FI L ED U.S. COURT OF A P P E A LS E LE V E N T H C IR C U IT APRI L30, 2008 THOMAS K. KAH

N CL ERK [PUBLIS H]

IN THE UN ITED STATES COURT OF APPEALS FO R T HE EL EV EN TH CIRC UI T

____ ____ ____ ____ ____ ____ N o. 06- 1452 4

____ ____ ____ ____ ____ ____ D.C. Dock etNo. 9 8- 01 40 7- CV-2 -KOB K IT T IE L A PE RR IE RE , Cl as s c er tif ic at ion to consis t of all persons who acquired the pub lic ly

tr ad ed e qui ty se curi tie s of V es taI nsur an ce G ro up, I nc . , be tw ee n Ju ne 2, 1 99 5, an d J un e 2 8, 1 99 8, i nc lu si ve (th e “ Cl as s Pe rio d” ). Exc lu de d fr om

th e cl as s, IS RAEL BURGER, RICHAR D SULLIVAN, POINTERS, THE CLEANERS & CAULKERS LOCAL 1 PENSION FUND, FLORIDA STATE BOARD OF ADMINISTRATION, Pl ai nti ff s- Appe llants , ve rs us VESTA INSURANCE GROUP, INC., et al ., D ef en dants , TORCHMARK C ORPORATION, De fendant-Appellee.

____ ____ ____ ____ ____ ____ ____ _ Appeal f rom the United State s District Court f o r th e N o rt h e rn D i s t r i c to f

A l ab a ma

____ ____ ____ ____ ____ ____ _ (A pr il 30, 200 8)See15 U.S.C. §78u-4(f) ( West 2007). Orig inally enac ted as sec tion 21(D)(g ) of the 1 Act, this provision was later rede signated sec tion 21(D)(f ). SeeSecurities L itigation Unifor m Standards Ac t of 1998, Pub.L . 105-353, Title I I I , § 301(b)( 13), 112 Stat. 3233, 3236 (1998). 2 Be fo re E D MO N D SO N , Ch ie f Judg e, CA RN E S an d F A Y , Ci rc uit Jud ge s. PE R CU RIA M: T his int er loc uto ry

appe al pr es en ts an is sue of f ir st i m pr es sio n inthe c ir cu it
co urts: w he the r, a nd t o w ha t e xte nt, the pr opor tio na te li ab ili ty

sc he m e of

se ct ion 21( D )( f) of

the S ec ur iti es E xc hange A ct of 193 4 ( the “ A ct ”) , e na ct ed a s part of 1 the P ri va te S ec ur iti es L iti ga tio n R ef orm A ct of 199 5 ( the “ PS L RA ”) , a m en ds
se ct ion20( a) of

the A ct , und er

w hic h ape rs on who c ontro ls a vio la tor of the A ct is

“ li ab le joi nt ly andsev eral ly w it h a nd to th e sa m e ex te nt ” as th atvi ol at or . In 1998, Appellants, a gr oup o f investors in pu blicly traded securities, filed a securities cla ss action against three groups of defendants: (1) Ve sta Insurance Gr oup, Inc. (“ Ve sta”) and ce rtain of its officer s and directors; (2) KPMG Peat Marw ic k, L L P, V es ta ’ s ou tsi de audi tor ; and ( 3) Appe lle e, T or ch m ar k C or por at ion , the f orm er pare nt c om

pany of V es ta . A ft er

c om ple tin g di sc ove ry , obt ai nin g c la ss ce rt if ic at ion , a nd s urviv ing vari ous m oti ons to d ism iss by de fe ndants , Appe llants re ac he d c ourt a

ppr ove d se ttl em en ts w ithV es taa nd KPM G
. T or ch m ar k, w hose
m oti on f or sum m ar y j udgm en t w as de nie d by the dis tr ic t c ourt, is the onl y rem ai ni ng de fen da nt in th e act io n.3

In200 3, Appe llants f

ile d am oti on t o stri ke tw o of T or ch m ar

k’ s a ff irm at ive d ef en s es t o th e e x t en tth o s e d ef en s es i m p ro p er l y s o u g h tt o g ra ft th e P SL RA ’s
sc he m e of

“pr opor tio na te li ab ili ty ” ont o th e j oin t and s ev er al li ab ili ty e xis tin g betwee n a controlling person and a controlled person u nder section 20(a). In 2004 , the dis tr ic t c ourt e nte re d an or de r de ny ing the m oti on t o stri ke , c onc lud ing , as am atte r of

f ir st i m pr es sio n, that the pr opor

tio na te li ab ili ty

r eg im e se t ou t i n section 21(D)(f

) of the A ct “ trum

ps” section 20 (a). In 2006, the district court gr an te d Appe llants ’ m oti on t o f ile a n in te rl oc uto ry

appe al a nd c er

tif ie d th e pr es en t iss ue a s on e “ inv olv [i ng] ac ontro lli ng que sti on o f lawa s to w hic h th er e is subs tantial ground for diffe rence of opinio n.” 28 U. S. C. § 129 2(b) (W est 2007 ). U nde r se ct ion21( D )( f) , ac ontro lli ng p er son is l ia ble j oin tly

a nd s ev er al ly fo r the e nti re ty

of pla int if fs ’ dam ag es onl y

if it c om m its akno w ing vio la tio n of the A ct . S ec tio n 20 (a ) ex pose s ac ontro lli ng p er son w ho c an not pr ove the a ff

irm at ive defense provided in th at section to derivative liabili ty for the ac ts of its controll ed person. For the reasons explained below, w e do not in terpret sec tion 2 1(D) (f) as

“ tru m pi ng ” a co nt ro ll in g p ers on ’s der iv at iv e li ab il it y un de r se ct io n 2 0( a). Re co gni zi ng tha t i m

pli ci t r ep ea ls o f statut or

y pr ovi sio ns are dis favor ed , w e hol d that se ct ion21( D )( f) a nd s ec tio n 20 (a ) shou ld b e re ad in harm ony

to pr es er ve both the P SL RA ’ s pr opor

tio na te li ab ili ty

sc he m e an d ac ontro lli ng p er son’ s de ri va tiv e4

liabilityunder section 20(a). BACKGRO UND

A
. T he P SL RAa nd P ro portio na te L ia bil ity I n 19 95, “ m oti va te d inlarg e part by ape rc ei ve d ne ed

to de te r str ike sui ts by opp ortun ist ic pr ivate pla int if fs that f ile d se curi tie s f

ra ud c la im s of

dub iou s m eri t i n o rd er t o e xa ctlar ge set tl em en t re co ve rie s,” C on gr es s p as se d t he PSLRA. Novak v. Kasaks , 216 F . 3d 3 00, 306 ( 2d C ir
. 200 0)
. T he P SL RAw as ar ea ct ion to the “ sig nif

ic an t e vid en ce of

abuse in pr ivate se curi tie s law sui ts, ” inc lud ing “ the
ro uti ne f ili ng o f law sui ts a ga ins t i ssu er s of se curi tie s and o the rs w he ne ve r the re is
a sig nif ic an t c hange in aniss ue r' s st oc k pr ic e, w ith out r eg ar d to a ny

und er ly ing
cu lp ab il it y

of t he is su er.” H.R. Co nf . Rep . No. 1 04 -3 69 , at 3 1 (1 99 5) , reprint ed in 1995 U . S. C. C. A
. N . 730 , 730
. C ongr es s a lso hop ed to put a n e nd t o “ the abuse of the discovery

