[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
APRIL 30, 2008
No. 06-14524
________________________ THOMAS K. KAHN
CLERK
D.C. Docket No. 98-01407-CV-2-KOB
KITTIE LAPERRIERE, Class certification
to consist of all persons who acquired
the publicly traded equity securities
of Vesta Insurance Group, Inc., between
June 2, 1995, and June 28, 1998, inclusive (the “Class Period”).
Excluded from the class, ISRAEL BURGER,
RICHARD SULLIVAN, POINTERS, THE
CLEANERS & CAULKERS LOCAL 1 PENSION FUND,
FLORIDA STATE BOARD OF ADMINISTRATION,
Plaintiffs-Appellants,
versus
VESTA INSURANCE GROUP, INC., et al.,
Defendants,
TORCHMARK CORPORATION,
Defendant-Appellee.
_____________________________
Appeal from the United States District Court
for the Northern District of Alabama
_________________________
(April 30, 2008)
Before EDMONDSON, Chief Judge, CARNES and FAY, Circuit Judges.
PER CURIAM:
This interlocutory appeal presents an issue of first impression in the circuit
courts: whether, and to what extent, the proportionate liability scheme of section
21(D)(f) of the Securities Exchange Act of 1934 (the “Act”),1 enacted as part of
the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), amends
section 20(a) of the Act, under which a person who controls a violator of the Act is
“liable jointly and severally with and to the same extent” as that violator.
In 1998, Appellants, a group of investors in publicly traded securities, filed
a securities class action against three groups of defendants: (1) Vesta Insurance
Group, Inc. (“Vesta”) and certain of its officers and directors; (2) KPMG Peat
Marwick, LLP, Vesta’s outside auditor; and (3) Appellee, Torchmark Corporation,
the former parent company of Vesta. After completing discovery, obtaining class
certification, and surviving various motions to dismiss by defendants, Appellants
reached court approved settlements with Vesta and KPMG. Torchmark, whose
motion for summary judgment was denied by the district court, is the only
remaining defendant in the action.
1
See 15 U.S.C. §78u-4(f) (West 2007). Originally enacted as section 21(D)(g) of the
Act, this provision was later redesignated section 21(D)(f). See Securities Litigation Uniform
Standards Act of 1998, Pub.L. 105-353, Title III, § 301(b)(13), 112 Stat. 3233, 3236 (1998).
2
In 2003, Appellants filed a motion to strike two of Torchmark’s affirmative
defenses to the extent those defenses improperly sought to graft the PSLRA’s
scheme of “proportionate liability” onto the joint and several liability existing
between a controlling person and a controlled person under section 20(a). In
2004, the district court entered an order denying the motion to strike, concluding,
as a matter of first impression, that the proportionate liability regime set out in
section 21(D)(f) of the Act “trumps” section 20(a). In 2006, the district court
granted Appellants’ motion to file an interlocutory appeal and certified the present
issue as one “involv[ing] a controlling question of law as to which there is
substantial ground for difference of opinion.” 28 U.S.C. § 1292(b) (West 2007).
Under section 21(D)(f), a controlling person is liable jointly and severally
for the entirety of plaintiffs’ damages only if it commits a knowing violation of the
Act. Section 20(a) exposes a controlling person who cannot prove the affirmative
defense provided in that section to derivative liability for the acts of its controlled
person. For the reasons explained below, we do not interpret section 21(D)(f) as
“trumping” a controlling person’s derivative liability under section 20(a).
Recognizing that implicit repeals of statutory provisions are disfavored, we hold
that section 21(D)(f) and section 20(a) should be read in harmony to preserve both
the PSLRA’s proportionate liability scheme and a controlling person’s derivative
3
liability under section 20(a).
BACKGROUND
A. The PSLRA and Proportionate Liability
In 1995, “motivated in large part by a perceived need to deter strike suits
by opportunistic private plaintiffs that filed securities fraud claims of dubious
merit in order to exact large settlement recoveries,” Congress passed the PSLRA.
Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000). The PSLRA was a reaction
to the “significant evidence of abuse in private securities lawsuits,” including “the
routine filing of lawsuits against issuers of securities and others whenever there is
a significant change in an issuer's stock price, without regard to any underlying
culpability of the issuer.” H.R. Conf. Rep. No. 104-369, at 31 (1995), reprinted
in 1995 U.S.C.C.A.N. 730, 730. Congress also hoped to put an end to “the abuse
of the discovery process to impose costs so burdensome that it is often economical
for the victimized party to settle.” Id.
