Opinion ID: 691379
Heading Depth: 2
Heading Rank: 4

Heading: Weeden's due diligence defense

Text: 57 Weeden moved for summary judgment on its defense of due diligence to the Sec. 11 claims. To prevail on this defense at summary judgment, Weeden would have to show as a matter of law that, at the time of the registration statement, it had reasonable ground to believe and did believe, following a reasonable investigation, that the statements in the registration statement were true, that they omitted no required material fact, and that they contained all material facts necessary to ensure that statements in the registration statement were not misleading. 15 U.S.C. Sec. 77k(b)(3)(A). 58 The district court noted that material issues of fact remained on the due diligence defense, although the court granted the defendants' motion for summary judgment on other grounds. Because the district court found that the prospectus statements were not false, it did not decide the motion for summary judgment on Weeden's due diligence defense. Because the defense was not decided below, and is not fully argued to us on appeal, we do not address it here. 59 Therefore, we reverse the district court's grant of summary judgment on the Sec. 11 claims with respect to Statements 1 and 2; we find that there are genuine issues of material fact as to whether these statements were material and misleading. In addition, we find that there is a genuine issue of fact whether the omission of the study results was material. However, we uphold the district court's determination that there is no genuine issue of material fact as to whether Statement 3 was false, and affirm the grant of summary judgment with respect to that statement. Finally, we decline to address Weeden's due diligence defense. III. Kaplan's Sec. 10(b) claims 60 Kaplan alleges that Medstone violated Sec. 10(b) by making six post-prospectus statements, Statements 4-9, in Medstone's press releases, the Annual Report for 1988, and a research report prepared by Weeden. He also alleges that Statements 1-3 in the prospectus violated Sec. 10(b). 61 Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful to use any manipulative or deceptive device in connection with the purchase or sale of any security. 15 U.S.C. Sec. 78j(b) (1988). Rule 10b-5, a regulation issued under Sec. 10(b), makes it unlawful [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of all the circumstances under which they were made, not misleading. 17 C.F.R. Sec. 240.10b-5(b). 62 A projection or statement of belief is a factual misstatement actionable under Sec. 10(b) if (1) the statement is not actually believed, (2) there is no reasonable basis for the belief, or (3) the speaker is aware of undisclosed facts tending seriously to undermine the statement's accuracy. In re Wells Fargo Sec. Litig., 12 F.3d 922, 930 (9th Cir.1993), cert. denied, --- U.S. ----, 115 S.Ct. 295, 130 L.Ed.2d 209 (1994); In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir.1989), cert. denied, 496 U.S. 943, 110 S.Ct. 3229, 110 L.Ed.2d 676 (1990). A plaintiff under Sec. 10(b) must show reliance on the material misstatement, and scienter (an intent to defraud or deceive). See Hanon v. Dataproducts Corp., 976 F.2d 497, 506-07 (9th Cir.1992). 63 In a securities fraud action, [m]ateriality and scienter are both fact-specific issues which should ordinarily be left to the trier of fact, although summary judgment may be granted in appropriate cases. Apple, 886 F.2d at 1113. To survive summary judgment, a plaintiff in a securities fraud suit must show a genuine issue of material fact regarding a particular statement or statements by the defendant company or its insiders. Id. at 1118. A. Post-Prospectus Statements 64 Statements 4-9 contain optimistic pronouncements regarding Medstone's clinical trials for gallstone lithotripsy (4 and 8), the market demand for Medstone's machines (5, 6, and 9), Medstone's competitive position in the market (4), the volatility in its public stock prices (4), and its future success (6 and 7). The individual statements are as follows: 65 Statement 4. There is no fundamental reason for the recent volatility in the company's common stock.... Our gallstone investigations are progressing as expected and our competitive position remains strong. (November 11, 1988 Medstone press release) 66 Statement 5. We believe noninvasive lithotripsy procedures for the treatment of kidney stones and gallstones will rise from 100,000 in 1987 to at least one million annually in the U.S. by the mid-1990s. This procedural demand should support an installed base, increasing from 200 machines at present, to in excess of 2,000 units in the U.S. alone. (November 15, 1988 Weeden Research Report) 67 Statement 6. Demand for Medstone lithotripters is strong and growing. (November 15, 1988 Weeden Research Report) 68 Statement 7. 1988 was an excellent year for Medstone.... We achieved exceptional financial results during the year and believe our outlook is bright. (1988 Medstone Annual Report) 69 Statement 8. The U.S. Food and Drug Administration (FDA) granted us permission in January 1988 to commence clinical trials to determine the safety and effectiveness of the Medstone STS for the treatment of gallstones. Progress is excellent. (1988 Medstone Annual Report) 70 Statement 9. The financial results for the first quarter were below plan, but we see increased sales activity compared to the fourth quarter of 1988. The market is responding favorably to Medstone's Dual Imaging therapy system. (May 2, 1989, press release) 71 In granting Medstone's motion for summary judgment, the district court found that Kaplan failed as a matter of law to show reliance on any of the alleged misstatements because any material information Medstone had failed to disclose was made available to the market by other sources. The district court thus found that as a matter of law Medstone had not perpetrated a fraud on the market. We therefore first discuss the reliance element of the Sec. 10(b) analysis.
