18.11 Securities-Good Faith Defense to Controlling Person Liability is a legal defense that protects a controlling person from liability for the actions of other persons who are controlling or managing a company's securities. This defense is only applicable when the controlling person can prove that he or she acted in good faith and with reasonable care when they were making decisions related to the company's securities. This defense may also be used when the controlling person is accused of negligence in the management of the company's securities. There are two types of 18.11 Securities-Good Faith Defense to Controlling Person Liability: the business judgment rule defense and the due diligence defense. The business judgment rule defense applies when the controlling person can demonstrate that their decision was made in good faith and with the care of a reasonable person. The due diligence defense applies when the controlling person can demonstrate that they exercised reasonable care and diligence when making decisions related to the company's securities.
18.11 Securities-Good Faith Defense to Controlling Person Liability
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FAQ
SEC Rule 10b-5, states that it is illegal for any person to defraud or deceive someone, including through the misrepresentation of material information, with respect to the sale or purchase of a security.
Section 15 provides that the controlling person is liable unless they ?had no knowledge or reasonable ground to believe in the existence? of the fraud, whereas Section 20(a) provides that the controlling person is liable unless they ?acted in good faith and did not directly or indirectly induce? the fraud.
Section 20(a) of the Securities Exchange Act of 1934 provides that "controlling persons" can be vicariously liable for 10b-5 violations. See 15 U.S.C. § 78t(a) (discussing liability of controlling persons); 17 C.F.R.
Section 15 provides that the controlling person is liable unless they ?had no knowledge or reasonable ground to believe in the existence? of the fraud, whereas Section 20(a) provides that the controlling person is liable unless they ?acted in good faith and did not directly or indirectly induce? the fraud.
The SEC can prosecute issuers and sellers of unregistered securities. Under Section 20(b)can seek injunctions against the sale or issue of securities if the Securities Act has been violated, or if a violation is imminent.
Section 10(b) of the Securities Exchange Act of 1934 (as amended) (Exchange Act), which prohibits fraud in the purchase or sale of securities (15 U.S.C. § 78j(b)). Securities and Exchange Commission (SEC) Rule 10b-5, which contains the general, catch-all, anti-fraud provision of the federal securities laws (17 C.F.R.
Section 20(b) states, ?It shall be unlawful for any person, directly or indirectly, to do any act or thing which it would be unlawful for such person to do under the provisions of this chapter or any rule or regulation thereunder through or by means of any other person.? This provision does not contain the term ?make,?
Section 15 provides liability for any person: who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any per- son liable under section 11, or 12.