Congress enacted the securities laws to protect the integrity of financial markets.  The plaintiff claims to have suffered a loss caused by the defendant’s violation of certain of these laws.

            There are terms concerning securities laws that have a specific legal meaning.  The following definitions apply throughout these instructions, unless noted otherwise.

            [A security is an investment of money in a commercial, financial, or other business enterprise, with the expectation of profit or other gain produced by the efforts of others. Some common types of securities are [stocks,] [bonds,] [debentures,] [warrants,] [and] [investment contracts].]

            The buying and selling of securities is controlled by the Securities Laws. Many of these laws are administered by the United States Securities and Exchange Commission (SEC).

            A “10b-5 Claim” is a claim brought under a federal statute, Section 10(b) of the Securities Exchange Act of 1934, which prohibits acts of deception in connection with the purchase or sale of a security and in violation of rules and regulations that the SEC has the duty and power to issue.  A corresponding SEC Rule, Rule 10b-5, prohibits the misrepresentation of material facts and the omission of material facts in connection with the purchase or sale of securities.  A person or business entity who violates the securities laws, including Rule 10b-5, may be liable for damages caused by the violation. 

            [A misrepresentation is a statement of material fact that is false or misleading when it is made. [A statement may be misleading even if it is literally true if the context in which the statement was made caused the listener or reader to remain unaware of the actual state of affairs.]]

            [An omission is a failure to disclose a material fact that needed to be disclosed to prevent other statements that were made from being misleading.]

            [A broker buys and sells securities for clients, usually for a commission.  A broker can also be a dealer.]

            [A dealer buys securities and resells them to clients.  A dealer also can be a broker.]

            [A controlling person is [an individual who] [a company that] possesses the power to direct the management or policies of a business enterprise or of another person involved in the management or policymaking of the enterprise.  A broker or a dealer may be a controlling person.]

            [“In connection with” means that there was some relationship, or  nexus, between the allegedly fraudulent conduct and the [sale] [purchase] of the securities. [The defendant’s conduct may be in connection with a purchase or sale of a security even if the defendant did not actually participate in any securities transaction.]]

            An instrumentality of interstate commerce includes the postal mails, e-mails, telephone, telegraph, telefax, interstate highway system, Internet and similar methods of communication and travel from one state to another within the United States. 

Comment

            “Materiality” is defined in Instruction 18.3. 

            “Knowingly” and “recklessly” are defined in Instruction 18.5. 

            Whether a specific financial instrument qualifies as a security can be a threshold issue. SEC v. Hui Feng, 935 F.3d 721, 728-729 (9th Cir. 2019). This includes “investment contracts.” The Supreme Court’s decision in Howey and later case law hold that an “investment contract” exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. See SEC v. W.J. Howey Co., 328 U.S. 298-99 (1946); United Housing Fund., Inc. v. Forman, 421 U.S. 837, 851-852 (1975). Courts applying Howey “conduct an objective inquiry into the character of the instrument or transaction offered based on what the purchasers were ‘led to expect,’” including an analysis of the promotional materials associated with the transaction. Hui Feng, 935 F.3d at 729.

            A statement of opinion does not constitute an “untrue statement of material fact” simply because the stated opinion ultimately proves incorrect. Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 575 U.S. 175, 176 (2015). For example, a statement that is merely aspirational—such as a corporate code of conduct—generally is not actionable because it cannot be said to be false. See Retail Wholesale & Dep’t Store Union Local 338 Retirement Fund v. Hewlett-Packard Co., 845 F.3d 1268, 1275-76 (9th Cir. 2017). But an opinion is actionable as a false statement if the speaker does not sincerely hold the view or belief expressed regarding the material representation or if the opinion contains a material, verifiable statement of fact that is untrue. Omnicare, 575 U.S. at 183-85. Further, an opinion may be actionable if the speaker omits material facts necessary to make the opinion not misleading. Id. at 185-91. When the omission of a fact, taken in its full context, makes an opinion misleading to a reasonable investor, securities law “creates liability only for the omission of material facts that cannot be squared with such a fair reading.” Id. at 190-91. Although Omnicare was decided under § 11 of the Securities Act of 1933, the Ninth Circuit has clarified that the pleading requirements set forth in Omnicare apply to claims under § 10(b) of the 1934 Act and Rule 10b-5. City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 616 (9th Cir. 2017); see also In re Alphabet, Inc. Sec. Litig., 1 F.4th 687, 699 (9th Cir. 2021); Glazer Cap. Mgmt. v. Forescout Techs., Inc., 63 F.4th 747, 764, 771, 779 (9th Cir. 2023) (applying Omnicare in the context of § 10(b) and Rule 10b-5 claims); In re Cloudera, 121 F.4th 1180, 1187-89 (9th Cir. 2024) (explaining that “cloud-related” terminology, such as “cloud-native,” “native public cloud services,” and “hybrid cloud,” in the allegedly false statements was not pleaded with particularity because the “terms lack[ed] a plain or ordinary meaning,” and the plaintiff failed to plead facts supporting his definitions of the terms).