72 Rather than alleging specifically the class's reliance on the statements in buying Medstone stock, Kaplan brought his claim under the fraud on the market theory, endorsed by the Supreme Court in Basic, 485 U.S. at 245-49, 108 S.Ct. at 990-93, and described in detail in Apple, 886 F.2d at 1113-16. Under the fraud on the market theory, the plaintiff has the benefit of a presumption that he has indirectly relied on the alleged misstatement, by relying on the integrity of the stock price established by the market. Apple, 886 F.2d at 1113-14. Kaplan's claim is that Medstone's alleged misstatements misled the market, the price of the stock responded accordingly, the plaintiff class bought the stock in reliance on the integrity of the price, and the class later lost money when the true state of affairs became clear and the price of Medstone's stock fell. 73 If, however, the information that defendants are alleged to have withheld from or misrepresented to the market has entered the market through other channels, the market will not have been misled, and the stock price will reflect the full universe of information, despite the defendants' misrepresentations. Id. at 1114. In such a case the element of reliance will not be satisfied, and plaintiffs' claims based on a fraud on the market theory will fail. Id. at 1115. ([I]n a fraud on the market case, the defendant's failure to disclose material information may be excused where that information has been made credibly available to the market by other sources.). The information that the defendants withheld or misrepresented, however, must be transmitted to the public with a degree of intensity and credibility sufficient to effectively counterbalance any misleading impression created by the insiders' one-sided representations. Id. at 1116. 74 Because the fraud on the market theory affords Sec. 10(b) plaintiffs a presumption of reliance, Medstone has the burden of producing evidence to rebut the presumption. Basic, 485 U.S. at 245, 108 S.Ct. at 990-91; Fed.R.Evid. 301. To succeed at the summary judgment stage, Medstone's evidence must show that no rational jury could find for Kaplan on this issue. Hanon, 976 F.2d at 500. Our inquiry is whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S.Ct. 2505, 2512, 91 L.Ed.2d 202 (1986). 75 Kaplan alleged that Medstone's optimistic statements 4-9 misled the market and omitted negative information about the success of the clinical trials, the likelihood of FDA approval, the size of the future market for lithotripsy and Medstone's place in the market, and the safety and efficacy of gallstone lithotripsy. 76 As evidence that the omitted information was conveyed to the market, Medstone submitted sixty articles discussing kidney and gallstone lithotripsy and published during the class period to the district court. Numbers can be deceiving. Only fourteen articles discuss Medstone specifically. An additional eight mention the company only in passing. 77 Six of the seven articles discussing Medstone's clinical trials are generally positive about the success of the trials, with a few cautionary notes. None predicts the low rate of success actually achieved by Medstone's system. Only one of the seven articles reports less than optimistic data. That single article is a summary of Medstone's clinical study results in the American Journal of Surgery, released one month before the end of the class period, which reported that only 10% of the patients who contacted the researchers ultimately were found eligible for lithotripsy, and that only 36% of those were stone-free after six months. The article concludes that surgical removal of the gall bladder is the gold standard of gallstone treatment, and lithotripsy may or may not replace or sharply curtail surgery. Two articles discuss the much more successful German trials of the Dornier lithotripter on gallstones. 78 The likelihood of FDA approval is addressed in eight articles, almost all of which assume approval is likely to be granted. Only two articles, from two stock analyst reports in September and October 1989, just before the end of the class period, express serious reservations. These articles warn that FDA approval may be iffy, and there is a good chance ... that Medstone will not receive panel approval. (emphasis in original). 