by the district court.”
The court said a split in the circuits on this issue currently exists, with the First Circuit, Eighth Circuit, and Tenth Circuit holding that a Securities Act plaintiff must plead compliance with Section 13, and the Seventh, Ninth, and Eleventh holding that it need not do so. The Third Circuit panel said that it agreed with the reasoning of the Seventh Circuit in Tregenza v. Great Am. Commc’ns Co., which rejected the First, Eighth, and Tenth Circuits’ reliance on “the archaic rule that in the case of common law claims the statute of limitations merely limits the remedy, while in the case of statutory claims it limits or defines the substantive right.”

The panel noted that the Third Circuit has repeatedly held that a statute of limitations is an affirmative defense, and the burden of establishing its applicability lies with the defendant. “Indeed, requiring a plaintiff to plead compliance with a statute of limitations would effectively ensure that a timeliness issue would always appear on the face of a complaint, thereby shifting the burden to the plaintiff to negate the applicability of the affirmative defense. Therefore, we hold that a Securities Act plaintiff need not plead compliance with Section 13,” the court wrote.

The court then turned to the dispute over which notice standard should be applied to the investors’ complaint. The investors argued that the district court erred by applying an inquiry noticed standard and finding the claims untimely. UBS argued that the district court correctly refused to adopt a discovery standard. The court held that a discovery standard should apply, but it nonetheless found the claims in the original complaint untimely.

The discovery standard announced by the Supreme Court in Merck applies not only to the Exchange Act’s statute of limitations, the court said, but also to the Securities Act’s statute of limitations. The Merck Court pointed out that the Exchange Act’s statute of limitations is indirectly based on the Securities Act’s statute of limitations, and both the Supreme Court and the Third Circuit have treated as interchangeable the precedent dealing with the different statutes of limitation.

The court then found that using the “storm warnings” popping up in the press about Countrywide and IndyMac were not specific enough to place a reasonably diligent plaintiff on inquiry notice, but the “sheer volume” of reports, articles, and lawsuits concerning the mortgage lending industry available prior to February 2009 should have triggered an investigation. Those storm warnings were not required to be specific to the certificate purchased by the investors. A reasonably diligent plaintiff, the court found, would have discovered the misleading statements in November 2008, and the Section 13 Statute of limitations would have run, at the latest, in November 2009, making the investors’ original complaint, filed in February 2010, untimely. Pension Trust Fund For Operating Engineers v. Mortgage Asset Securitization Transactions, Inc. (3rdCir) is reported at ¶97,642.

Morrison also applies to criminal prosecutions under 10(b). A Second Circuit panel has held that criminal liability under Exchange Act Section 10(b) does not extend to conduct in connection with an extraterritorial purchase or sale of securities. This question was left open by the U.S. Supreme Court in Morrison v. National Australia Bank Ltd. (2010), and the panel here concluded that the antifraud provisions of the Exchange Act do not apply to extraterritorial conduct, regardless of whether criminal or civil liability is sought.

Alberto Vilar and Gary Alan Tanaka were convicted in February 2010 after a jury found that they had lied to clients about the nature and quality of certain investments. The two investment advisers managed billions of dollars in investments for their clients through their "Guaranteed Fixed Rate Deposit Accounts" (GFRDAs), which promised investments in high-quality, short-term deposits, resulting in a high, fixed rate of interest over a set term.

Despite Vilar and Tanaka’s promises, investor funds were put into technology and biotech stocks. When the dot-com bubble burst in 2000, the value of the investments dropped, and Vilar and Tanaka could not pay the promised rates of return. Several of the GRFRDA investors lost millions of dollars.

In 2002, Vilar and Tanaka used a client’s account to pay their personal and corporate obligations. The client was told that her funds were safely in escrow. When the suspicious client reported Vilar and Tanaka to the SEC, Vilar made several false statements to the Commission in an effort to conceal the scheme.
Vilar and Tanaka were indicted and charged in twelve counts, including conspiracy, securities fraud, wire fraud and making false statements to the SEC. Vilar was convicted on all counts, and Tanaka was convicted of conspiracy, securities fraud, and investment adviser fraud. Both received prison sentences and both were ordered to pay $35 million in restitution.

