Opinion ID: 628267
Heading Depth: 3
Heading Rank: 1

Heading: Controlling Person

Text: 21 Sections 15 of the 1933 Act 13 and 20 of the 1934 Act 14 impose liability on controlling persons for securities violations committed by those under their control. Appellants maintain that material fact issues remain concerning Home and Graham's liability as controlling persons. As discussed infra, we have no ruling by the district court of an underlying securities violation and thus assume a violation for purposes of our analysis. 22 The parties disagree on the elements for a prima facie case under Secs. 15 and 20. 15 Specifically, appellants take issue with Home and Graham's assertion, based on G.A. Thompson & Co., Inc. v. Partridge, 636 F.2d 945 (5th Cir.1981), and Schlifke v. Seafirst Corp., 866 F.2d 935, 949 (7th Cir.1989), that this circuit has adopted the two part test of Metge v. Baehler, 762 F.2d 621 (8th Cir.1985), cert. denied, Metge v. Bankers Trust Co., 474 U.S. 1057, 106 S.Ct. 798, 88 L.Ed.2d 774 (1986). 23 In Thompson, our court held that an officer and director, who owned 24% of the company, and was apparently involved in the day-to-day coordination of loan gathering, 16 had the requisite power to directly or indirectly control or influence corporate policy, and, thus, was a controlling party. 636 F.2d at 958. In so doing, our court rejected the contention that actual participation in the transaction underlying the violation was a prerequisite for a prima facie case, noting that [l]ack of participation and good faith constitute an affirmative defense. Id. At the same time, it noted that our precedent was ambiguous on whether 'effective day-to-day control' is required, and, without deciding the issue, noted that the evidence established sufficient day-to-day control. Id. at 958 n. 24. 24 In Metge, the Eighth Circuit subsequently established a two-prong test for a prima facie case for controlling person liability: (1) that the defendant [ ] actually participated in (i.e. exercised control over) the operations of the corporation in general; and (2) that the defendant possessed the power to control the specific transaction or activity upon which the primary violation is predicated, but [plaintiff] need not prove that this later power was exercised. 762 F.2d at 631 (internal quotations omitted) (emphasis in original). 17 The court cited Thompson only as support for its rejection of a  'culpable participation' requirement, which requires a showing that [the defendant] actually participated in the alleged violation. Id. at 631. 25 It is clear that Thompson did not definitively address prong one of the Metge test, i.e. a required showing that the defendant exercised control over the general operations of the wrongdoer; nor did it adopt the two prong Metge test, as urged by appellees in reliance on the Seventh Circuit's opinion in Schlifke, 866 F.2d at 949; and, conversely, Metge did not cite Thompson as support for its formulation of prong one (only, as stated supra, as support for prong two). 26 Thus, the law is somewhat more unsettled as to prong one than Home and Graham would have it. Our decision in Dennis v. General Imaging, Inc., 918 F.2d 496 (5th Cir.1990), however, provides some guidance on that narrow ground. There we adopted a district court opinion, which interpreted Thompson as requiring a plaintiff, for a prima facie case, to show actual power or influence over the controlled person. 18 Id. at 509. 27 Dennis is consistent with Metge to the extent that both require a separate showing of control over the controlled entity (Equity); but appellants insist that our circuit only requires that they show Home and Graham's power to control Equity, not the actual exercise of that power. We need not presently analyze the above distinction because, even assuming that only the former applies, a reasonable jury could not so find based on the record before us. 28 According to the affidavits of John MacGregor (assistant vice president of Home), and Glick (Graham), neither Home nor Graham nor their respective employees and representatives were stockholders, directors, officers, employees, or partners of Equity; they did not attend its board or committee meetings; they were not involved in decisions by Equity to purchase properties for syndications to investors; they were not involved in operations of properties purchased by Equity or its affiliates; and they were not otherwise involved in the general operations of Equity, including business, financial and marketing plans. 29 Appellants fail to contradict these statements with evidence of Home and Graham's power to control the general affairs of Equity. Graham's involvement with the issuance of financial guarantee bonds for other Equity projects, 19 and correspondence reflecting that Equity kept Graham informed of the status of the Courtside offering, as well as others, do not indicate that Graham had such power, even assuming its participation in such discussions. 30 Appellants' remaining evidence is less persuasive, as it narrowly relates to Home and Graham's involvement in the Courtside transaction. 20 Although appellants make much of Home and Graham's influence over the formation of the E-C partnerships, see infra, and the statement in an internal Graham memo (dated March 6, 1986) from Thomas Pine to Glick that, [w]ithout Home, Courtside wouldn't have been done, this evidence is not probative of Home and Graham's influence beyond the Courtside transaction. Accordingly, summary judgment on this claim was proper.