79 General market estimates for lithotripters appear in ten articles, again mostly positive. Four articles forecast an eventual 2000 machines in the United States, one projects 400 by 1991, and two are generally optimistic. Only the remaining three, appearing in the two months before the end of the class period in October 1989, acknowledge that the market had leveled off and that Medstone's sales had dropped. 80 Over twenty general articles discussed the size of the gallstone patient group eligible for lithotripsy in sources including the New England Journal of Medicine (two articles), stock analyst reports, Associated Press and other newswires, the Los Angeles Times, Reader's Digest, medical specialty and business journals, the Denver Post, the Pittsburgh Post Gazette, and USA Today. These articles, however, gave widely varying estimates of the eligible patient group, ranging from 10%-80%, with most in the 20%-30% range. 81 A smaller group of fourteen articles mentions side effects. Of these, five said side effects were few, two had to do with kidney lithotripsy only, and four report possible kidney damage. Subsequent articles minimized the possibility of serious side effects. 82 Viewing this evidence in the light most favorable to Kaplan, we conclude that a genuine issue of fact remains whether, during the majority of the class period, cautionary information about the results of Medstone's clinical trials, the likelihood of FDA approval, the size of the lithotripsy market and Medstone's share in it, and the safety and efficacy of gallstone lithotripsy was transmitted to the public with a degree of intensity and credibility sufficient to effectively counterbalance Medstone's allegedly misleading statements. Apple, 886 F.2d at 1116. The information available during all but the very end of the class period was generally optimistic about the success of the clinical trials, the size of the market, the likelihood of FDA approval, and the prospects of gallstone lithotripsy in general and of Medstone in particular. In contrast to the evidence found sufficient for summary judgment in Apple, 886 F.2d at 1111-12, 1116, the negative articles Medstone submitted are not as numerous as the at least twenty articles from such sources as Business Week and the Wall Street Journal, citing the specific problems with a new computer. In fact, a significant number of the Medstone articles came from obscure sources, and only a few mention any specific problems. See id. at 1116 (not enough to refute fraud on the market theory where the omitted information has received only brief mention in a few poorly-circulated or lightly-regarded publications). 83 We therefore hold that, for most of the class period, Medstone has failed to sustain its burden of establishing that no reasonable jury could find that the market was misled by its statements and omissions. [T]he total mix of information ... sufficiently gives rise to different interpretations as to whether the representations and/or omissions made by [Medstone] were materially misleading to the market. The impression that this mix of information conveyed cannot be resolved as a matter of law. Cooke v. Manufactured Homes, Inc., 998 F.2d 1256, 1262 (4th Cir.1993) (citation omitted). 84 We emphasize that we do not hold that Kaplan has established his theory. We find only that Medstone has not eliminated the possibility that a rational jury could find that the alleged misrepresentations and omissions misled the market. Our role is not to weigh the conflicting inferences to be drawn from the articles presented by Medstone. That is a function that is properly left to the finder of fact. 3 85 The end of the class period presents a different picture. About two months before the October 20, 1989 FDA rejection of Medstone's application (which marks the end of the class period), detailed negative articles began to appear in such major sources as the Los Angeles Times Orange County Edition, the American Journal of Surgery, and two stock analyst reports. In combination, these articles fully apprised the market of Medstone's business problems and falling sales, the limited success of the clinical trials, the small eligible patient group, the possible side effects, and the possibility that FDA approval would not be forthcoming. Kaplan cannot claim that the market was misled after this information became available. We therefore agree with the district court that summary judgment was proper as to claims accruing after the beginning of September 1989, when Medstone's clinical results were published. All of the submitted articles after that time warned of the problems Medstone faced. The pessimistic conclusions in the study report, in conjunction with the Los Angeles Times article detailing Medstone's business problems and the later stock analyst reports predicting FDA rejection, were sufficient as a matter of law to counter the market effect of Medstone's earlier optimistic statements. 86 We therefore find that the district court erred in granting Medstone summary judgment on the fraud on the market theory only for claims accruing prior to September 1989. This factual issue is best left to the jury. See Cooke, 998 F.2d at 1262 (claims based on fraud on the market theory are fact-specific and generally for the trier of fact to decide). We affirm the district court's grant of summary judgment for claims accruing in the period beginning in September 1989.
