Let’s Be Frank: The Future Direction of Controlling Person Liability Remains Uncertain

PdfPDF by Michael A. BednarzMay-15-2013

Category: Notes, Number 2, Print Edition, Volume 46

In the wake of the Great Depression, Congress enacted the Securities Act of 1933 (1933 Act) and the Securities Exchange Act of 1934 (1934 Act).  Together, the Acts provide the Securities and Exchange Commission (SEC) with broad authority over the securities industry, and institute methods for holding those who commit securities fraud liable.  Section 15 of the 1933 Act and section 20(a) of the 1934 Act establish controlling person liability, a mechanism for establishing secondary liability against corporate directors and officers for securities fraud committed by their subordinates.  Section 15 of the 1933 Act merely permits controlling person liability to be pursued if very limited types of securities fraud have been committed.  As a result, pursuing a controlling person liability claim under section 20(a) of the 1934 Act has historically been both the SEC and private litigants’ preferred course of action as it broadly allows for secondary liability to be attached to any underlying security claim within the Act.

While drafting both Acts, Congress consciously refrained from defining the term “control” because it believed that courts could effectively apply the term depending on the given facts of a case.  Therefore, varying standards of controlling person liability have evolved throughout the judicial system, including within federal circuit and district courts.  Recently, in continuing efforts to protect investors, Congress has enacted a substantial piece of legislation that may help shed light on the inconsistent application of controlling person liability:  the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). . .

Read the full Note here.

Author: Michael A. Bednarz

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