On appeal, Vilar and Tanaka argued that the conduct underlying their convictions for securities fraud was "extraterritorial," and therefore not criminal under the Exchange Act fraud provisions. Morrison, which was decided after Vilar and Tanaka were convicted, limits the application of the antifraud provisions to "transactions in securities listed on domestic exchanges, and domestic transactions in other securities." The government argued that Morrison only applied in the civil context.

The panel concluded that Morrison applies to criminal cases brought under Section 10(b) and Rule 10b-5. The convictions were affirmed because the record showed that Vilar and Tanaka’s conduct occurred in connection with domestic securities transactions. In support of its conclusion, the court noted Supreme Court precedent recognizing the presumption against extraterritoriality in criminal statutes, unless explicitly stated otherwise.

Even if there were no presumption against extraterritoriality in criminal statutes, the court continued, Section 10(b) would not apply extraterritorially in criminal cases. "A statute either applies extraterritorially or it does not" the court stated, and has the same meaning regardless of the specific facts of the case. The only question, the court said, was "whether the relevant conduct occurred in the territory of a foreign sovereign."

The panel then held that there was no plain error in Vilar and Tanaka’s convictions with respect to the territoriality of their conduct. The record showed that the GFRDA fraud occurred domestically, and that irrevocable liability was incurred in the United States. Therefore, a jury would have found that Vilar and Tanaka engaged in fraud in connection with a domestic purchase or sale of securities.

The defendants then claimed that the district court erred in omitting a reliance element from the securities fraud charges. The panel held that since reliance is not an element of a criminal case brought by the government under Section 10(b), the district court did not err by not instructing the jury on the issue of reliance. Vilar also argued that the instructions concerning mail fraud erroneously "lowered the government’s burden of proof," but the panel concluded that the instructions "did not impermissibly amend the mail fraud count or improperly broaden the basis for Vilar’s conviction on that count."

Finally, the panel remanded the action to the district court with directions to vacate Vilar and Tanaka’s sentences and resentence them in terms consistent with this opinion. According to the panel, the district court must reconsider in the first instance whether losses suffered by victims who purchased GFRDAs abroad may constitute "relevant conduct" under the sentencing guidelines. Next, the district court must recalculate restitution because it cannot be awarded for investors who purchased GFRDAs abroad. Third, a forfeiture order was vacated because its calculation was clearly erroneous. U.S. v. Vilar (2ndCir) is reported at ¶97,625.

CCH Blue Sky Law Reporter  

Oregon proposes alternative (shorter) form to license issuer/ owner salespersons. As proposed by the Oregon Division of Finance & Corporate Securities, a non-FINRA broker-dealer, issuer or securities owner would send the Director a complete salesperson licensing application that includes, among other specified items, a complete Form U-4, Uniform Application for Securities Industry Registration or Transfer, or a Director-approved alternate form. Similarly, a state or federal covered investment adviser would send the IARD (if it’s capable of receiving sent items) or otherwise to the Director an application that includes, among other specified items, a complete Form U-4 or a Director-approved alternate form. ¶47,594.

Allegations of fraud in bank’s foreign exchange transactions survived motion to dismiss. In People v. Bank of New York Mellon Corp., the New York Supreme Court (New York County) held that the defendant bank failed to meet its burden of showing that foreign exchange transactions executed pursuant to standing instructions did not qualify as “foreign currency orders” and thus did not meet the definition of “securities” under the Martin Act. The New York Attorney General had brought an action for fraud against the bank, alleging that the bank had falsely claimed to offer best execution on standing instruction foreign exchange transactions while intentionally charging the clients the worst rates during the trading day and then retaining the difference between that price and the market price.

Although the Attorney General claimed that the transactions involved “foreign currency orders” and thus fell within the scope of his enforcement authority under Section 352, the bank argued that the statute did not apply to the transactions because, among other things, a foreign currency order must involve a negotiable instrument, and not merely a request to purchase currency. The court ruled that the record provided an insufficient basis, however, to construe the term “foreign currency order,” which the Martin Act does not define, nor did the record contain any evidence that would be probative of the term’s meaning when the Martin Act was amended to add the term in 1925. Accordingly, the bank’s motion to dismiss the Martin Act claims on coverage grounds was denied. The decision is reported at ¶75,043.