87 The district court also granted Medstone summary judgment on the scienter element of the Sec. 10(b) claims, finding that Kaplan failed to produce evidence that the defendants intended to deceive investors. 88 In order to prevail on his Sec. 10(b) claim, Kaplan must establish that the defendants made the allegedly misleading statements and omissions with scienter, a mental state embracing intent to deceive, manipulate or defraud. Hanon, 976 F.2d at 507. Kaplan must show actual knowledge or a recklessness that is only one step down from intent, 89 a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. 90 Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir.1990) (en banc) (as amended), cert. denied, 499 U.S. 976, 111 S.Ct. 1621, 113 L.Ed.2d 719 (1991) (citations and quotations omitted). 91 Medstone moved for summary judgment on the issue of scienter, and submitted sworn declarations from each individual defendant, each testifying that he believed in good faith that his challenged statements (including Statements 4-9) were true. Medstone also submitted declarations regarding actions Medstone took in 1988 and 1989, including moving its operations to a larger facility, hiring more employees, increasing its inventory, and entering into an international distribution agreement in late 1988; an internal memo written in June 1989 regarding a productive meeting with the FDA; and positive statements made by FDA personnel in the spring and summer of 1989, as evidence that Medstone had a good faith belief in the future success of its system. 92 Kaplan's opposition repeated his allegations that Medstone had made false statements, using as specific examples three statements not even properly before the court on this appeal. Kaplan's opposition incorporates his own motion for summary adjudication on his Sec. 10(b) claims, which asked for summary judgment on the issue of falsity only. He also referred the court to a declaration which was struck on a motion from Medstone. 93 Without the declaration, this portion of Kaplan's argument boils down to an assertion that These statements are so false that defendants must have known they were false and must have intended to mislead the public. Such an argument does not suffice to rebut the declarations of good faith made by the defendants. A plaintiff ... must offer more than conclusory allegations, and if the defendant presents affidavits or other evidence establishing a lack of scienter, the plaintiff must come forward with some affirmative showing. Vucinich v. Paine, Webber, Jackson & Curtis, Inc., 739 F.2d 1434, 1436 (9th Cir.1984) (per curiam). Kaplan, however, presented affirmative evidence as to several defendants. 94
95 Kaplan presented evidence that Payne, Medstone's CEO at the time of the public offering, sold two-thirds of his stock in the fall of 1988 for $6.5 million, and Penfil, Medstone's president, sold one-fourth of his stock at the same time for $2.4-2.5 million. These sales occurred as soon as was legally possible after the public offering in June 1988. Penfil then sold the rest of his stock for another $4.5 million in August of 1989, just before the publication of Medstone's clinical results. Kaplan alleged that these sales coincided with the anticipation that negative information about Medstone would surface. 96 Insider trading in suspicious amounts or at suspicious times is probative of bad faith and scienter. Apple, 886 F.2d at 1117. Payne and Penfil's stock sales, in conjunction with the allegations that they were aware of undisclosed negative information about Medstone, do raise suspicions about their intent, as they are massive sales at times alleged to have been calculated to avoid the negative effects of undisclosed inside information. See Apple, 886 F.2d at 1117 (cases basing scienter on insider trades have involved trades in amounts dramatically out of line with prior trading practices at times calculated to maximize personal benefit from undisclosed inside information). 97 Medstone cites Apple to support its argument that Payne and Penfil's affidavits providing innocent explanations of their stock sales are sufficient as a matter of law to prove that no scienter existed. Payne explained that he sold the stock in the fall of 1988 after he decided to resign as CEO, to reap the economic rewards for the significant effort and risk that I had invested in Medstone. Penfil explained that he and his family sold one-fourth of his stock in the fall of 1988 for the same reason as Penfil, and sold the remainder concurrent with his resignation in August of 1989 to ensure his financial security so he could spend more time with his family, and because he feared the possibility of hereditary early cancer. 