18.11 Securities—Good Faith Defense to Controlling Person Liability

The defendant [name] contends that [he] [she] [other pronoun] is not liable to the plaintiff [name] even if [he] [she] [other pronoun] was a controlling person because [he] [she] [other pronoun] did not induce the violation that led to the plaintiff [name]’s economic injury and [he] [she] [other pronoun] acted in good faith. The defendant [name] has the burden of proving each of the following two elements by a preponderance of the evidence:

First, the defendant [name] did not directly or indirectly induce the violation; and

Second, the defendant [name] acted in good faith.

The defendant [name] can prove good faith only by establishing that [he] [she] [other pronoun] maintained and enforced a reasonable and proper system of supervision and internal control.

If you find that the defendant [name] has proved each of these two elements, your verdict should be for the defendant [name]. If you find that the defendant [name] has failed to prove either of these elements (or both), your verdict should be for the plaintiff [name].

Comment

            See 15 U.S.C. § 78t(a) (Section 20(a) of the 1934 Act (providing that a “controlling person” is liable “unless [he] acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of aciotion”); Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1575-76 (9th Cir. 1990) (en banc) (holding that defendant has burden of establishing good faith).

Revised September 2024