Aspen Federal Securities Publications  

Regulation of Securities: SEC Answer Book, Fourth Edition, by Steven Mark Levy. The 2014-1 Supplement is now available online. This practical guide aids the reader in understanding and complying with the day-to-day requirements of the federal securities laws that affect all public companies. Using a question-and-answer format similar to that which the SEC has embraced, this guide provides clear, concise, and understandable answers to the most frequently asked securities compliance questions. The 2014-1 Supplement features a variety of timely topics, including: What must the SEC prove to establish a violation of the registration provisions of Securities Act Section 5 (Q 1:25.5)? How, and how often, do companies use Form 12b-25 to extend the filing deadline for annual and quarterly reports (Q 3:14)? What safe-harbor liability protections are available for material misstatements or omissions in Form 8-K filings (Q 3:97)? How does Section 16(b) seek to deter “short swing speculation” by company insiders (Q 7:1)? Must the purchase and sale be in the same class of equity security in order to incur Section 16(b) liability (Q 7:2.5)? Does owning more than 10 percent of the company’s stock strip an officer, director, or director by deputization of the Board Approval Exemption under Section 16(b) (Q 7:49.5)? May companies outsource the internal audit function to a third-party service provider (Q 8:63.15)? What constitutes a “separate matter” for purposes of the proxy antibundling rules (Q 10:37.5)? What are the elements of Rule 14a-9’s “materially misleading omission” requirement for proxy fraud (Q 10:100.5)? What factors determine whether the use of Facebook or other social media channels constitutes a “recognized channel of distribution” for purposes of Regulation FD compliance (Q 16:23.5)? Must class action plaintiffs prove materiality of defendant’s misrepresentations at the class certification stage in order to invoke the fraud-on-the-market presumption of reliance (Q 17:24.5)? How do executives use Rule 10b5-1(c) trading plans to engage in prearranged securities transactions without violating insider trading restrictions (Q 18:20)? What is the most common pitfall in anti-money laundering compliance by broker-dealers (Q 22:39.5)? What is the scope of the broker-dealer exemption from the definition of investment adviser (Q 23:11.5)? What requirements protect and safeguard the assets of clients of investment advisers (Q 23:40.5)?

Representing Corporate Officers, Directors, Managers, and Trustees, Second Edition, by Marc J. Lane. The 2013 supplement is now available online. This publication is a guide to the practical aspects of corporate governance for attorneys, officers, directors, managers, and trustees. The introduction of new legislation, rules, and standards by governmental bodies and society in the wake of recent corporate and accounting scandals has lead to a focus upon the responsibilities and liabilities of directors, officers, managers, and trustees. A host of new hurdles have arisen. Increased SEC oversight, new NYSE and NASDAQ listing standards, new fiduciary and other duties, and new criminal penalties have changed the landscape for those who control corporations and have cast new meaning unto preexisting law. The author’s careful examination of the terrain of the current business world with an experienced legal eye identifies these and other new landmarks of law for the busy director or officer The most recent supplement reflects the changing needs of directors, officers, managers, and trustees and requirements of the laws, rules, and standards that affect them, including: updated information on crowdfunding under the Jumpstart Our Business Startups (JOBS) Act (see § 1.09); new sections on the New York Stock Exchange’s elimination of the quorum requirement for shareholder voting (see § 1.10) and on the “admit wrongdoing” policy (see § 1.11); new section concerning constituency statutes—also referred to as stakeholder statutes or non-shareholder statutes—that allow corporate directors to deviate from the doctrine of shareholder value maximization in the best interest of the company (see § 2.02[N]); new section on fiduciary duties in LLCs under state law (see § 2.03[B][3]); additional information about trends in executive compensation (see § 2.04[E][1]; new section on lawyers as whistleblowers under Dodd-Frank (see § 9.01[A][3][a]); new section and table covering “cooperative corporations,” or “cooperative associations” (see § 11.01[H]); and updated information on the spread of benefit corporations (see § 11.01[H]).