98 In Apple, this court found that sales consistent with earlier patterns (and in much smaller amounts) did not create a genuine issue of fact regarding scienter in the face of credible and wholly innocent explanations for the sales. Apple, 886 F.2d at 1117. Apple does not apply here, however, for two reasons. First, these sales were not consistent with earlier patterns; they were in large amounts and at sensitive times. Second, Payne's and Penfil's explanations--that they wanted to reap financial benefits for personal reasons--merely beg the question of whether they acted on the basis of undisclosed inside information in order to reap large returns. Penfil's implication that he wanted to retire can even be read to support a finding of his scienter. 99 [If defendant's] motivation in selling his stock was to fund retirement activities, plaintiff would doubtless argue that the desire to sell the stock to fund retirement was an incentive for [the defendant] to cause the making of inflationary misstatements. Such an implication would give substance to the contention that the alleged misrepresentations and omissions were deliberate. 100 Goldman v. Belden, 754 F.2d 1059, 1071 (2d Cir.1985). 101 Viewing the evidence in the light most favorable to Kaplan, we find that the evidence of the stock sales was sufficient to create a genuine issue of material fact as to the scienter of Payne and Penfil, and through them Medstone. 102
103 Radlinski and Rose's affidavits present a different picture. Radlinski, Medstone's CFO, submitted affidavits stating that to the extent he made or participated in the statements alleged to be misleading in the prospectus and afterwards, he acted in the good faith belief that each of the statements ... [was] accurate and not misleading. He also stated that as to the statements made after the prospectus I did not believe I was omitting any material information, and I was not aware of any objective fact contradicting any of the statements. He also pointed out that he owned Medstone stock (he did not say how much) and had never sold any shares. 104 With his summary judgment motion, Rose (Medstone's CEO after Payne) submitted an affidavit stating that all the statements he made were true at the time and were made in good faith. He also stated that to his knowledge, all the information given to the public was true, and he never directed or induced anyone to make public statements that he knew were false or misleading. He stated that he owned approximately 101,000 shares of Medstone stock throughout the class period, and had never sold any. 105 Even viewing the evidence in the light most favorable to Kaplan, these affidavits, uncontradicted by any evidence of insider trading or other evidence of scienter, are enough to justify granting Radlinski and Rose summary judgment on the issue of their scienter. See Worlds of Wonder II, 35 F.3d at 1425 (affirming summary judgment finding good faith where officers held on to stock during period of decline); Apple, 886 F.2d at 1117 (statements of good faith in affidavits were uncontroverted for purposes of summary judgment when there was no evidence of suspicious stock sales); Bryson v. Royal Business Group, 763 F.2d 491, 494 (1st Cir.1985) (uncontradicted affidavit by CEO allows summary judgment on scienter). 106
107 Don Hill, the former Director of Corporate Finance of Weeden, also submitted an affidavit regarding Weeden's public statements following the offering. Hill's affidavit describes his reliance on the reports of the Wilkerson Group, a consulting firm, and his good faith in making any public statements about Medstone's market (including Statements 5 and 6, which appeared in a Weeden Research Report of November 15, 1988). He also purchased stock in Medstone just before the FDA denied approval in October 1989. 108 Hill is not named as an individual defendant, however, and his affidavit of personal good faith does not establish as a matter of law that Weeden lacked scienter. The district court cast some doubt on the reasonableness of Weeden's investigation and mentioned a possible conflict of interest in the context of Weeden's due diligence defense to the Sec. 11 claims. Hill apparently became a member of Medstone's board right after the public offering. Unresolved issues remain regarding the objectivity of Weeden's investigation and Hill's membership on Medstone's board at a time when Weeden purported to perform objective research. Given the conflicting evidence, this affidavit from a single Weeden officer does not establish Weeden's lack of scienter as a matter of law for its statements after the initial public offering.