process to im

pose costs s o burdenso m e that it is often econom ical fo r th e v ic ti m iz edpa rty to s et tl e.” Id
. Before the PSL RA, the general r ule in m ost securities law ac tions wa s that de fe ndants f

ound to ha ve vio la te d th e A ct

w er e j oin tly

a nd s ev er al ly

li ab le f or a ll the pla int if

f' s dam ag es . Se e M

usi ck , P ee le r & G arr et t , 508 U . S. a t 29 2 ( not ing t h a tv i o l a t o r s “s h a r e j o i n tl i ab i l i t y f o r th a tw r o n g u n d e r

ar e me d i a l s c h e me es ta bli she d by

the f ed er al c ourts. ”) ; G. A. Thompson & Co., Inc. , 636 F . 2d at 96 3;5

TB G , I nc . v . B en dis , 36 F. 3d 91 6, 927 (10th Cir. 1994). I n a ddi tio n to str ike sui ts, the le gis la tiv e his tor

y of the P SL RAsug ge sts Co ngr es s w as c onc er ne d a bout the
m an y c as es in w hic h th e ap pli catio n of tr ad iti ona l j oin t and s ev er al li ab ili ty unfairly resulted in defendants havin g to pay for dam ages caused by

other de fen da nt s. See H.R. Rep . No. 1 04 -3 69 , at 3 7 (1 99 5) (Co nf . Rep .), re pri nte d in 1995 U. S. C.C .A .N . 730, 736 (“ Under c urrent law , a single defendant who has be enf ound to be 1% li ab le m ay

be f or ce d to pay

100 % of the dam ag es in the
cas e.”); S. Rep . No. 1 04 -9 8, at 20 (19 95 ), re pri nte d in 1995 U . S. C. C. A
. N . 679 , 699 (“ U nde r j oin t and s ev er al li ab ili ty , e ac h de fe ndant i s li ab le f or a ll of the da m ag es a w ar de d to the pla int if f. T hus, ade fe ndant f

ound r es pons ibl e fo r onl y 1% o f th e h arm

co ul d b e req ui redto pa y 10 0% o f th e d am ag es .”). T o c om bat the se pe rc ei ve d in

j ust ic es , Co ngr es s e na ct ed se ct ion21( D )( f) of the P SL RA , w hic h r ep la ce d th e ex ist ing j oin t and s ev er al li ab ili ty r eg im e w itha pr opor tio na te li ab ili ty

sc he m e that r es tr ic ts j oin t and s ev er al li ab ili ty to pe rs ons w ho know ing ly

vio la te the A ct . S ec tio n 21 (D )( f) pr ovi de s inr el ev an t part : (f ) Pr opor tio na te li ab ili ty (1 ) Appl ic ab ili ty Nothing in this su bsection sh all be construed to create, af fe ct , or in an y m an ne r m odi fy , the standard of li ab ili ty associated with any

action arising und er the sec urities law s. (2) L iabilityfor dam ages15 U. S.C. §7 8u -4 (f )( 3) (A ) ( De te rm inatio n o f r e sp on sib ili ty ) s tate s: 2 [T] he [fact f

inder] shall make finding s, with respec t to each cover ed per son and ea ch of the other pe rsons claimed by any of the parties to have cause d or contributed to the loss incur red by the 6 (A ) Joi nt and s ev er al li ab ili ty A ny c ove re d pe rs on a ga ins t w hom af ina l j udgm en t i s entered in a private a ction shall b e liable for dam ages j oin tly a nd s ev er al ly

onl y if the tr ie r of

f ac t sp ec if ic al ly de te rm ine s th at

suc h c ove re d pe rs on know ing ly co m m itt ed avio la tio n of

the se curi tie s law s. (B ) Pr opor

tio na te li ab ili ty (i) I n general Exce pt as provid ed in subp aragra ph (A), a covere d pe rs on a ga ins t w hom

af ina l j udgm en t i s e nte re d ina pr ivate a ct ionsha ll be li ab le sol el y f or the portio n of

the j udgm en t tha t c or

re spon ds t o th e pe rc en ta ge of re spon sib ili ty

of that c ove re d pe rs on, a s de te rm ine d [ by th e fac t fi nd er]. 15 U. S. C. §78u -4(f) (2) (W est 2007 ). Im portantl y , Co ngr es s c lari fi ed that se ct ion21( D )( f) a ff

ec ts o nly the a llo catio n of da m ag es be tw ee n li ab le de fe ndants a nd m ust not “ be c onstru ed

to cr eate , a ff

ec t, or in any m an ne r m odi fy , the standard of li ab ili ty a sso ci at ed

w itha ny a ct ion ” ar isi ng under the Act. 15 U. S. C. §78u -4(f) (1). Under S ection 21(D)( f)’ s proportio nate liability schem e, there is a thre e step pr oc es s to be f

oll ow ed by the f ac t f ind er de te rm ini ng a

li ab le de fe ndant’ s sh ar e of
re spon sib ili ty

und er the A ct . T he f

ir st s te p is f

or the f ac t f ind er to de te rm ine 2pla int if f, inc lud ingpe rs on s who have e nte re d into s e ttl e me nts wi th the plaintiff or pla intiffs, conce rning
-- (i ) whe the r s uc h p e rs on

vio late d th e se c ur iti e s la

ws ; (i i) the pe rc e nta g e of

re sp on sib ili ty

of su c h p e rs on , me a sure d a s a perc entag e of the total fault of all per sons who cause d or contributed to the loss incurr ed by the plaintiff; and (iii) whether

such per son knowing ly

committed a violation of the se c ur iti e s la

ws . We do not interpret the inclusion of the w ord “c ontributed” in the phra se “c aused or 3 contributed to the loss incurr ed by plaintiff ” a s signify

ing a n intent to include seconda ry actor s. This phrase r ecognizes that in certain ca ses involving multiple primary violators more than one actor may have c ontributed to the loss incurre d by plaintiff. 7 w he the r the “ co ve re d pe rs on [ or ] oth er pe rs ons cl ai m ed

by a ny of the part ie s to ha ve c au se d or

c ontri but ed

to the los s in curr ed

by the pla int if

f” vio la te d th e se curi tie s law s. S ec ond, the f ac t f ind er de te rm ine s th e pe rc en ta ge of 3
re spon sib ili ty

of e ac h pe rs on “ m ea sur ed

a s ape rc en ta ge of

the tot al f

au lt of a ll p e r s o n s wh o c au s e do r

c o n t r i b u t e dt o th e l o s s i n c u rr e db y th e p l a i n t i f f
. ” La s t l y, the f ac t f ind er de te rm ine s w he the r suc h pe rs on know ing ly c om m itt ed avio la tio n of the se curi tie s law s. A pe rs on “ know ing ly

c om m its avio la tio n of

the se curi tie s law s” a nd thus is
re spon sib le f

or dam ag es j oin tly

a nd s ev er al ly

if it ( 1) “ m ak es a n un tr

ue state m en t of am at er ia l f

ac t, w itha ct

ua l kn ow le dge that the r ep re se ntatio n is f al se ” or ( 2)

“ om its to state af

ac t ne ce ssary

in or de r to m ak e the state m en t m ad e notSection 15 of the Sec urities Act of 1933 a lso imposes li ability on controllingpersons. 4 See 15 U.S.C. § 77o (West 20007). 8 m isl ea din g, w itha ct

ua l kn ow le dge that . . . one of the m at er ia l r ep re se ntatio ns o f the c ove re d pe rs on i s f

al se ” or ( 3) “ en ga ge s in
. . . c ondu ct w itha ct ua l kn ow le dge of the f ac ts and c ir cu m stanc es that m ak e the c ondu ct of that c ove re d pe rs on a vi ol at io n o f th e se cu rit ie s l aws .” 15 U.S.C. §7 8u -4 (1 0) (W es t 2 00 7)
.

