Opinion ID: 219549
Heading Depth: 3
Heading Rank: 2

Heading: The Section 20(a) claim for control person liability

Text: The SEC asserts that there are genuine issues of material fact as to whether Weitzen was a control person for purposes of finding liability under Section 20(a) of the Act, 15 U.S.C. § 78t(a). It also maintains that the district court erred in ruling that Weitzen met his burden of establishing a good-faith defense of relying on others, and that he did not induce fraud when he reported misleading information about Gateway's financial condition. We agree. We conclude that there is a genuine issue of material fact concerning Weitzen's control over Gateway. Moreover, because Weitzen substantially participated in the preparation of the press release, his knowledge that he misrepresented the nature of the one-time transactions vitiates his good-faith-reliance defense at the summary judgment stage of this litigation. The Act 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). Accordingly, under Section 20(a), a defendant may be liable for securities violations if (1) there is a violation of the Act and (2) the defendant directly or indirectly controls any person liable for the violation. Howard v. Everex Sys., Inc., 228 F.3d 1057, 1065 (9th Cir. 2000). [4] The definition of person under the Act encompasses a company, 15 U.S.C. § 78c(a)(9), rendering Gateway the violator at issue here, as discussed supra. However, even if a securities violation occurs, there is no liability if the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation. 15 U.S.C. § 78t(a). The burden is on the defendant to show that both requirements of the good-faith exception are met. Howard, 228 F.3d at 1065 ([A] defendant is entitled to a good faith defense if he can show no scienter and an effective lack of participation.). When determining control person status, the issue is whether the defendant exercised power or control over the primary violator, and the plaintiff need not show that the defendant was a culpable participant in the violation. Howard, 228 F.3d at 1065. Whether [the defendant] is a controlling person is an intensely factual question, involving scrutiny of the defendant's participation in the day-to-day affairs of the corporation and the defendant's power to control corporate actions. Kaplan v. Rose, 49 F.3d 1363, 1382 (9th Cir.1994) (citation and internal quotation marks omitted). The fact that a person is a CEO or other high-ranking officer within a company does not create a presumption that he or she is a controlling person. Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1163 (9th Cir.1996). Rather, indicia of control include whether the person managed the company on a day-to-day basis and was involved in the formulation of financial statements, which is sufficient to presume control over the `transactions giving rise to the alleged securities violation.' Howard, 228 F.3d at 1065 (citing Wool v. Tandem Computers Inc., 818 F.2d 1433, 1441 (9th Cir.1987)). Moreover, actual authority over the preparation and presentation to the public of financial statements is sufficient to demonstrate control. Howard, 228 F.3d at 1066. Here, there is sufficient evidence to create a genuine issue of fact as to whether Weitzen was properly considered a control person within the meaning of the statute. According to Gateway's bylaws, Weitzen, as president and CEO, had general management and control of the business and the officers and the employees of the Company. He had day-to-day control of the company, and could veto any plan or strategy. He was responsible for Gateway's financial reporting. Weitzen also signed the management representation letter to PwC confirming the 10-Q report. Additionally, Weitzen substantially assisted in preparing the press release that reported the results from the third quarter, including the unusual Lockheed and AOL transactions. Moreover, Weitzen does not meet his burden of showing that he is entitled to a good-faith defense. To be eligible for the defense, Weitzen must demonstrate that he acted in good faith based on an absence of scienter, and did not directly or indirectly induce the act or acts constituting the violation. 15 U.S.C. § 78t(a); Paracor, 96 F.3d at 1164. Here, there is a genuine issue of material fact as to whether Weitzen acted in good faith. As discussed supra, there is evidence that Weitzen acted with at least recklessness, or scienter, when he reported the Lockheed and AOL transactions as accelerated growth. This precludes his ability to rely on the good-faith defense to defeat summary judgment. [5] See Howard, 228 F.3d at 1065. We are further persuaded that there is a genuine issue of material fact whether Weitzen indirectly induced fraud, thereby precluding him from using the good-faith defense to defeat summary judgment. The SEC, relying on Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424 (9th Cir.1995), argues that Weitzen induced fraud when he substantially participated in the press release that reported the unusual and one-time Lockheed and VenServ transactions. Under our case law, these facts are sufficient to vitiate Weitzen's defense at the summary judgment stage. In Nordstrom, we held that officers and directors could be liable under Section 20(a) when they authorized misleading public disclosures, press releases, and statements to the press that were allegedly fraudulent. Id. at 1434. We further concluded that the good-faith defense is unavailable even when the defendants who induced the fraud believed in good faith that they were not perpetrating a fraud. Id. Here, not only is there evidence of Weitzen's scienter, but he engaged in disseminating misleading information to the public regarding Gateway's purported financial health in the third quarter of 2000. Accordingly, we conclude that there is a genuine issue of material fact as to whether Weitzen is a control person under Section 20(a), and that summary judgment on this claim was inappropriate. We further conclude that Weitzen's good-faith defense fails at the summary judgment stage.