109 Because it granted Medstone's summary judgment motion by finding as a matter of law that Medstone had rebutted Kaplan's presumption of reliance and that Kaplan had failed to establish scienter, the district court did not address the falsity of the post-prospectus statements made by Medstone after the initial public offering. The district court did address the falsity of the statements attributed to Rose, Statements 4, 8, and 9, and found they were not false. 110 We decline to address the falsity of any of the post-prospectus statements. Because we find that Kaplan produced no evidence that Rose or Radlinski had scienter, we find that summary judgment in their favor was appropriate on that ground. Further, as to the other defendants, Medstone's motion for summary judgment argued the issues of materiality and scienter, and the district court based its holding on those issues. On appeal, Medstone does not address the falsity of the post-prospectus statements, claiming that they are not properly before the court. We therefore do not decide the issue of the statements' falsity.
111 In a Sec. 10(b) action, an omitted fact is material if a reasonable investor would have been misled about the nature of an investment in Medstone, VeriFone, 11 F.3d at 869, because there is  'a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.'  Basic, 485 U.S. at 231-32, 108 S.Ct. at 983 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1986)). 112 The parties' summary judgment papers and the district court's opinion, however, discuss materiality as if it were determined by whether the omitted information were credibly available to the market through other sources. Their discussion combines the fraud on the market theory of establishing reliance with the analysis of an individual statement's materiality. The two inquiries are closely related but not identical. A plaintiff who shows reliance under the theory that the market relied on a misrepresentation or omission must also establish materiality by showing that a reasonable shareholder would consider the misrepresentation or omission important, because it altered the total mix of available information. 113 The district court thus did not fully address the materiality of Statements 4-9. We therefore do not address it here. We note, however, that this issue is fact-specific and usually left to the fact-finder. See Basic, 485 U.S. at 239-41, 108 S.Ct. at 987-89; TSC Indus., 426 U.S. at 450, 96 S.Ct. at 2133 (materiality is mixed question of law and fact generally not properly resolved on summary judgment). 114 Therefore, as regards Kaplan's Sec. 10(b) claims for Statements 4-9, we find that there is a material issue of fact as to reliance prior to September 1989. Moreover, there are material issues of fact regarding the scienter of Medstone, Payne, Penfil, and Weeden. Thus, we reverse the district court's grant of summary judgment for those defendants prior to September 1989. However, summary judgment was appropriate for any Sec. 10(b) claims after that date. In addition, we affirm summary judgment for Rose and Radlinsky, as there is no genuine issue of material fact regarding their scienter. B. The prospectus statements 115 The district court granted summary judgment to Medstone on Kaplan's claim that Statements 1-3 in the prospectus violated Sec. 10(b), finding that Kaplan had failed to show any evidence of scienter. Because we find that Kaplan presented a material question of fact regarding the scienter of Payne, Penfil, and Weeden, and because we find above that there is a material question of fact whether Statements 1 and 2 in the prospectus were false and material, we find that there is a material question of fact whether Medstone, Payne, Penfil, and Weeden violated Sec. 10(b) in making Statements 1 and 2 in the prospectus. 4 IV. Rose as a control person of Medstone 116 Kaplan does not argue on appeal that Freeman Rose is liable under Sec. 11 for false or misleading statements made in the prospectus. (At the time of the offering, Rose was not a director of Medstone, and he did not sign the registration statement.) We hold above that there was no material question of fact concerning Rose's lack of scienter in regard to statements made after the initial public offering, and so summary judgment on Rose's liability under Sec. 10(b) for his own public statements was appropriate. 