B. S ec tio n 20 (a ) of

the A ct a nd D er ivativ e L ia

bil ity T he A ct im pose s li ab ili ty

not onl y on the pe rs on who a ct

ua lly c om m its a se curi tie s lawvio la tio n, but a lso on an e nti ty

or ind ivi dua l tha t c ontro ls the vio la tor . S ec tio n 20 (a ) pr ovi de s:

4 E ve ry

pe rs on who, dir ec tly

or ind ir ec tly , c ontro ls any pe rs on l ia ble und er a ny pr ovi sio n of

thi s c ha pte r or of an y r ule or r eg ulatio n th er eunde r sha ll al so b e lia ble joi ntl y and se ve ral lywi th a nd to th e sam e ex te nt as such controlled person to any

person to whom

such controlled pe rs on i s li ab le , unl es s th e co ntr oll ing pe rs on a ct ed in good f ai th and d id n ot d ir ec tly

or ind ir ec tly

ind uc e the ac t or a ct s c onst itu tin g th e vio la tio n or c au se of a ct ion
. 15 U. S. C. §78t (a) (em

phasis add ed). T he te xt o f se ct ion20( a) unam big uous ly im pose s de ri va tiv e lia

bil ity on p er sons that c ontro l pr im ar

y vio la tor s of

the A ct . U nde r se ct ion20( a) , ac ontro lli ng p er son is l ia ble to the pla int if

f j oin tly a nd s ev er al ly

w itha nd t o th e sa m e ex te nt a s a co ntr oll ed

pe rs on f or the c ontro lle d pe rs on’ s a ct s, unl es s th e co ntr oll ing pe rs onH. R. R e p. No . 7 3- 15 2, at 12 (1 93 3) ; see ge nerally Wil liam O. Doug las, Directors W ho 5 Do Not Direct , 4 7 H ar

v . L. R e v . 1 3 0 5 ( 1 9 3 4 ) ; Lo f tu s C
. C ar s o nII, The Liabil ity of Control ling Pe rso ns Un de r th e Fe de ra l Se c ur iti es A c ts , 72 Notre D ame L . Rev. 263, 266 (1997). S. Re p. No . 7 3- 47 , at 5- 6 ( 19 33 ); see also H.R. Rep. No. 73-152, at 12 (1933); Stock 6 Exc hange Practice

s: Hearing on S. Re

s. 84 ( 72nd Cong.) and S. Res. 56 and 97 ( 73rd Cong.) Before the Se nate Comm. on Banking and Currenc y , 73rd Cong ., 1st Sess. 6556 (1934) (re mark of Sen. B arkle y

). H.R. Rep. No. 73-1383, at 26 (1934) (e mphasis added)
. 7 9 can est ab li sh th e aff

irmativ e d efen se of g oo d fa it h a nd no n- in du cem en t. The le gislativ e purpose in enacting a control person liabilityprovisio n was to prevent peopl e and entities from using strawparties, subsi diaries, or other ag en ts a ct ing on the ir

be ha lf to ac co m pli sh e nds that w oul d be f or bid de n di re ct ly by the se curi tie s law s. I n c ongr es sio na l he ar ing s pr ec ed ing the pa ssa ge of the 5 A ct , Co ngr es s r ef

er re d to c or re ct ing the “ dange ro us and unr el ia ble sy ste m

of de pe ndi ng u

pon dum m y dir ec tor s” that l ac ke d any a cc ount ab ili ty

or responsib ility
. T he House of Re presentatives Report accom pany ing th e A ct 6
sum m ar iz ed se ct ion20( a) a nd c lari fi ed that C ongr es s in te nde d to a ch ie ve it s purpos e by

m aking “ a person who controls a person subject to the act .
. . liable to the sam e ex te nt as the pe rs on c ontro lle d un le ss the c ontro lli ng p er son ac te d in go od fai th .” 7 Under traditional legal principl es in effe ct prior to the Ac t, nonfeasance
w as aba sis f

or f ra ud l ia bil ity onl y w he n th e de fe ndant o w ed a“ spe ci al duty ” toSee Restatement (Sec ond) of Tor ts § 314 (1965). 8 Se e id . at § 3 14 A; see also Wil liam O. Doug las & Geor g e E. B ates, The Fede ral 9 Securities Ac t of 1933 , 43 Yale L .J . 171, 174 (1933) ( explaining that, prior to the e nactment of the Se c ur iti e s A c t, “ [s]atis fa c tio n o f t he c omm on -l aw r e qu ir e me nts of fr a ud ra ise d a lmo st insurmountable bar

riers to re cover

y .”). 1 0 the pla int if

f. C ongr es s e na ct ed

se ct ion20( a) be ca

use it und er sto od tha t m an y 8 control relationsh ips are not within the special dutyexceptions recognized at
com m on law. Further, m any controlling persons could have avoided tradition al 9
se co ndary

li ab ili ty und er the c om m on l awto the e xte nt s uc h se co ndary li ab ili ty re lie d ona ge nc y

pr inc ipl es . Pr ior to se ct ion20( a) , the c ondu ct of ac or por at ion ’ s a ge nts in vio la tio n of the se curi tie s law s w as not a ttr ibu ta ble to tho se w ho w er e part of the c or por at e hie rarc hy , suc h a s sh ar eh old er s, dir ec tor s, a nd o ff ic er s, be ca

use und er the c om m on la w of a ge nc y

th e p rin ci pa l i n t he ag en cy rel at io ns hi p was th e co rp or at io n. Co ngr es s in te nde d se ct ion20( a) to ex pand u pon the c om

m on l awof

vic ar iou s lia bil ity a nd c ra ft ed

astatut e that e nc om

pa sse d r el at ion shi ps b ro ad er than th ose as so ci at edwit h m as te r an d s erv an t, o r pr in ci pa l an d a ge nt . Pure vic ar iou s li ab ili ty , suc h a s respon de at s upe rio r liability , attributes lia bil ity to one party

ba se d onthe a ct ion s of

the oth er party r eg ar dle ss o f an y al le gatio n of

c ulp ab ili ty

on the party

he ld v ic ar iou sly

li ab le
. S ec tio n 20 (a ) is a de ri va tiv e lia

bil ity statut e be ca

use it in ef fe ct r equir es , thr oughthe a ff irm at iveSEC v. First Jersey Secs., I nc. , 1 01 F .3 d 1 45 0, 14 72 (2 d Ci r. 19 96 ) ( “ In o rd e r t o 10 establish a prima f

acie case of controlling -per son liabilit y , a plaintiff must show a pr imary violation by

the controlled pe rson and c ontrol of the primar y violator by

the targ eted de fenda

nt”); Schlifke v . Seafirst Corp. , 866 F.2d 935, 949 ( 7th Cir. 1989) (“[S] ection 20(a ) re quires contr ol at the time of the a lleg ed violation; activities and eve nts that occur later c annot support a c laim of lia bil ity .” ); Maher v . Durango Metals, Inc
. , 144 F.3d 1302, 1306 ( 10th Cir. 1998) (“This cour t rec og nizes there is a potential c ircuit split reg ardingwhether , as par t of a prima f

acie case of control per son liabilit y , a plaintiff must show that the alleg ed contr ol person ac tually exercised control over