A Practical Guide to Section 16: Reporting and Compliance, Fourth Edition, edited by Stanton P. Eigenbrodt. The 2014 Supplement is now available online. This publication contains complete information on reporting and filing procedures to comply with the complex shareholder, SEC, public disclosure, and stock exchange requirements. This latest update includes significant revisions to provide updated information in a variety of areas including: significant revisions to Chapter 1, An Overview of the Rules Under Section 16 of the Securities Exchange Act of 1934; updates to Chapter 2, Definition of Terms, to discuss recent relevant case law; updated Chapter 3, The Reporting Scheme; updated Chapter 8, The Treatment of Trusts; updates to Chapter 9, The Treatment of Derivative Securities, to discuss recent relevant case law; revisions to Chapter 11, Merger and Acquisition Implications; and updates to the Appendices.

Sarbanes-Oxley Act: Planning and Compliance. The 2014 supplement is now available online. This comprehensive resource provides practical guidance to help ensure compliance with all Sarbanes-Oxley rules and regulations. The 2014 Supplement includes a detailed analysis of “Communications With Audit Committees; Related Amendments to PCAOB Standards; and Transitional Amendments to AU Sec. 380 (“AS16”) (see §6.05[G]); an explanation of SEC Rule 10C-1, which the SEC adopted to implement the provisions of Section 952 of the Dodd-Frank Act (see § 3.08[B]); a detailed look at the amendments that the national securities exchanges and associations adopted on January 11, 2013, to bring their corporate governance rules into compliance with SEC Rule 10C-1's compensation committee and compensation adviser requirements (see § 4.04[C][1]); discussion of a Third Circuit Court of Appeals case under Sarbanes-Oxley Act § 806 (see Wiest v. Lynch at § 2.05[F][4]); discussion of a Sixth Circuit opinion holding that in a case charging a defendant with falsification of documents under Sarbanes-Oxley § 802, the government did not have to prove that defendant intended to obstruct a federal investigation (see U.S. v. Gray at § 10.03[A]); an explanation of the PCAOB’s Proposed Framework for Reorganization of PCAOB Standards (see § 6.08); revision of § 3.02, Enhanced Disclosure on Expanded Form 10-K, to include discussion of the Items added to the form since the enactment of Sarbanes-Oxley § 409 (see § 3.02); and a look at a case in the S.D.N.Y. holding that a violation need not be “existing” in order for a report to be protected (see Leshinsky v. Telvent GIT, S.A at § 2.05[F][4]).


IPO Vital Signs

IPO Vital Signs, an advanced IPO research analysis tool, assists IPO professionals and pre-IPO companies satisfy their most challenging research needs and answers hundreds of mission critical questions for all the players in the IPO process. IPO Vital Signs’ tabular data analyses focus on issues surrounding client advisement, deal negotiation, and prospectus disclosure.

IPO Week in Review, a weekly e-newsletter to keep professionals up to date with recent filing and going public activity, is an important element of the IPO Vital Signs system or is available by separate subscription. Coverage includes a monthly feature article on recent trends in going public in the U.S.

To see how an IPO Vital Sign works click on the Vital Sign title below:



#1003 - The IPO Queue 
An interactive table that lists companies currently in registration at the SEC.
Review current IPO registrants by...

  • Prospective Issuer Name
  • Filing Date
  • SIC or NAICS Code
  • Business Description – Prospectus Summary First Paragraph
  • Proposed Offer Amount – if price range disclosed in initial registration
  • Revenue
  • Net Income
  • Net Worth
  • Team Members: Lead Manager(s), Co-Manager(s), Issuer’s Law Firm, Underwriters’ Law Firm, Auditor, Transfer Agent


Tip! Click on the column headings to re-sort the table in ascending order, pause and click again to sort in descending order.
Review prospective issuers’ business descriptions by

  • placing a check mark in the check boxes provided in column four for those prospective issuers you wish to review, and
  • clicking the [COMPARE] button located in the fifth column heading.


A new research tool powered by the Securities Redbook (Securities Act Handbook), RBsource offers you securities laws, rules, regulations and forms together with related SEC guidance and interpretations. With RBsource, you will have SEC guidance related to a specific law, regulation or rule at your fingertips without the need of further searching or browsing. RBsource uniquely associates related content, going beyond the limits of standard searching making research more streamlined and productive. This intuitive research tool will drastically reduce your research time and provide the unparalleled confidence expected from the trusted Securities Act Handbook.