Before the PSLRA, the general rule in most securities law actions was that
defendants found to have violated the Act were jointly and severally liable for all
the plaintiff's damages. See Musick, Peeler & Garrett, 508 U.S. at 292 (noting
that violators “share joint liability for that wrong under a remedial scheme
established by the federal courts.”); G.A. Thompson & Co., Inc., 636 F.2d at 963;
4
TBG, Inc. v. Bendis, 36 F.3d 916, 927 (10th Cir. 1994). In addition to strike suits,
the legislative history of the PSLRA suggests Congress was concerned about the
many cases in which the application of traditional joint and several liability
unfairly resulted in defendants having to pay for damages caused by other
defendants. See H.R. Rep. No. 104-369, at 37 (1995) (Conf. Rep.), reprinted in
1995 U.S.C.C.A.N. 730, 736 (“Under current law, a single defendant who has
been found to be 1% liable may be forced to pay 100% of the damages in the
case.”); S. Rep. No. 104-98, at 20 (1995), reprinted in 1995 U.S.C.C.A.N. 679,
699 (“Under joint and several liability, each defendant is liable for all of the
damages awarded to the plaintiff. Thus, a defendant found responsible for only
1% of the harm could be required to pay 100% of the damages.”).
To combat these perceived injustices, Congress enacted section 21(D)(f) of
the PSLRA, which replaced the existing joint and several liability regime with a
proportionate liability scheme that restricts joint and several liability to persons
who knowingly violate the Act. Section 21(D)(f) provides in relevant part:
(f) Proportionate liability
(1) Applicability
Nothing in this subsection shall be construed to create,
affect, or in any manner modify, the standard of liability
associated with any action arising under the securities
laws.
(2) Liability for damages
5
(A) Joint and several liability
Any covered person against whom a final judgment is
entered in a private action shall be liable for damages
jointly and severally only if the trier of fact specifically
determines that such covered person knowingly
committed a violation of the securities laws.
(B) Proportionate liability
(i) In general
Except as provided in subparagraph (A), a covered
person against whom a final judgment is entered in a
private action shall be liable solely for the portion of the
judgment that corresponds to the percentage of
responsibility of that covered person, as determined [by
the fact finder].
15 U.S.C. §78u-4(f)(2) (West 2007).
Importantly, Congress clarified that section 21(D)(f) affects only the allocation of
damages between liable defendants and must not “be construed to create, affect, or
in any manner modify, the standard of liability associated with any action” arising
under the Act. 15 U.S.C. §78u-4(f)(1).
Under Section 21(D)(f)’s proportionate liability scheme, there is a three step
process to be followed by the fact finder determining a liable defendant’s share of
responsibility under the Act.2 The first step is for the fact finder to determine
2
15 U.S.C. §78u-4(f)(3)(A) (Determination of responsibility) states:
[T]he [fact finder] shall make findings, with respect to each
covered person and each of the other persons claimed by any of the
parties to have caused or contributed to the loss incurred by the
6
whether the “covered person [or] other persons claimed by any of the parties to
have caused or contributed to the loss incurred by the plaintiff” violated the
securities laws.3 Second, the fact finder determines the percentage of
responsibility of each person “measured as a percentage of the total fault of all
persons who caused or contributed to the loss incurred by the plaintiff.” Lastly,
the fact finder determines whether such person knowingly committed a violation
of the securities laws.
A person “knowingly commits a violation of the securities laws” and thus is
responsible for damages jointly and severally if it (1) “makes an untrue statement
of a material fact, with actual knowledge that the representation is false” or (2)
“omits to state a fact necessary in order to make the statement made not
plaintiff, including persons who have entered into settlements with
the plaintiff or plaintiffs, concerning--
(i) whether such person violated the securities laws;
(ii) the percentage of responsibility of such person, measured as a
percentage of the total fault of all persons who caused or
contributed to the loss incurred by the plaintiff; and
(iii) whether such person knowingly committed a violation of the
securities laws.
3
We do not interpret the inclusion of the word “contributed” in the phrase “caused or
contributed to the loss incurred by plaintiff ” as signifying an intent to include secondary actors.
This phrase recognizes that in certain cases involving multiple primary violators more than one
actor may have contributed to the loss incurred by plaintiff.
7
misleading, with actual knowledge that . . . one of the material representations of
the covered person is false” or (3) “engages in . . . conduct with actual knowledge
of the facts and circumstances that make the conduct of that covered person a
violation of the securities laws.” 15 U.S.C. §78u-4(10) (West 2007).
B. Section 20(a) of the Act and Derivative Liability
The Act imposes liability not only on the person who actually commits a
securities law violation, but also on an entity or individual that controls the
violator.4 Section 20(a) provides:
Every person who, directly or indirectly, controls any
person liable under any provision of this chapter or of
any rule or regulation thereunder shall also be liable
jointly and severally with and to the same extent as such
controlled person to any person to whom such controlled
person is liable, unless the controlling person acted in
good faith and did not directly or indirectly induce the
act or acts constituting the violation or cause of action.
15 U.S.C. §78t(a) (emphasis added).
The text of section 20(a) unambiguously imposes derivative liability on persons
that control primary violators of the Act. Under section 20(a), a controlling person
is liable to the plaintiff jointly and severally with and to the same extent as a
controlled person for the controlled person’s acts, unless the controlling person
4
Section 15 of the Securities Act of 1933 also imposes liability on controlling persons.
See 15 U.S.C. § 77o (West 20007).
8
can establish the affirmative defense of good faith and non-inducement.
The legislative purpose in enacting a control person liability provision was
to prevent people and entities from using straw parties, subsidiaries, or other
agents acting on their behalf to accomplish ends that would be forbidden directly
by the securities laws.5 In congressional hearings preceding the passage of the
Act, Congress referred to correcting the “dangerous and unreliable system of
depending upon dummy directors” that lacked any accountability or
responsibility.6 The House of Representatives Report accompanying the Act
summarized section 20(a) and clarified that Congress intended to achieve its
purpose by making “a person who controls a person subject to the act . . . liable to
the same extent as the person controlled unless the controlling person acted in
good faith.”7
Under traditional legal principles in effect prior to the Act, nonfeasance
was a basis for fraud liability only when the defendant owed a “special duty” to
5
H.R. Rep. No. 73-152, at 12 (1933); see generally William O. Douglas, Directors Who
Do Not Direct, 47 Harv. L. Rev. 1305 (1934); Loftus C. Carson II, The Liability of Controlling
Persons Under the Federal Securities Acts, 72 Notre Dame L. Rev. 263, 266 (1997).
6
S. Rep. No. 73-47, at 5-6 (1933); see also H.R. Rep. No. 73-152, at 12 (1933); Stock
Exchange Practices: Hearing on S. Res. 84 (72nd Cong.) and S. Res. 56 and 97 (73rd Cong.)
Before the Senate Comm. on Banking and Currency, 73rd Cong., 1st Sess. 6556 (1934) (remark
of Sen. Barkley).
7
H.R. Rep. No. 73-1383, at 26 (1934) (emphasis added).
9
the plaintiff.8 Congress enacted section 20(a) because it understood that many
control relationships are not within the special duty exceptions recognized at
common law.9 Further, many controlling persons could have avoided traditional
secondary liability under the common law to the extent such secondary liability
relied on agency principles.
Prior to section 20(a), the conduct of a corporation’s agents in violation of
the securities laws was not attributable to those who were part of the corporate
hierarchy, such as shareholders, directors, and officers, because under the common
law of agency the principal in the agency relationship was the corporation.
Congress intended section 20(a) to expand upon the common law of vicarious
liability and crafted a statute that encompassed relationships broader than those
associated with master and servant, or principal and agent.
Pure vicarious liability, such as respondeat superior liability, attributes
liability to one party based on the actions of the other party regardless of any
allegation of culpability on the party held vicariously liable. Section 20(a) is a
derivative liability statute because it in effect requires, through the affirmative
8
See Restatement (Second) of Torts § 314 (1965).
9
See id. at § 314A; see also William O. Douglas & George E. Bates, The Federal
Securities Act of 1933, 43 Yale L.J. 171, 174 (1933) (explaining that, prior to the enactment of
the Securities Act, “[s]atisfaction of the common-law requirements of fraud raised almost
insurmountable barriers to recovery.”).
10
defense, a defendant to disprove certain wrongful conduct on its part. See Musick,
Peeler & Garrett v. Employers Ins. of Wausau, 508 U.S. 286, 296, 113 S. Ct.
2085, 2091 (1993) (“§ 20 of the 1934 Act . . . impose[s] derivative liability.”).
Specifically, a defendant must prove that it did not act in bad faith or with a
recklessness that equates to inducing the acts constituting a securities law
violation. See G.A. Thompson & Co., Inc. v. Partridge, 636 F.2d 945, 963 (5th
Cir. 1981). Notwithstanding Section 20(a) liability involves culpable conduct
both by the person who is derivatively liable and the person whose wrongful
conduct was the direct cause of the securities law violation and injury to the
plaintiff, a controlling person’s liability under section 20(a) is derived from the
acts of its controlled person.
