Opinion ID: 768466
Heading Depth: 3
Heading Rank: 4

Heading: Controlling Person Liability and Insider Trading

Text: 41 The plaintiffs bring claims against the individual defendants both as controlling persons of the corporation and as individual insider traders. Because plaintiffs fail to state a claim against the corporation they also fail to state a claim against the individual defendants as controlling persons. See Comshare, 183 F.3d at 554 n.11. In order for plaintiffs' claim of insider trading to stand against the individual defendants, plaintiffs must allege that the defendants had knowledge of non-public information that they utilized in a manipulative and deceptive manner. See 15 U.S.C. § 78j(b) (West 1997). Plaintiffs' only allegations attributing inside information to the defendants concern the internal memorandum discussing the potential effects of the Balanced Budget Act. The individual defendants, like the corporation, did not know whether the Balanced Budget Act would be passed; thus, they cannot be held liable for actions alleged to be taken in reliance on the passage of the Balanced Budget Act. Because the plaintiffs do not allege that the individual defendants had inside information stating that the Balanced Budget Act would pass they fail to state a claim against the individual defendants who sold their stock prior to the passage of the legislation. 15 In addition, the internal memorandum upon which the plaintiffs rely states that further study is needed to make an accurate assessment of the effects of the Act on the corporation. We do not believe that this memorandum provided those defendants who sold their stock after the passage of the Act with inside information. 16 While plaintiffs' allegations may establish motive and opportunity, they are insufficient to demonstrate a strong inference of the individual defendant's use of inside information deceptively.