the primary

violator' s g ener al af

fairs or whether it is sufficient to show that the control per son had the powe r to exercise suc h control.”)
. 1 1 de fen se , a de fen da nt to di sp ro ve cert ai n wro ng fu l co nd uc t o n i ts pa rt. See M usick, P ee le r & G arr et t v . E

m plo ye rs I ns. of W ausa u , 508 U . S. 286 , 296 , 113 S
. Ct
. 20 85 , 20 91 (19 93 ) (“ § 2 0 o f th e 1 93 4 Act
. . . im po se [s ] de riv at iv e li ab il it y .”). Sp ec if ic al ly , ade fe ndant m

ust pr ove that i t di d no t a ct

in ba d f ai th o r w itha recklessness that equates to ind ucing th e acts c onsti tutin g a securities law vio la tio n. Se e G
. A
. T

hom pson & Co
. , I

nc . v . P artrid

ge , 636 F . 2d 9 45, 963 ( 5th Cir. 1981 ). N otwithstandi ng Section 20(a) liability invol ves culpable condu ct both by the pe rs on who i s de ri va tiv el y li ab le a nd the pe rs on whose w ro ngf ul
co nduc t w as the dir ec t c au se of the se curi tie s lawvio la tio n and i nj ur y to the pla int if f, ac ontro lli ng p er son’ s li ab ili ty und er se ct ion20( a) is de ri ve d f ro m the
ac ts o f its c ontro lle d pe rs on. A pla int if f m ust sho wthat the c ontro lle d pe rs on ( not the c ontro lli ng p er son) vio la te d th e fe de ra l se curi tie s law s. Apla int if f m ust a lso sho wthat the c ontro lli ng pe rs on e xe rc ise d c ontro l ov er the c ontro lle d pe rs on. C ongr es s r ec ogni ze d th at it 10See H.R. Rep. No. 73-1383, su pra no te 7; see also Roc hez Bros., Inc . v. Rhoade s , 527 11 F.2d 880, 884- 85 (3d Cir. 1975). In Bo nn e r v . Ci ty

of Pric ha rd, 6 61 F .2 d 1 20 6, 12 09 (1 1th Cir .1 98 1) (e n b anc ), thi s 12 c ourt a do pte d a s b ind ingpr e c e de nt a ll d e c isi on s o f t he fo rm e r F if

th C ir c uit ha nd e d d own p ri or

to October 1, 1981. 1 2 w oul d be dif

fi cu lt, if not im poss ibl e, to enum er at e or a nti ci pa te the m an y

w ay s in which actual c ontrol m ay be exerc ised and expresslydeclined to define the term "c ontro l, " l eavin g c ourts f re e to d ec ide iss ue s of

c ontro l st at

us o n ac as e by

c as e ba sis
. T he S ec ur iti es a nd E xc hange Co m m iss ionpr om

ulg at ed am or e spe ci fi c 11 de fi nit ionof

c ontro l un de r the A ct , de fi nin g “ co ntr ol” a s “ the pos se ssi on, dir ec t or ind ir ec t, of

the pow er

to dir ec t or

c au se the dir ec tio n of

the m an ag em en t and pol ic ie s of

ape rs on, w he the r thr oughow ne rs hip of vot ing se curi tie s, by

c ontra ct , or oth er w ise
. ” 17 C
. F. R. § 23 0. 405 (W es t 20 07)
. C ir cu it co urts h av e re co gni ze d, how ev er , that the c ontro l r eg ulatio n, li ke the statut e, doe s no t a tte m pt t o f orm ulate
a pr ec ise de fi nit ionof

“ co ntr ol” appl ic ab le to al l c as es , but is int en de d on ly

to pr ovi de som e gui danc e, le av ing ade te rm inatio n a s to w he the r co ntr ol e xis ts dependent on the particular f actual circ um stances of eac h case. See , e.g., G.A. Thompson & Co., Inc. , 636 F . 2d at 94 5; She ink opf v . Sto ne , 927 F . 2d 1 259, 127 0 (1 st C ir
. 199 1) ; Adams v . K inder-Morgan , I

nc. , 340 F. 3d 10 83, 1108 (10t h Cir. 2003 ); SEC v . F

irst Jersey Sec. , I

nc. , 101 F. 3d 14 50, 1472-73 (2d Cir. 1996 ); M ahe r v . D uran go M

etals , I nc ., 144 F.3d 1302 , 1305 (10th Cir. 1998). 12See She inkopf , 927 F.2d at 1270 (“F or [defenda nt] to be liable . . . ther e must be 13 ‘ s i g n i f i c an t l y p r o b at i v e ’ e v i d e n c e th atth e [ d e f e n d an t ] e x e r c i s e d , d i r e c t l y o r i n d i r e c t l y, me anin g fu l he g e mony

ov e r” the c ontr oll e d p e rs on .) (c itatio n o mitte d) ; Harrison v. Dean W itter Rey nolds, Inc. , 974 F.2d 873, 880- 881 (7th Cir. 1992) (de scribinga similar re quirement for plaintiff); Metgev. Bae hler , 762 F.2d 621, 631 ( 8th Cir. 1985) (holding that control person mere ly must possess, not necessar ily exercise, the pow er to de termine the a cts or omissions upon wh ic h th e un de rl yingvio latio n is pr e dic ate d) ; San Francisco-Okla. Petroleum E xploration Corp. v. Carston Oil Co. , 7 65 F .2 d 9 62 , 9 64 (1 0th Cir . 1 98 5) (s tatin gthat a pla int if f e sta bli sh e s a pr ima fac ie ca se of c ontrolling pe rson liability “whe n the . . . def

endant [is] shown to be a c ontrolling person” ); Hollinger v. Titan Capi tal Corp. , 914 F.2d 1564, 1572 ( 9th Cir. 1990) (same)
. The Court in Enstar Group, Inc. no te d a n im po rt ant d ist inc tio n b e tw e e n th e te st i t 14 a do pte d a nd the Ei g hth

Cir c uit ' s te st r e qu ir inga

pla int if f t o p ro ve that a

de fe nd ant a c tua lly e xer c ise d p ow e r o ve r t

he e nti ty pr ima ri ly lia ble . B e c a us e the Court

fo un d th at th e de fe nd ant i n Enstar Group, Inc. neither posse ssed nor e x erc ised power over the entity

primarily liable at the re le va nt t ime , it did no t de c ide wh e the r t

he po we r t o c ontr ol t

he g e ne ra l a ff

a ir s o f t he e nti ty pr ima ri ly lia ble me ans “ sim

ply a bs tr a c t po we r t o c ontr ol, or a c tua l e xer c ise of

the po we r t o control.” Enstar Group, Inc. , 8 4 F .3 d at 39 7 n . 6 .; see also G.A. Thompson &Co., Inc. , 636 F.2d at 958. 1 3 The der ivative nature of section 20(a) liability has caused courts to disagree
ove r the e xte nt and n at

ur e of the bur de n th at

the pla int if

f m ust be ar to pr ove se ct ion20( a) li ab ili ty . I n Brown v. Enstar Group, Inc. , 84 F
. 3d 3 93, 396 ( 11th 13 Cir. 1996 ), we held that a plaintiff alleging control ling p erson liabilityunder
se ct ion20( a) m

ust a lle ge that ( 1) the de fe ndant h ad the pow er

to co ntr ol the ge ne ra l a ff

ai rs of the pr im ar

y vio la tor , a nd ( 2) the de fe ndant h ad the pow er

to co ntr ol the spe ci fi c co rp or at e pol ic y that r es ult ed

in the pr im ar

y vio la tio n. 14 So m e of our sis te r ci rc uit s have r equir ed apla int if f se ek ing to hol d a
co ntr oll ing pe rs on l ia

ble und er se ct ion20( a) to pr ove that the c ontro lli ng p er sonSe e Lanza , 4 79 F .2 d at 12 99 ; Roche z Bros., Inc. , 527 F.2d at 880. 15 District courts in the Second Circ uit have re cently conclude d that when a

plaintiff 16 pleads c ontrol and a pr imary violation, the plaintiff has pled “ culpable pa rticipation.” Se e In re W or ldC om , I nc . S e c . Li tig ., 29 4 F .Su

pp .2 d 3 92 , 4 14 -1 9 ( S.D .N .Y . 2 00 3) (n oti ngthat c ulp a ble conduct is a ple adingrequire ment that is satisfied when c ontrol and a pr imary violation are ple a de d b e c a

us e “ c ulp a

ble pa rt ic ipatio n” re fe rs me re ly to t he le ve l of

c ontr ol r e qu ir e d a

nd no t to the controllingparty ' s state of mind); In re I nitial Publ ic Offering Sec . Liti g. , 241 F.Supp.2d 281, 30 8 ( S.D .N .Y . 2 00 3) (“ [W]he ne ve r t he Se c on d Ci rc uit

ha s a pp lie d it s o wn

te st, it h a s e sse nti a lly re nd e re d th e ‘c ulp a

ble pa rt ic ipatio n’ re qu ir e me nt m e anin g le ss. ” ); Gabriel Capital L .P. v. NatW est Fin., Inc. , 122 F.Supp.2d 407, 428-29 (S.D.N.Y . 2000) (notingpersua sive authority for the proposition that where a contr ol person knew or should have known that the primary violator was e ng ag ed in fra

udulent conduct, but did not take steps to pre vent the primar y violation, there is culpability

in the sense r equire d by

the Second Circuit). G.A. Thompson &Co., Inc. , 636 F.2d at 960. 17 See M yzel , 386 F.2d at 738 (Section 20(a) “is to be construe d liberally . . . [and] has 18 been inter prete d as re quiringonly

some indirect mea

ns of discipline or influenc e short of a ctual direc tion to hold a ‘controlling pe rson’ liable.” ); Richardson v. Mac Arthur , 451 F.2d 35, 41- 42 1 4 wa s a “ culpable participant” in the prim ary violatio n. H owever , a

car eful review 15 of the de ci sio ns a

ppl y ing the “ cu lpa

ble part ic ipant” standard

r ev ea ls tha t c ourts sto p sh ort of

r equir ing the c ontro lli ng p er son to k now ing ly part ic ipate in or ind ep en de ntl y

c om m it a vio la tio n of

the A ct . D es pit e the vary ing standard s,

16 courts for good reason appear to be in agreem ent that a controlling person need
no t co m m it an in te nt io na l v io la ti on of t he Act t o b e li ab le un de r se ct io n 2 0( a). As the f orm er F if th C ir cu it obse rv ed , “ [w ] ha t w oul d be the pur pose of the c ontro lli ng pe rs on p ro vis ionif

int en t w er e re qui re d–the pr ovi sio n w oul d hard ly m ak e an y one li ab le who wou ldno t b e so ot he rwis e.” 17 E ve n th oughse ct ion20( a) sho uld be c onstru ed

li be ra lly , it

is not 18(1 0 thC i r. 1 9 7 1 ) ( ci t i n g Myze l).

The Senate proposed a

n “insurer ’s liability ” standa rd, while the H ouse opted for a 19 “fiduc iary standard” which would impose a duty of due c are . SeeS. 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 (1 93 3) . T he Ho us e version wa s adopted.

Com pa re Myze l v. Fields , 386 F.2d 718, 738 ( 8th Cir. 1967) (statingthat defe ndant 20 need ha ve no knowledg e of spe cific wrong doing) , cer t. 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 lib e ra l Myze l

definition of control a

nd noting that de fenda

nt must establish ex istence of prec autionary

measure s to demonstrate g ood faith), c ert. de nied, 409 U.S. 880, 93 S.Ct . 85, 34 L .Ed.2d 134 (1972), and Richardson v. Mac Arthur , 451 F.2d 35, 42 ( 10th Cir. 1971) (citing Myze l), with Lanza v. Drexe l &Co. , 479 F.2d 1277, 1299 ( 2d Cir. 1973) (en ba nc) ( stating that dir e c tor s are lia

ble a s c ontr oll ingpe rs on s o nly if the y are “ in s ome me anin g fu l se ns e c ulp a ble participa nts in the fraud pe rpetrated by controlled pe rsons.”), and Roche z Bros., Inc. , 527 F.2d at 884-85, 889-91 ( stating that culpable pa rticipation is a pre requisite for liability under se ction 20(a) and imposition of liabili ty for de fenda

nt’s inaction is proper

only wher e inac tion deliberately

further ed fr aud or pr evente d discovery ), and Gould v. Ame rican-Hawaiian S. S. Co. , 535 F.2d 761, 779 ( 3d Cir. 1976) (construingsection 20(a ) def ense a s g ood faith and la ck of culpable pa

rticipation). 1 5 ap p l i cab l e w h er ev erth e f ac to f c o n t ro l ex i s t s , a s Co n g re s s re je ct ed an “ i n s u re r’s lia bil ity ” fo r co ntr oll ing pe rs ons by e sta bli shi ng a “ good f ai th d ef en se ” not available under com

m on law principles of agency
. Courts have also interpreted 19 the duty im pose d onade fe ndant b y

se ct ion20( a) dif

fe re ntl y in vary ing c ont ex ts. 20 In G
. A
. T hom pson & Co., Inc. , the f

orm er F if th C ir cu it he ld tha t a

c ontro lli ng pe rs on atte m

pti ng t o in voke the a ff

irm at ive de fe nse ha s th e bur de n of e sta bli shi ng that “ he did

not a ct r ec kle ssl y

in ind uc ing , e ith er

by his a ct ionor

his ina ct ion , the act or a cts constitu ting th e violation .” G
. A
. T hom pson & Co., Inc. , 636 F. 2d at 960. A cc or din gly , w e int er pr et se ct ion20( a) a s r equir ing ac ontro lli ng p er son to1 6

pr ove m or e than ala ck

of part ic ipatio n inthe pr im ar y vio la tio n. Ac ontro lli ng person is derivativelyliable under section 20(a) for the violations o f its controlled pe rs on i f the c ontro lli ng p er son “ ac te d r ec kle ssl y in fa ili ng t o do w ha t he c oul d have done to prevent th e violation .” Id
. From our prior cases it is clear that section 20(a) w as founded and con tinues unt il tod ay

a s ade ri va tiv e lia

bil ity statut e, im

put ing li ab ili ty

to a co ntr oll ing pe rs on b as ed

on i ts r el at ion shi p to apr im ar y vio la tor and n ot b as ed

on any ind ep en de nt v iol at ionof

the se curi tie s law s by

the c ontro lli ng p er son. W e not e that se co ndary

a ct or s m ay

be he ld l ia

ble und er the A ct by m eans o the r than se ct ion 20( a)
. T he re is a co nse nsus in the c ir cu it co urts tha t se ct ion20( a) w as int en de d to supp lem ent, not to supp lant the com m on law theory

of respon de at s upe rio r as a ba sis f or vic ar iou s li ab ili ty

und er the A ct a nd thus, se ct ion20( a) doe s no t constitu te an exclusive subs titute for the vicarious liabilit y of secondary

actors that
m ig ht ot he rwis e ex is t u nd er co m m on law ag en cy

pri nc ip le s. Se e, e . g. , I

n re A tla nti c F

in. M anag em en t, I

nc ., 78 4 F .2d29 , 32 -3 4 (1 st Cir . 19 86 ), cert. denied , 481 U . S. 107 2 ( 1987 ); Co m m er ford v
. O lso n , 794 F. 2d 13 19, 1322-23 (8th Cir. 1986 ); M arbu ryM anag em en t, I

nc . v . Ko hn , 629 F. 2d 70 5, 712-16 (2d Cir. 1980); P aul F
. Ne wton &Co
. v . T

ex as C om m er ce B ank, 630 F. 2d 11 11, 1115-19 (5th Cir. 1980 ); H oll ow ayv . H

ow erdd , 536 F . 2d 6 90, 694 -9 5 ( 6thCi r. 197 6) ; Hollinger v.After Roche z Bros., Inc. , th e Th ir d Ci rc uit he ld t hat respondeat superior

“should not 21 be wi de ly e xpand e d in

the are a of fe de ra l se c ur iti e s r e gulatio n, ” but th at it sh ou ld b e ava ila

ble ag ainst broker -dea lers and a ccountingfirms in view of “ the public trust of the fir ms involved, and the duty

to supervise a

rising the ref

rom.” See Sharp v . Coopers &Lybrand , 649 F.2d 175, 182-83 (3d Cir. 1981), c ert. de nied, 455 U.S. 938, 102 S.Ct . 1427, 71 L .Ed.2d 648 (1982) overruled in part on other grounds , In reDa ta A c c ess S y s. Se c . Li tig ., 843 F.2d 1537 ( 3d Cir. 1988) (e n banc)
. 1 7 Ti tan Ca pital C orp. , 914 F.2d 156 4 (9th Cir. 1990 ); Ker bs v. Fal l Ri ver Indus ., Inc. , 502 F . 2d 7 31, 740 -4 1 ( 10th C ir
. 197 4) ; but see Rochez B ros., I nc. , 527 F . 2d at88 4- 86 (co nc lu di ng th atth e p rin ci pl es of a ge nc y , i.e. , respon de at s upe rio r , are inapprop riate to im

pose secondary

liabilityin a securities violation case)
. 21 How ever, because Congress intended for persons “ presum ptivelybey ond th e re ach of respon de at s upe rio r

. . . [to] be caught in the net of § 20(a),” In re V illa , 261 F. 3d 11 48, 1153 (11t h Cir. 2001 ), com m on law agency

principles alone are ins uf fi ci en t t o c ap tur e the f

ull se t of se co ndary

a ct or s th at

Co ngr es s e xpr es sly in te nd edto be li ab le un de r se ct io n 2 0( a) o f th e Act
. DISC US SION W iththi s ba ck gr ound

in m ind , w e tur

n to the que sti on a ske d of us b y the dis tr ic t c ourt: “ w he the r, a nd t o w ha t e xte nt, the pr opor tio na te li ab ili ty

pr ovi sio ns of Sec tion 2 1D(g) of

the Sec urities Act of 1933 , 15 U .S .C. § 78u-4(f), enacted as part of the P ri va te S ec ur iti es L iti ga tio n R ef or m A ct of 199 5, a m en de d th e j oin t
an d s ev eral li ab il it y

pro vi si on s o f Sec ti on 20 (a), 1 5 U.S.C. § 78 t(a ).” Bef or e we1 8

an sw er thi s qu es tio n, how ev er , w e m ust f ir st a sk whe the r the pr opor tio na te lia bil ity pr ovi sio ns o f se ct ion21( D )( f) appl y to se ct ion20( a) c la im s a ga ins t co ntr oll ing pe rs ons at

a ll. W e fi nd tha t the y

do. The P SL RA provides th at: “ Any covered person against whom a final j udgm en t i s e nte re d inapr ivate a ct ionsha ll be li ab le f or dam ag es j oin tly

a nd
se ve ra lly onl y if the f ac t f ind er spe ci fi ca lly

de te rm ine s th at

suc h c ove re d pe rs on know ing ly

c om m itt ed avio la tio n of

the se curi tie s law s. ” 15 U
. S. C. § 78 u4(f)( 2)(A ). If

the fac t finder does not sp ecifica lly determ ine that the covered person kno wingly

com m itted a violatio n of the securities law s, then the “ covered pe rs on a ga ins t w hom

af ina l j udgm en t i s e nte re d inapr ivate a ct ionsha ll be li ab le sol el y f or the portio n of

the j udgm en t tha t c or

re spon ds t o th e pe rc en ta ge of responsib ility

of that covered person.” 15 U. S. C. § 78u -4(f) (2)(B )(i). By its plain lang uage, then, the PSL RA applies sol ely to “ covered persons.” If aparty to a se curi tie s f

ra ud a ct ionis not

ac ove re d pe rs on, the n th e p r o p o rt i o n a t e l i ab i l i ty p r o v i s i o n s o f th e P S LRA d o n o tap p l y. T he P SL RAde fi ne s th e te rm “ co ve re d pe rs on” to m ean “ a de fe ndant i n any pr ivate a ct iona ri sin g un de r thi s c ha pte r. ” 15 U
. S. C. § 78 u- 4( f) (1 0) (C )( i)
. “ [T ] his ch ap te r” r ef

er s to c ha pte r 2B of

ti tle 15 o f the U nit ed

S ta te s C ode , w he re the PS L RAis loc at ed
. S ec tio n 20 (a ) of the S ec ur iti es E xc hange A ct is al so l oc at ed

inSee United States v. Gonzales , 520 U.S. 1, 5, 117 S. C t. 1032, 1035 (1997) (“ Read 22 natura lly , the word ‘ any ’ has a n expansive meaning , that is, one or some indiscriminately of whateve r kind.” (inter

nal quotation marks omitted)); Price v . Time, Inc. , 416 F.3d 1327, 1336 (11th Cir. 2005) (“ The United States Supre me Court and this Court have re cognized on many occa sions that the word ‘a ny ’ is a powe rful and br oad wor d, and that it does not mean ‘ some’ or ‘a ll b ut a fe w, ’ b ut i ns te a d me ans ‘a ll. ’” ); Merritt v. Dillard Paper Co. , 120 F.3d 1181, 1186 (1 1th Cir . 1 99 7) (s ame a s Gonzales ). 1 9 “th i s c h ap t e r ”

— c h ap t e r

2 B o f t i t l e 1 5 o f

th e Un i t e dS t a t e s C o d e . P u ta n o t h e r wa y, se ct io n 2 0( a) ar is es un de r “ th is ch ap te r.” The proportionate liabilityprovisio ns of section 21 (D )(f ) plainly m ean that the y appl y to “ an y ” co ve re d pe rs on— not j ust to som e of

the m , a nd n ot j ust

to an y c o v e r e dp e r s o n e x c e p tc o n t r o l l i n g p e r s o n s , a s Ap p e l l a n t s s u g g e s t . T h e S up r e me Co ur t h as sai d, an d s o h av e we, th atth e te rm “ an y ” in a st atut e h as a “ br oa d,”

“ po werfu l,” a nd “ ex pa ns iv e” m ean in g; “ it do es no t m ean ‘ so m e’ or ‘all bu t a f ew,’ bu t i ns te adm ean s ‘all .’ ” Whe n s ect io n 2 1( D)(f) re fers to “ an y co ve redpe rs on ,” 22 it m eans e xa ct ly

that and n oth ing le ss. Giv en th atsec ti on 21 (D)(f) st at es th atitap pl ie s t o “ an y co ve redpe rs on ,” which plainly

includes a controllin g person covered under section 20 (a), we rea d
se ct ion21( D )( f) a s a

ppl y ing to se ct ion20( a) c ontro lli ng p er son lia bil ity
. W e ne xt ad dr es s th e que sti on o f w he the r the P SL RAam en ds the j oin t and s ev er al li ab ili ty pr ovi sio ns o f se ct ion20( a)
. I t do es not . W e knowthat se ct ion21( D )( f) doe s no t am en d c ontro lli ng p er son lia bil ity2 0

unde r se ct ion20( a) be ca

use the P SL RAte ll us s o. T he te xt unde r se ct ion 21( D )( f) ’ s “ Appl ic ab ili ty ” he ad ing , pr ovi de s th at : “ N oth ing in thi s su

bse ct ion sha ll be c onstru ed

to cr eate , a ff

ec t, or in an y m an ne r m odi fy , the standard f or li ab il it y ass oc ia te d wi th an y

act io n a ris in g u nd er t he sec ur it ie s l aws .” 15 U.S.C. § 78u- 4( f) (1 ). I n othe r w or ds, nothin g inthe pr opor tio na te li ab ili ty

pr ovi sio ns o f the PSL RA displ aces in any

way the “ standard of liability ” cr eated by the Sec urities Ex c h a n g e Ac t , i n c l u d i n g s e c t i o n 2 0 ( a ) c o n t r o l l i n g p e r s o n l i ab i l i t y. A s no te d a

bove , se ct ion20( a) pr ovi de s th e standard f or hol din g c ontro lli ng persons su bstantiv ely

liable for the sec urities fraud that they do not them selves
com m it but in stead is com

m itted by those they

control. Se ction 20 (a) states that
co ntr oll ing pe rs ons w ill be li ab le —and n ot j ust li ab le , but

j oin tly a nd s ev er al ly lia ble —i n th ose c ir cu m stanc es unl es s th ey e sta bli sh the a ff

irm at ive de fe nse of good faith and lack of inducem ent. T he “ Applicability ” provision in the PSL RA state s th at nothin g inse ct ion21( D )( f) m odi fi es “ in any m an ne r” “ the standard

f or lia bil ity ” as soc ia te d w ith“ an y a ct iona ri sin g un de r the se curi tie s law s. ” T he pla in
m eanin g of

that l an gua ge of

the P SL RAc om

pe ls the c onc lus ionthat i f co ntr oll ing pe rs on l ia bil ity e xis te d be fo re the P SL RAa dde d se ct ion21( D )( f) , it sti ll ex ist s af te rw ar ds.Ratzlaf v. United States , 5 10 U. S. 1 35 , 1 47 –4 8, 11 4 S. Ct. 65 5, 66 2 ( 19 94 ); United 23 States v. Ron Pair Enterprises, Inc
. , 4 89 U. S. 2 35 , 2 41 , 1 09 S. Ct . 1 02 6, 10 30 (1 98 9) ; United States v. Maung , 2 67 F .3 d 1 11 3, 11 21 (1 1th Cir . 2 00 1) ; Harris v. Garner , 216 F.3d 970, 976 (11th Cir. 2000) (e n banc)
. 2 1 If the c le ar a nd p la in l an gua ge w er e not e noug h, a nd i t i s, the le gis la tiv e 23 histo ry of the PSL RA leads to the sam e conclusion
. The C onference Com m ittee that pr oduc ed

the f ina l ve rs ionof

the P SL RAe xpl ai ne d init s r ep ort tha t: “ [T ] he

‘ fa ir share ’ r ule of pr opor tio na te li ab ili ty

doe s no t c re at e an y

ne wc au se of

a ct ion
or e xpand, dim ini sh, or

oth er w ise a ff ec t the sub stanti ve standard f or li ab ili ty in
an y a ct ionund er

the 193 3 A ct

or the 193 4 A ct . . . . [ T ] he standard of li ab ili ty in any such action sho uld be determ ined by the pre-e xistin g, unam ended statuto ry pr ovi sio n th at

c re at es the c au se of

a ct ion , w ith out

r eg ar d to thi s pr ovi sio n, which appl ies solely to the allo cation o f damages
. ” H . R. Co nf

. Re pt. N o. 104 -3 69, a t 38 , as r ep rin te d in 19 95 U.S.C.C.A.N. 73 0, 7 37 (em ph as is ad de d)
. A ll of thi s m eans tha t the P SL RA , inc lud ing the pr opor tio na te li ab ili ty pr ovi sio ns, doe s no t c hange the r ule s f or de te rm ini ng who i s li ab le f or vio la tin g the se curi tie s law s. I f a co ntr oll ing pe rs on w oul d have be ensub stanti ve ly li ab le unde r se ct ion20( a) be fo re the P SL RA , it sti ll w ill be a ft er

w ar ds. Sect io n 2 1( D)(f) i s n ot su pe rfl uo us , ho wev er. Itdo es ha ve a ro le to pl ay . A s th e Co nf

er en ce Co m

m itt ee Re port a lso e xpl ai ne d, w hil e the P SL RAdid not
m odi fy “ in any m an ne r” the standard

of li ab ili ty und er the se curi tie s law s,2 2

inc lud ing se ct ion20( a) , it did c hange the r

ule s f or a llo catin g dam ag es a m ong the parties once liability

has been established bythe fac t finder. Bef ore the PS LR

A
w as e na ct ed , if

one of tho se part ie s w as f

ound li ab le a s ac ontro lli ng p er son of vio la tin g se ct ion20( a) , it w oul d have be enr es pons ibl e j oin tly a nd s ev er al ly

f or the da m ag es to the sam e ex te nt a s th e pr im ar y vio la tor . U nde r the pr opor tio na te lia bil ity pr ovi sio ns o f the P SL RA , if aparty is fo und lia

ble a s ac ontro lli ng p er son under section 20 (a), there is a newstandard for allocating dam ages. What has ch an ge d is not

the standard

of li ab ili ty that a ppl ie s to c ontro lli ng p er sons —the

“ Appl ic ab ili ty ” pr ovi sio n st at es that ha s no t be enm odi fi ed “ in any m an ne r” —bu t the ir r es pons ibi lity

a s li ab le pe rs ons fo r the dam ag es . T he pr opor tio na te li ab ili ty pr ovi sio ns o f se ct ion21( D )( f) a re appl ic ab le onl y a ft er li ab ili ty is de te rm ine d, a nd li ab il it y is go ve rn edby the st an da rdset ou t i n s ect io n 2 0( a). U n d e r th e n e ws t a tu t o ry r e g i me , ac o n t r o l l i n g p e r s o n i s l i ab l e t o th e s a me ex te nt a s th e co ntr oll ed

pe rs on, unl es s th e co ntr oll ing pe rs on a ff irm at ive ly
es ta bli she s th at

it a ct ed in good f ai th and d id n ot i nduc e the vio la tio n by the
co ntr oll ed

pe rs on. U nle ss the c ontro lli ng p er son carr ie s th e bur de n of e sta bli shi ng that a ff irm at ive de fe nse , it

is lia ble f or vio la tin g th e se curi tie s law , spe ci fi ca lly
se ct ion20( a)
. T he n, f

or the pur pose of de te rm ini ng whe the r the c ontro lli ng pe rs on i s r es pons ibl e fo r the e nti re a m ount of dam ag es or

onl y it s pr opor

tio na te2 3

share , w e loo k to the pr opor tio na te li ab ili ty

pr ovi sio ns o f the P SL RA , a s w e do f or al l “ co ve re d pe rs ons. ” U nde r the se pr ovi sio ns j oin t and s ev er al li ab ili ty f or a ll the da m ag es e xis ts o nly

if the f ac t f ind er spe ci fi ca lly

de te rm ine s th at

the c ontro lli ng person kno wingly

com m itted the vio lation. 15 U. S. C. § 78u -4(f) (2)(A ). Where a
co ntr oll ing pe rs on f

ai ls t o a ff irm at ive ly

e sta bli sh g ood fa itha nd l ac k of ind uc em en t un de r se ct ion20( a) but the f ac t f ind er doe s no t sp ec if

ic al ly f ind a know ing vio la tio n, the re is lia bil ity f or the vio la tio n bu t r es pons ibi lity f or the da m ag es is onl y

pr opor tio na te , not

j oin t and s ev er al
. 15 U . S. C. § 78 u4( f)(2 )(B) (i)
. Se ct ion20( a) pr ovi de s th e standard of li ab ili ty f or c ontro lli ng p er sons ; i f the y a re li ab le und er

that st an dard , the pr opor tio na te li ab ili ty

se ct ion s of

the PS L RApr ovi de the ir

r es pons ibi lity

f or dam ag es ; and the “ Appl ic ab ili ty ” se ct ion acts as a le vy

ensuring th at eac h of the two provision s stay s within its prop er ch an ne l, pr ev en tin g e ith er one f ro m w as hin g ou t the oth er . T he dis tin ct ion betwee n subs tantive liabili ty and allocation of dam ages is refle cted in the statutory langua ge , w hic h st at es that: “ A ny c ove re d pe rs on a ga ins t w hom af ina l j udgm en t is entered in a private ac tion sh all be lia ble for dam ages jo int lyand

se ve ral lyonl y if
. . . . ” 15 U
. S. C. § 78 u- 4( f) (2 )( A ) (e m pha sis a dde d)
. T ha t dam ag es langua ge is dif fe re nt f ro m the li ab ili ty

langua ge —“ lia

ble j oin tly

a nd s ev er al ly ”—

w hic h is2 4

used in section 20(a). The le gislativ e history

also bears this out. The report of the prim ary com m ittee that drafted the P SL RA indicates that this part of the A ct w as intended to a ddr es s th e pr obl em

of dam ag es be ing im

pose d j oin tly

a nd s ev er al ly

on those
w ho h ad not the m se lve s do ne a nythi ng wro ng. T he c om m itt ee he ar d f

ro m the president of the United Share hold ers A ssociation , who testified that “ in cases wher e there wa s no proo f of ac tual fraud ‘ [e] lim inating j oint andseveral lia bil ity
. . . w ill sig nif

ic an tly r ed uc e the num

be r of str ike sui ts b ro ught

a ga ins t defendants who have done not hing wr ong b ut are see n as having deep pockets.’ ” S. Rep . 10 4- 98 , at 2 2 (1 99 5) , as r ep rin te d in 199 5 U . S. C. C. A
. N . 679 , 701 (alteration andom issio n in origin al). Based on testim ony like that, and the need

“ to e lim inate unf

ai rn es s and t o r ec onc ile the c onf lic tin g in te re sts of

inv es tor s ina m anner designed to best protect the interests of all investors,” the c omm ittee “m o d i f i e [ d ] jo i n ta n ds e v e r a l l i ab i l i t y” t o “ i mp o s e [ ] f u l l jo i n ta n ds e v e r a l l i ab i l i t y, as under curre nt law, on all defendants who engage in kno wing securities fr aud.” Id
. ( em pha sis a dde d)
. H ow ev er , f or “ [d ] ef en dants w ho are f

ound li ab le but

w ho did no t engage in kno wing securities fr aud,” the c omm ittee intended that th ey wo u l db e “li ab l e o n l y fo r t h ei r s h ar e o f t h e ju d g m en t(b as ed up o n th e f ac tfi n d er ’s apportion m ent of responsibi lity ). ” Id
. T he c om

m itt ee r ep ort i s e nti re ly

c onsi ste nt2 5

with the plain language of the statute. Re ad ing se ct ion21( D )( f) to ex cl ude se ct ion20( a) c ontro lli ng p er sons f ro m the proportio nate liability provisio ns, as Appellants askus to do , w ouldlead to an unt en ab le r es ult
. I t w oul d m ak e it poss ibl e in s om e ci rc um stanc es f or the
co ntr oll ing pe rs on t o be he ld r es pons ibl e fo r m or e of the dam ag es c au se d by

the prim ary violator than th e prim ary violator itself. Consider the situation where both a controlling person and a controlled prim ary violator acted rec klesslyinstead of kno w ing ly
. T he f

orm er F if th C ir cu it in G
. A
. T

hom pson & Co
. he ld tha t the
co ntr oll ing pe rs on’ s r ec kle ssn es s m ak es it ine lig ibl e fo r the a ff

irm at ive de fe nse of go od fai th un de r se ct io n 2 0( a). See G
. A
. T hom pson & Co
. , 63 6 F .2dat 9 59 –6 0. Re ad ing se ct ion21( D )( f) a s Appe llants do t o e xc lud e se ct ion20( a) c ontro lli ng pe rs ons fr om

the pr opor

tio na te li ab ili ty

pr ovi sio ns, the r ec kle ss c ontro lli ng p er son would be responsib le j ointl y and severally

for dam ages even thoug h it didnot act knowingl y . The prim ary violator, however , w ouldescape j oint andseveral li ab il it y forda m ag es un de r se ct io n 2 1( D)(f) b ecau se itdi d n ot actkn owi ng ly. W e ought to avoid any

interpretation of the statute that would treat
co ntr oll ing pe rs ons m or e hars hly than th e pr im ar

y vio la tor —tha t w oul d pu t derivatively

liable controlling persons on the hookfor all dam ages, but let prim ary violato rs off the hook for any dam ages that their own ac tion d id not cause. T hat2 6

re sul t w oul d be c ontrary

to co m m on s en se , to w ha t the c om m itt ee that dr af

te d th e PS L RAsa id i t i nte nde d to do, a nd t o w ha t C ongr es s a ct ua lly did in the pla in la ng ua ge of t he PSLRA. CON CLU SION W e co nc lud e that se ct ion20( a) c ontro lli ng p er son lia bil ity sur viv es se ct ion 21(D)( f)’ s proportio nate liability schem e. T hose who would have been subs tantively

liable as controlling person und er sec tion 2 0(a) bef ore the PS LR

A
wa s enacted w ill be subs tantively liable after

its enactm ent. A ll that the PSL RA ha s c hange d f

or c ontro lli ng p er sons is the standard f or de ci din g w he the r the ir
re spon sib ili ty

f or dam ag es is j oin t and s ev er al or pr opor tio na te . D am ag es a re now al loc at ed ba se d onthe pr opor

tio na te li ab ili ty

pr ovi sio ns i n th e PS L RA , inc lud ing the provisi on that kn owing viol ators of the securities law s are “ liable for dam ages j oin tly a nd s ev er al ly
. ” T he dis tr ic t c ourt’ s or de r de ny ing Appe llants ’ m oti on t o str ike T or ch m ar

k’ s P SL RA -b as ed

a ff irm at ive de fe nse s is AF FIRMED .