SEC Rulemaking Activity

  • 34-70462—Registration of Municipal Advisors (September 20, 2013).

The SEC adopted final rules and forms implementing Dodd-Frank Act provisions for the registration of municipal advisers. The Commission, however, adopted a detailed compliance deadline schedule based on municipal advisory firms’ temporary registration numbers.

  • 34-70468—Extension of Temporary Registration of Municipal Advisors (September 23, 2013).

The Commission’s interim final temporary rule extended the sunset date of Rule 15Ba2-6T and Form MA-T from September 30, 2013, to December 31, 2014.

  • 33-9457— Adoption of Updated EDGAR Filer Manual (September 25, 2013).

This latest update to the EDGAR Filer manual includes revisions to accommodate Form D and submission form types 13F-HR and 13F-HR/A.

  • 33-9452—Pay Ratio Disclosure (September 18, 2013).

The SEC proposed rules to implement the Dodd-Frank Act’s requirements for companies to disclose the pay ratio between their highest paid executives and other employees.

  • 33-9458—Re-opening of Comment Period for Amendments to Regulation D, Form D and Rule 156 (September 27, 2013).

The re-opened comment period for the Commission’s Regulation D proposal will end 30 days after the re-opening release is published in the Federal Register.

The Road Ahead

Upcoming rulemaking activity will continue to reshape the securities regulation landscape. The items below are a selection of expected near-term regulatory actions. The SEC’s schedule is subject to change at any time. RBsource includes daily updates to securities regulations affected by final Commission action.

The October 1, 2013 federal government shutdown may impact financial markets regulators. The SEC, however, has announced that it plans to be open for business in the event that significant portions of the federal government close temporarily due to the appropriations stalemate in Congress. The SEC has issued its “Plan of Operations During an SEC Shutdown” (dated September 27, 2013), should it become needed. Status updates after October 1, said the SEC, will be posted on its official website,


Hot Topic of the Month

This month's hot topic is controlling person liability. A director or officer may incur controlling person liability for fraud and other violations committed by another person. Under Exchange Act Section 20(a), any person who directly or indirectly controls someone who has violated the law is liable to the same extent as the violator. The controlling person is not liable, however, if he or she acted in good faith and did not induce the other person to commit the violation. Similarly, Securities Act Section 15 imposes controlling person liability upon a person who controls another person liable under Section 11 or 12. Controlling person claims are predicated on a primary violation of securities law; where there is no underlying primary security claim, secondary claims must be dismissed.

Controlling person status is a factual question, and a director of a corporation is not automatically liable as a controlling person. There must be some showing of actual participation in the company's operation or some influence before courts will impose the consequences of control. The courts are split on the necessary level of participation or influence to trigger control person liability.

Some circuits have adopted what is known as the "culpable participant" test, requiring some evidence that the alleged control person actually participated in the transaction in question. Under this test, liability may be established without regard to whether the controlling person was directly or indirectly involved in the fraud and may be premised on inaction, but only if it is apparent that the inaction intentionally furthered the fraud or prevented its discovery. The majority of courts have rejected the stricter culpable participation requirement and have, instead, required the plaintiff to show that the defendant: (1) exercised general control over the operations of the company principally liable; and (2) possessed the power or ability to control the specific transaction or activity on which the primary violation was predicated, even if that power was not exercised.

In July 2010, Congress amended Section 15. The Dodd-Frank Act changes provided that the SEC may bring actions for aiding-and-abetting violations and established that the mental state requirement for aiding-and-abetting liability may be satisfied by recklessness as well as by knowing misconduct. This expansion of aiding-and-abetting liability applies only to SEC actions. The legislation did not disturb the Supreme Court’s 1994 holding in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. that private plaintiffs cannot recover on aiding-and-abetting claims.

We publish related information in a wide range of resources (e.g., Federal Securities Law Reporter, Insights – Amy L. Goodman, Securities Regulation – Loss, Seligman & Paredes, etc.), and document types (laws, regulations, releases, newsletter articles, treatise discussion). For example: