Opinion ID: 201697
Heading Depth: 1
Heading Rank: 3

Heading: Pertinent Elements of Plaintiffs' Claims

Text: 7 The three different statutory bases of the claims under the Exchange Act — § 10(b) and Rule 10b-5 promulgated thereunder (Rule 10b-5), § 20(a), and § 18 — rest on slightly different theories and thus have different elements, especially with respect to a plaintiff's need to plead and prove that the defendant acted with a specified state of mind. These differences have a significant effect on this appeal. A summary of the elements of these three claims, to the extent pertinent to this dispute, is as follows. 8 The Supreme Court has described the basic elements of a claim under Rule 10b-5 as including: (1) a material misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation. See Dura Pharm., Inc. v. Broudo, ___ U.S. ___, 125 S.Ct. 1627, 1631, 161 L.Ed.2d 577 (2005) (emphasis removed); see also Wortley v. Camplin, 333 F.3d 284, 294 (1st Cir.2003); Geffon v. Micrion Corp., 249 F.3d 29, 34 (1st Cir.2001). To prove scienter, a plaintiff must show either that the defendant[] consciously intended to defraud, or that they acted with a high degree of recklessness. Aldridge v. A.T. Cross Corp., 284 F.3d 72, 82 (1st Cir.2002). 9 To succeed on a claim under § 18, 1 that statute appears to require a plaintiff to plead and prove that (i) the defendant made a false or misleading statement, (ii) the statement was contained in a document filed pursuant to the Exchange Act or any rule or regulation thereunder, (iii) reliance on the false statement, and (iv) resulting loss to the plaintiff. 2 Under this statute, unlike Rule 10b-5, a plaintiff bears no burden of proving that the defendant acted with any particular state of mind. See Magna Invest. Corp. v. John Does One Through Two Hundred, 931 F.2d 38, 39-40 (11th Cir.1991). The state of mind with which the defendant acted enters the case instead as a defense. The statute provides that the defendant can rebut liability by proving that he acted in good faith and had no knowledge that such statement was false or misleading.... See 15 U.S.C. § 78r(a). 10 Section 20(a) asserts the liability of persons exercising control for violations of law by a controlled entity. 3 Smith and Langford are alleged to have exercised control over S & W, and therefore to share liability for S & W's violations of Rule 10b-5. The elements of § 20(a) are generally stated to be (i) an underlying violation of the same chapter of the securities laws by the controlled entity, here S & W; and (ii) control of the primary violator by the defendant. See 15 U.S.C. § 78t(a); see also Aldridge, 284 F.3d at 84-85. 11 As with § 18, and once again unlike Rule 10b-5, § 20(a) does not on its face obligate the plaintiff to plead or prove scienter (or any other state of mind) on the part of the controlling persons named as a defendant. 4 Instead, the burden is shifted. The defendant can rebut liability by proving that he or she acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action. See 15 U.S.C. § 78t(a). 12