Securities — Issue of First Impression — Proportionate Liability Regime of PSLRA Does Not Affect Scope of Control Person Liability

The issue in LaPerriere v. Vesta Ins. Group, 2008 U.S. App. LEXIS 9300 (11th Cir. April 30, 2008), an interlocutory appeal, was whether or to what extent the proportionate liability scheme of regime of the Private Securities Litigation Reform Act (§ 21(D)(f) of the Securities Exchange Act of 1934, 15 U.S.C. § 78u-4(f)), amends section 20(a) of the Act, under which a person who controls a violator of the Act is "liable jointly and severally with and to the same extent" as that violator. Held, control person liability unaffected:

Under section 21(D)(f), a controlling person is liable jointly and severally for the entirety of plaintiffs' damages only if it commits a knowing violation of the Act. Section 20(a) exposes a controlling person who cannot prove the affirmative defense provided in that section to derivative liability for the acts of its controlled person. For the reasons explained below, we do not interpret section 21(D)(f) as "trumping" a controlling person's derivative liability under section 20(a). Recognizing that implicit repeals of statutory provisions are disfavored, we hold that section 21(D)(f) and section 20(a) should be read in harmony to preserve both the PSLRA's proportionate liability scheme and a controlling person's derivative liability under section 20(a).

The reasoning:

Given that section 21(D)(f) states that it applies to "any covered person," which plainly includes a controlling person covered under section 20(a), we read section 21(D)(f) as applying to section 20(a) controlling person liability. We next address the question of whether the PSLRA amends the joint and several liability provisions of section 20(a). It does not.

We know that section 21(D)(f) does not amend controlling person liability under section 20(a) because the PSLRA tell us so. The text under section 21(D)(f)'s "Applicability" heading, provides that: "Nothing in this subsection shall be construed to create, affect, or in any manner modify, the standard for liability associated with any action arising under the securities laws." 15 U.S.C. § 78u-4(f)(1). In other words, nothing in the proportionate liability provisions of the PSLRA displaces in any way the "standard of liability" created by the Securities Exchange Act, including section 20(a) controlling person liability.

Conclusion:

Those who would have been substantively liable as controlling person under section 20(a) before the PSLRA was enacted will be substantively liable after its enactment. All that the PSLRA has changed for controlling persons is the standard for deciding whether their responsibility for damages is joint and several or proportionate. Damages are now allocated based on the proportionate liability provisions in the PSLRA, including the provision that knowing violators of the securities laws are "liable for damages jointly and severally."

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