Practitioners in the Second Circuit representing individuals accused of securities law violations know all too well that there is confusion surrounding proving and defending a control person claim under §20(a) of the Securities Exchange Act of 1934. What level of wrongdoing is required before one can be deemed a control person and thereby subjected to the same liability as the primary violator?
For long over a decade, there has been a “lively debate” in the Second Circuit courts as to whether “culpable participation” is an element of a plaintiff’s prima facie case. CSX Corp. v. Children’s Inv. Fund Mgmt. (UK) LLP, 562 F. Supp. 2d 511, 558 (SDNY, 2008). As the Second Circuit has yet to squarely answer the issue, a plaintiff’s best bet is to plead culpable participation in accordance with Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act (PSLRA). Certainly, it is far easier to allege that a defendant is a control person as opposed to a “culpable” control person, but given the uncertainty in the pleading standard, plaintiffs significantly advance their position if they can allege culpability.