117 In addition to the summary judgment rulings on Kaplan's Sec. 11 and Sec. 10(b) claims, Kaplan also appeals the district court's holding that Rose was not secondarily liable for allegedly misleading statements made by the other defendants. Although Rose's position as CEO and his participation in the day-to-day affairs of the company were evidence that he exercised control over the other defendants, the court concluded that Rose was not a controlling person subject to liability for the statements of others because Kaplan ha[d] not provided any evidence to support the contention that Rose was a culpable participant in the violations allegedly perpetrated by the other defendants. 118 Section 20(a) of the 1934 Securities Exchange Act provides: 119 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. 120 15 U.S.C. Sec. 78t(a) (1988). 121 Whether Rose 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. Arthur Children's Trust v. Keim, 994 F.2d 1390, 1396-97 (9th Cir.1993). A director is not automatically liable as a controlling person, although director status is a red light to the court. Id. (quotations omitted). 122 Rose was Medstone's CEO and a member of Medstone's board of directors during almost the entire class period. Kaplan also alleged Rose's significant participation in day-to-day activities at Medstone. Although Rose's status as an officer and director may not per se establish that he controlled the other defendants, his participation in the daily affairs of a relatively small company such as Medstone suffices to establish a material question of fact whether he was a controlling person. See id. Viewing the evidence in the light most favorable to Kaplan, we find that Kaplan alleged enough to survive summary judgment on Rose's status as a controlling person. 123 Rose relies on a line of cases holding that the plaintiff had the burden of showing that the defendant alleged to be a controlling person did not come within the good faith exception, thus requiring the plaintiff to show that the defendant had been a culpable, knowing participant in the misstatements. See, e.g., Orloff v. Allman, 819 F.2d 904, 906-07 (9th Cir.1987). By a subsequent en banc decision, however, we have established that it is the alleged controlling person who has the burden of showing that he acted in good faith, and so did not share in the scienter required for liability under Sec. 10(b). Hollinger, 914 F.2d at 1575. See also Arthur, 994 F.2d at 1398; San Mateo County Transit Dist. v. Dearman, Fitzgerald and Roberts, Inc., 979 F.2d 1356, 1358 (9th Cir.1992). Therefore, once Kaplan has shown a material question of fact whether Rose was a controlling person, the burden shifts to Rose to show as a matter of law that he acted in good faith. 124 Rose has met his burden. To establish his good faith, Rose submitted an affidavit in support of defendants' motion for summary judgment, stating that [d]uring the time I was employed by Medstone, I never directed or induced anyone to make any public statements on behalf of or regarding Medstone which I knew to be false or misleading. Rose also stated: To my knowledge, all information released to the public was done entirely in good faith, was supported by fact, and was true. Kaplan points to no evidence disputing Rose's declaration of innocence. 125 Because an uncontradicted declaration of good faith can establish a lack of scienter, see Apple, 886 F.2d at 1117, Rose's uncontroverted statement that he never directed anyone to make statements that he knew to be misleading, and that to his knowledge all the information made public was true, is enough to shield him from secondary liability. Summary judgment was properly granted to Rose under Sec. 20(a). 126 V. Res judicata dismissal of Kramer's action 127 Kramer argues that her complaint was improperly dismissed as res judicata, because the Kramer complaint contained allegations that did not appear in Kaplan. Those allegations were the allegedly misleading Statements 10-13, which Kaplan attempted to add to his complaint at the summary judgment phase. Kramer argues that the district court cannot find that the statements did not appear in Kaplan and yet dismiss them as res judicata in Kramer. 128 We need not address this argument. Because we reverse in part the grant of summary judgment to Medstone, the judgment that was the basis for res judicata is reversed. Kramer's Sec. 10(b) claims will thus be reinstated, except to the extent we affirm the district court's grant of summary judgment in favor of Medstone as to all Sec. 10(b) claims against Rose and Radlinski, and in favor of Rose on the claims based on secondary liability.