A plaintiff must show that the controlled person (not the controlling person)
violated the federal securities laws. A plaintiff must also show that the controlling
person exercised control over the controlled person.10 Congress recognized that it
10
SEC v. First Jersey Secs., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996) (“In order to
establish a prima facie case of controlling-person liability, a plaintiff must show a primary
violation by the controlled person and control of the primary violator by the targeted defendant”);
Schlifke v. Seafirst Corp., 866 F.2d 935, 949 (7th Cir. 1989) (“[S]ection 20(a) requires control at
the time of the alleged violation; activities and events that occur later cannot support a claim of
liability.”); Maher v. Durango Metals, Inc., 144 F.3d 1302, 1306 (10th Cir. 1998) (“This court
recognizes there is a potential circuit split regarding whether, as part of a prima facie case of
control person liability, a plaintiff must show that the alleged control person actually exercised
control over the primary violator's general affairs or whether it is sufficient to show that the
control person had the power to exercise such control.”).
11
would be difficult, if not impossible, to enumerate or anticipate the many ways in
which actual control may be exercised and expressly declined to define the term
"control," leaving courts free to decide issues of control status on a case by case
basis.11 The Securities and Exchange Commission promulgated a more specific
definition of control under the Act, defining “control” as “the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of a person, whether through ownership of voting securities, by contract,
or otherwise.” 17 C.F.R. § 230.405 (West 2007). Circuit courts have recognized,
however, that the control regulation, like the statute, does not attempt to formulate
a precise definition of “control” applicable to all cases, but is intended only to
provide some guidance, leaving a determination as to whether control exists
dependent on the particular factual circumstances of each case. See, e.g., G.A.
Thompson & Co., Inc., 636 F.2d at 945; Sheinkopf v. Stone, 927 F.2d 1259, 1270
(1st Cir. 1991); Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1108 (10th Cir.
2003); SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472-73 (2d Cir. 1996);
Maher v. Durango Metals, Inc., 144 F.3d 1302, 1305 (10th Cir. 1998).12
11
See H.R. Rep. No. 73-1383, supra note 7; see also Rochez Bros., Inc. v. Rhoades, 527
F.2d 880, 884-85 (3d Cir. 1975).
12
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981) (en banc), this
court adopted as binding precedent all decisions of the former Fifth Circuit handed down prior to
October 1, 1981.
12
The derivative nature of section 20(a) liability has caused courts to disagree
over the extent and nature of the burden that the plaintiff must bear to prove
section 20(a) liability.13 In Brown v. Enstar Group, Inc., 84 F.3d 393, 396 (11th
Cir. 1996), we held that a plaintiff alleging controlling person liability under
section 20(a) must allege that (1) the defendant had the power to control the
general affairs of the primary violator, and (2) the defendant had the power to
control the specific corporate policy that resulted in the primary violation.14
Some of our sister circuits have required a plaintiff seeking to hold a
controlling person liable under section 20(a) to prove that the controlling person
13
See Sheinkopf, 927 F.2d at 1270 (“For [defendant] to be liable . . . there must be
‘significantly probative’ evidence that the [defendant] exercised, directly or indirectly,
meaningful hegemony over” the controlled person.) (citation omitted); Harrison v. Dean Witter
Reynolds, Inc., 974 F.2d 873, 880-881 (7th Cir. 1992) (describing a similar requirement for
plaintiff); Metge v. Baehler, 762 F.2d 621, 631 (8th Cir. 1985) (holding that control person
merely must possess, not necessarily exercise, the power to determine the acts or omissions upon
which the underlying violation is predicated); San Francisco-Okla. Petroleum Exploration Corp.
v. Carston Oil Co., 765 F.2d 962, 964 (10th Cir. 1985) (stating that a plaintiff establishes a prima
facie case of controlling person liability “when the . . . defendant [is] shown to be a controlling
person”); Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1572 (9th Cir. 1990) (same).
14
The Court in Enstar Group, Inc. noted an important distinction between the test it
adopted and the Eighth Circuit's test requiring a plaintiff to prove that a defendant actually
exercised power over the entity primarily liable. Because the Court found that the defendant in
Enstar Group, Inc. neither possessed nor exercised power over the entity primarily liable at the
relevant time, it did not decide whether the power to control the general affairs of the entity
primarily liable means “simply abstract power to control, or actual exercise of the power to
control.” Enstar Group, Inc., 84 F.3d at 397 n. 6.; see also G.A. Thompson & Co., Inc., 636 F.2d
at 958.
13
was a “culpable participant” in the primary violation.15 However, a careful review
of the decisions applying the “culpable participant” standard reveals that courts
stop short of requiring the controlling person to knowingly participate in or
independently commit a violation of the Act.16 Despite the varying standards,
courts for good reason appear to be in agreement that a controlling person need
not commit an intentional violation of the Act to be liable under section 20(a). As
the former Fifth Circuit observed, “[w]hat would be the purpose of the controlling
person provision if intent were required–the provision would hardly make anyone
liable who would not be so otherwise.”17
Even though section 20(a) should be construed liberally,18 it is not
15
See Lanza, 479 F.2d at 1299; Rochez Bros., Inc., 527 F.2d at 880.
16
District courts in the Second Circuit have recently concluded that when a plaintiff
pleads control and a primary violation, the plaintiff has pled “culpable participation.” See In re
WorldCom, Inc. Sec. Litig., 294 F.Supp.2d 392, 414-19 (S.D.N.Y. 2003) (noting that culpable
conduct is a pleading requirement that is satisfied when control and a primary violation are
pleaded because “culpable participation” refers merely to the level of control required and not to
the controlling party's state of mind); In re Initial Public Offering Sec. Litig., 241 F.Supp.2d 281,
308 (S.D.N.Y. 2003) (“[W]henever the Second Circuit has applied its own test, it has essentially
rendered the ‘culpable participation’ requirement meaningless.”); Gabriel Capital L.P. v.
NatWest Fin., Inc., 122 F.Supp.2d 407, 428-29 (S.D.N.Y. 2000) (noting persuasive authority for
the proposition that where a control person knew or should have known that the primary violator
was engaged in fraudulent conduct, but did not take steps to prevent the primary violation, there
is culpability in the sense required by the Second Circuit).
17
G.A. Thompson & Co., Inc., 636 F.2d at 960.
18
See Myzel, 386 F.2d at 738 (Section 20(a) “is to be construed liberally . . . [and] has
been interpreted as requiring only some indirect means of discipline or influence short of actual
direction to hold a ‘controlling person’ liable.”); Richardson v. MacArthur, 451 F.2d 35, 41-42
14
applicable wherever the fact of control exists, as Congress rejected an “insurer’s
liability” for controlling persons by establishing a “good faith defense” not
available under common law principles of agency.19 Courts have also interpreted
the duty imposed on a defendant by section 20(a) differently in varying contexts.20
In G.A. Thompson & Co., Inc., the former Fifth Circuit held that a controlling
person attempting to invoke the affirmative defense has the burden of establishing
that “he did not act recklessly in inducing, either by his action or his inaction, the
act or acts constituting the violation.” G.A. Thompson & Co., Inc., 636 F.2d at
960. Accordingly, we interpret section 20(a) as requiring a controlling person to
(10th Cir. 1971) (citing Myzel).
19
The Senate proposed an “insurer’s liability” standard, while the House opted for a
“fiduciary standard” which would impose a duty of due care. See S. Rep. No. 73-47, at 5-6
(1933); H.R. Rep. No. 73-152, at 27 (1933); H.R. Rep. No. 73-85, at 5 (1933). The House
version was adopted.
20
Compare Myzel v. Fields, 386 F.2d 718, 738 (8th Cir. 1967) (stating that defendant
need have no knowledge of specific wrongdoing), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19
L.Ed.2d 1143 (1968), and SEC v. First Secs. Co., 463 F.2d 981, 987 (7th Cir. 1972) (following
liberal Myzel definition of control and noting that defendant must establish existence of
precautionary measures to demonstrate good faith), cert. denied, 409 U.S. 880, 93 S.Ct. 85, 34
L.Ed.2d 134 (1972), and Richardson v. MacArthur, 451 F.2d 35, 42 (10th Cir. 1971) (citing
Myzel), with Lanza v. Drexel & Co., 479 F.2d 1277, 1299 (2d Cir. 1973) (en banc) (stating that
directors are liable as controlling persons only if they are “in some meaningful sense culpable
participants in the fraud perpetrated by controlled persons.”), and Rochez Bros., Inc., 527 F.2d at
884-85, 889-91 (stating that culpable participation is a prerequisite for liability under section
20(a) and imposition of liability for defendant’s inaction is proper only where inaction
deliberately furthered fraud or prevented discovery), and Gould v. American-Hawaiian S. S. Co.,
535 F.2d 761, 779 (3d Cir. 1976) (construing section 20(a) defense as good faith and lack of
culpable participation).
15
prove more than a lack of participation in the primary violation. A controlling
person is derivatively liable under section 20(a) for the violations of its controlled
person if the controlling person “acted recklessly in failing to do what he could
have done to prevent the violation.” Id.
From our prior cases it is clear that section 20(a) was founded and continues
until today as a derivative liability statute, imputing liability to a controlling
person based on its relationship to a primary violator and not based on any
independent violation of the securities laws by the controlling person. We note
that secondary actors may be held liable under the Act by means other than section
20(a). There is a consensus in the circuit courts that section 20(a) was intended to
supplement, not to supplant the common law theory of respondeat superior as a
basis for vicarious liability under the Act and thus, section 20(a) does not
constitute an exclusive substitute for the vicarious liability of secondary actors that
might otherwise exist under common law agency principles. See, e.g., In re
Atlantic Fin. Management, Inc., 784 F.2d 29, 32-34 (1st Cir. 1986), cert. denied,
481 U.S. 1072 (1987); Commerford v. Olson, 794 F.2d 1319, 1322-23 (8th Cir.
1986); Marbury Management, Inc. v. Kohn, 629 F.2d 705, 712-16 (2d Cir. 1980);
Paul F. Newton & Co. v. Texas Commerce Bank, 630 F.2d 1111, 1115-19 (5th Cir.
1980); Holloway v. Howerdd, 536 F.2d 690, 694-95 (6th Cir. 1976); Hollinger v.
16
Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990); Kerbs v. Fall River Indus.,
Inc., 502 F.2d 731, 740-41 (10th Cir. 1974); but see Rochez Bros., Inc., 527 F.2d
at 884-86 (concluding that the principles of agency, i.e., respondeat superior, are
inappropriate to impose secondary liability in a securities violation case).21
However, because Congress intended for persons “presumptively beyond the reach
of respondeat superior . . . [to] be caught in the net of § 20(a),” In re Villa, 261
F.3d 1148, 1153 (11th Cir. 2001), common law agency principles alone are
insufficient to capture the full set of secondary actors that Congress expressly
intended to be liable under section 20(a) of the Act.
DISCUSSION
With this background in mind, we turn to the question asked of us by the
district court: “whether, and to what extent, the proportionate liability provisions
of Section 21D(g) of the Securities Act of 1933, 15 U.S.C. § 78u-4(f), enacted as
part of the Private Securities Litigation Reform Act of 1995, amended the joint
and several liability provisions of Section 20(a), 15 U.S.C. § 78t(a).” Before we
21
After Rochez Bros., Inc., the Third Circuit held that respondeat superior “should not
be widely expanded in the area of federal securities regulation,” but that it should be available
against broker-dealers and accounting firms in view of “the public trust of the firms involved,
and the duty to supervise arising therefrom.” See Sharp v. Coopers & Lybrand, 649 F.2d 175,
182-83 (3d Cir. 1981), cert. denied, 455 U.S. 938, 102 S.Ct. 1427, 71 L.Ed.2d 648 (1982)
overruled in part on other grounds, In re Data Access Sys. Sec. Litig., 843 F.2d 1537 (3d Cir.
1988) (en banc).
17
answer this question, however, we must first ask whether the proportionate
liability provisions of section 21(D)(f) apply to section 20(a) claims against
controlling persons at all. We find that they do.
The PSLRA provides that: “Any covered person against whom a final
judgment is entered in a private action shall be liable for damages jointly and
severally only if the fact finder specifically determines that such covered person
knowingly committed a violation of the securities laws.” 15 U.S.C. § 78u-
4(f)(2)(A). If the fact finder does not specifically determine that the covered
person knowingly committed a violation of the securities laws, then the “covered
person against whom a final judgment is entered in a private action shall be liable
solely for the portion of the judgment that corresponds to the percentage of
responsibility of that covered person.” 15 U.S.C. § 78u-4(f)(2)(B)(i).
By its plain language, then, the PSLRA applies solely to “covered persons.”
If a party to a securities fraud action is not a covered person, then the
proportionate liability provisions of the PSLRA do not apply.
The PSLRA defines the term “covered person” to mean “a defendant in any
private action arising under this chapter.” 15 U.S.C. § 78u-4(f)(10)(C)(i). “[T]his
chapter” refers to chapter 2B of title 15 of the United States Code, where the
PSLRA is located. Section 20(a) of the Securities Exchange Act is also located in
18
“this chapter”—chapter 2B of title 15 of the United States Code. Put another way,
section 20(a) arises under “this chapter.”
The proportionate liability provisions of section 21(D)(f) plainly mean that
they apply to “any” covered person—not just to some of them, and not just to any
covered person except controlling persons, as Appellants suggest. The Supreme
Court has said, and so have we, that the term “any” in a statute has a “broad,”
“powerful,” and “expansive” meaning; “it does not mean ‘some’ or ‘all but a few,’
but instead means ‘all.’”22 When section 21(D)(f) refers to “any covered person,”
it means exactly that and nothing less.
Given that section 21(D)(f) states that it applies to “any covered person,”
which plainly includes a controlling person covered under section 20(a), we read
section 21(D)(f) as applying to section 20(a) controlling person liability. We next
address the question of whether the PSLRA amends the joint and several liability
provisions of section 20(a). It does not.
We know that section 21(D)(f) does not amend controlling person liability
22
See United States v. Gonzales, 520 U.S. 1, 5, 117 S. Ct. 1032, 1035 (1997) (“Read
naturally, the word ‘any’ has an expansive meaning, that is, one or some indiscriminately of
whatever kind.” (internal quotation marks omitted)); Price v. Time, Inc., 416 F.3d 1327, 1336
(11th Cir. 2005) (“The United States Supreme Court and this Court have recognized on many
occasions that the word ‘any’ is a powerful and broad word, and that it does not mean ‘some’ or
‘all but a few,’ but instead means ‘all.’”); Merritt v. Dillard Paper Co., 120 F.3d 1181, 1186
(11th Cir. 1997) (same as Gonzales).
19
under section 20(a) because the PSLRA tell us so. The text under section
21(D)(f)’s “Applicability” heading, provides that: “Nothing in this subsection
shall be construed to create, affect, or in any manner modify, the standard for
liability associated with any action arising under the securities laws.” 15 U.S.C. §
78u-4(f)(1). In other words, nothing in the proportionate liability provisions of the
PSLRA displaces in any way the “standard of liability” created by the Securities
Exchange Act, including section 20(a) controlling person liability.
As noted above, section 20(a) provides the standard for holding controlling
persons substantively liable for the securities fraud that they do not themselves
commit but instead is committed by those they control. Section 20(a) states that
controlling persons will be liable—and not just liable, but jointly and severally
liable—in those circumstances unless they establish the affirmative defense of
good faith and lack of inducement. The “Applicability” provision in the PSLRA
states that nothing in section 21(D)(f) modifies “in any manner” “the standard for
liability” associated with “any action arising under the securities laws.” The plain
meaning of that language of the PSLRA compels the conclusion that if controlling
person liability existed before the PSLRA added section 21(D)(f), it still exists
afterwards.
20
If the clear and plain language were not enough, and it is,23 the legislative
history of the PSLRA leads to the same conclusion. The Conference Committee
that produced the final version of the PSLRA explained in its report that: “[T]he
‘fair share’ rule of proportionate liability does not create any new cause of action
or expand, diminish, or otherwise affect the substantive standard for liability in
any action under the 1933 Act or the 1934 Act. . . . [T]he standard of liability in
any such action should be determined by the pre-existing, unamended statutory
provision that creates the cause of action, without regard to this provision, which
applies solely to the allocation of damages.” H.R. Conf. Rept. No. 104-369, at 38,
as reprinted in 1995 U.S.C.C.A.N. 730, 737 (emphasis added).
All of this means that the PSLRA, including the proportionate liability
provisions, does not change the rules for determining who is liable for violating
the securities laws. If a controlling person would have been substantively liable
under section 20(a) before the PSLRA, it still will be afterwards.
Section 21(D)(f) is not superfluous, however. It does have a role to play.
As the Conference Committee Report also explained, while the PSLRA did not
modify “in any manner” the standard of liability under the securities laws,
23
Ratzlaf v. United States, 510 U.S. 135, 147–48, 114 S. Ct. 655, 662 (1994); United
States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S. Ct. 1026, 1030 (1989); United
States v. Maung, 267 F.3d 1113, 1121 (11th Cir. 2001); Harris v. Garner, 216 F.3d 970, 976
(11th Cir. 2000) (en banc).
21
including section 20(a), it did change the rules for allocating damages among the
parties once liability has been established by the fact finder. Before the PSLRA
was enacted, if one of those parties was found liable as a controlling person of
violating section 20(a), it would have been responsible jointly and severally for the
damages to the same extent as the primary violator. Under the proportionate
liability provisions of the PSLRA, if a party is found liable as a controlling person
under section 20(a), there is a new standard for allocating damages. What has
changed is not the standard of liability that applies to controlling persons—the
“Applicability” provision states that has not been modified “in any manner”—but
their responsibility as liable persons for the damages. The proportionate liability
provisions of section 21(D)(f) are applicable only after liability is determined, and
liability is governed by the standard set out in section 20(a).
Under the new statutory regime, a controlling person is liable to the same
extent as the controlled person, unless the controlling person affirmatively
establishes that it acted in good faith and did not induce the violation by the
controlled person. Unless the controlling person carries the burden of establishing
that affirmative defense, it is liable for violating the securities law, specifically
section 20(a). Then, for the purpose of determining whether the controlling
person is responsible for the entire amount of damages or only its proportionate
22
share, we look to the proportionate liability provisions of the PSLRA, as we do for
all “covered persons.” Under these provisions joint and several liability for all the
damages exists only if the fact finder specifically determines that the controlling
person knowingly committed the violation. 15 U.S.C. § 78u-4(f)(2)(A). Where a
controlling person fails to affirmatively establish good faith and lack of
inducement under section 20(a) but the fact finder does not specifically find a
knowing violation, there is liability for the violation but responsibility for the
damages is only proportionate, not joint and several. 15 U.S.C. § 78u-
4(f)(2)(B)(i).
Section 20(a) provides the standard of liability for controlling persons; if
they are liable under that standard, the proportionate liability sections of the
PSLRA provide their responsibility for damages; and the “Applicability” section
acts as a levy ensuring that each of the two provisions stays within its proper
channel, preventing either one from washing out the other. The distinction
between substantive liability and allocation of damages is reflected in the statutory
language, which states that: “Any covered person against whom a final judgment
is entered in a private action shall be liable for damages jointly and severally only
if . . . .” 15 U.S.C. § 78u-4(f)(2)(A) (emphasis added). That damages language is
different from the liability language—“liable jointly and severally”—which is
23
used in section 20(a).
The legislative history also bears this out. The report of the primary
committee that drafted the PSLRA indicates that this part of the Act was intended
to address the problem of damages being imposed jointly and severally on those
who had not themselves done anything wrong. The committee heard from the
president of the United Shareholders Association, who testified that “in cases
where there was no proof of actual fraud ‘[e]liminating joint and several
liability . . . will significantly reduce the number of strike suits brought against
defendants who have done nothing wrong but are seen as having deep pockets.’”
S. Rep. 104-98, at 22 (1995), as reprinted in 1995 U.S.C.C.A.N. 679, 701
(alteration and omission in original). Based on testimony like that, and the need
“to eliminate unfairness and to reconcile the conflicting interests of investors in a
manner designed to best protect the interests of all investors,” the committee
“modifie[d] joint and several liability” to “impose[] full joint and several liability,
as under current law, on all defendants who engage in knowing securities fraud.”
Id. (emphasis added). However, for “[d]efendants who are found liable but who
did not engage in knowing securities fraud,” the committee intended that they
would be “liable only for their share of the judgment (based upon the fact finder’s
apportionment of responsibility).” Id. The committee report is entirely consistent
24
with the plain language of the statute.
Reading section 21(D)(f) to exclude section 20(a) controlling persons from
the proportionate liability provisions, as Appellants ask us to do, would lead to an
untenable result. It would make it possible in some circumstances for the
controlling person to be held responsible for more of the damages caused by the
primary violator than the primary violator itself. Consider the situation where
both a controlling person and a controlled primary violator acted recklessly instead
of knowingly. The former Fifth Circuit in G.A. Thompson & Co. held that the
controlling person’s recklessness makes it ineligible for the affirmative defense of
good faith under section 20(a). See G.A. Thompson & Co., 636 F.2d at 959–60.
Reading section 21(D)(f) as Appellants do to exclude section 20(a) controlling
persons from the proportionate liability provisions, the reckless controlling person
would be responsible jointly and severally for damages even though it did not act
knowingly. The primary violator, however, would escape joint and several
liability for damages under section 21(D)(f) because it did not act knowingly.
We ought to avoid any interpretation of the statute that would treat
controlling persons more harshly than the primary violator—that would put
derivatively liable controlling persons on the hook for all damages, but let primary
violators off the hook for any damages that their own action did not cause. That
25
result would be contrary to common sense, to what the committee that drafted the
PSLRA said it intended to do, and to what Congress actually did in the plain
language of the PSLRA.
CONCLUSION
We conclude that section 20(a) controlling person liability survives section
21(D)(f)’s proportionate liability scheme. Those who would have been
substantively liable as controlling person under section 20(a) before the PSLRA
was enacted will be substantively liable after its enactment. All that the PSLRA
has changed for controlling persons is the standard for deciding whether their
responsibility for damages is joint and several or proportionate. Damages are now
allocated based on the proportionate liability provisions in the PSLRA, including
the provision that knowing violators of the securities laws are “liable for damages
jointly and severally.” The district court’s order denying Appellants’ motion to
strike Torchmark’s PSLRA-based affirmative defenses is AFFIRMED.
26