             As to “omissions,” the Supreme Court has held that Rule 10b-5 is violated by nondisclosure only when there is a duty to disclose. See Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988) (“Silence, absent a duty to disclose, is not misleading under Rule 10b-5.”). There is a duty to disclose “when necessary ‘to make . . . statements made, in the light of the circumstances under which they were made, not misleading.’” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011) (citing 17 C.F.R. § 240.10b-5(b)); see also Hanon v. Dataproducts Corp., 976 F.2d 497, 504 (9th Cir. 1992) (“Rule 10b-5 imposes a duty to disclose material facts that are necessary to make disclosed statements, whether mandatory or volunteered, not misleading”). In addition, the Supreme Court has stated that “[p]ure omissions are not actionable under Rule 10b-5(b).” Macquarie Infrastructure Corp. v. Moab Partners, 601 U.S. 257, 260, 264 (2024) (holding that the failure to disclose information that Item 303 of SEC Regulation S-K requires be provided in periodic public filings does not, by itself, support a private action under Rule 10b-5(b); that rule prohibits only misrepresenting material facts and omitting material facts that are necessary to make the statements that are made not misleading).

            A duty of disclosure also may arise when the parties have “a fiduciary or agency relationship, prior dealings or circumstances such that one party has placed trust and confidence in the other.” Paracor Fin., Inc. v. Gen. Electric Capital Corp., 96 F.3d 1151, 1157 (9th Cir. 1996) (citations and internal quotation marks omitted) (holding that a financer of a leveraged buyout of a corporation did not have a duty to disclose material information regarding the corporation to investors in the corporation’s debentures). A notable example of Rule 10b-5 liability for material omissions arising out of a fiduciary relationship is insider trading. See Chiarella v. United States, 445 U.S. 222, 228 (1980) (recognizing that insider trading is actionable under Section 10(b) because “a relationship of trust and confidence [exists] between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation”). It bears emphasis, however, that a trust relationship is not essential to establishing liability for failure to disclose under Rule 10b-5; a defendant can assume a duty to disclose by “affirmatively tell[ing] a misleading half-truth about a material fact to a potential investor[,] . . . independent of any responsibilities arising from a trust relationship.” United States v. Laurienti, 611 F.3d 530, 541 (9th Cir. 2010).

            Regarding “brokers,” the Ninth Circuit has used the totality-of-the-circumstances approach. See Hui Feng, 935 F.3d at 731-31. In determining if an individual acted as a broker, courts may consider whether that individual: 

            (1) is an employee of the issuer of the security;

            (2) received transaction-based income such as commissions rather than a salary;

            (3) sells or sold securities from other issuers;

            (4) was involved in negotiations between issuers and investors;

            (5) advertis[ed] for clients;

            (6) gave advice or made valuations regarding the investment;

            (7) was an active finder of investors; and

            (8) regularly participates in securities transactions. 

Id.

            Regarding “controlling persons,” see Section 20(a) of the 1934 Act, 15 U.S.C. § 78f(a). See also No. 84 Employer-Teamster Joint Council Pension Trust Fund v. America West Holding Corp., 320 F.3d 920, 945 (9th Cir. 2003) (discussing controlling person liability). 

            Regarding the phrase “in connection with,” the Ninth Circuit has noted:
 

To show a Rule 10b-5 violation, a private plaintiff must prove a “causal connection between a defendant’s misrepresentation and [the] plaintiff’s injury[,]” . . . a proximate relationship between the plaintiff’s injury and the purchase or sale of a security[,] . . . [and] a connection between the defendant’s alleged misrepresentation and the security at issue. 

Levine v. Diamanthuset, Inc., 950 F.2d 1478, 1485-86 (9th Cir. 1991) (citations omitted) (first alteration in original). A defendant need not, however, have participated in any securities transaction so long as that defendant was engaged in fraudulent conduct that was “in connection with” a purchase or sale. See Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 12 (1971) (holding that fraudulent conduct is “in connection with” a purchase or sale if the alleged fraudulent conduct is “touching” the securities transaction). 

            Regarding the phrase “instrumentality of interstate commerce,” it is not necessary that interstate mailings, interstate telephone calls, or other interstate use of instrumentalities of interstate commerce be proved; intrastate use of such instrumentalities of interstate commerce is sufficient to satisfy the jurisdictional requirements. Spilker v. Shayne Labs., Inc., 520 F.2d 523, 526 (9th Cir. 1975).

Revised March 2025

           The plaintiff alleges that the defendant defrauded [him] [her] [other pronoun] [it] by [describe the plaintiff’s “10b-5” claim]. This is referred to as “the plaintiff’s 10b-5 claim.”

            To succeed on this claim, the plaintiff has the burden of proving each of the following five elements by a preponderance of the evidence:
 

First, the defendant [made an untrue statement of a material fact] [omitted a material fact necessary under the circumstances to keep the statements that were made from being misleading] in connection with the [purchase] [sale] of securities;

Second, the defendant acted [knowingly] [knowingly or recklessly] [recklessly];

Third, I defendant [used] [caused the use of] [an instrumentality of interstate commerce, such as mail, telephone, or internet] [a facility of a national securities exchange] in connection with the [purchase] [sale] of securities, regardless of whether the [instrumentality] [facility] itself was used to make an untrue statement or a material omission;

FourtIhe plaintiff justifiably relied on [the defendant’s untrue statement of a material fact] [the defendant’s omission to state a necessary material fact] in [buying] [selling] securities; and

FiftIhe defendant’s [misrepresentation] [omission] caused the plaintiff to suffer damages. 

            If you find that the plaintiff has proved each of these elements, your verdict should be for the plaintiff. If, on the other hand, you find that the plaintiff has failed to prove any of these elements, your verdict should be for the defendant. 

Comment 

            See Retail Wholesale & Dep’t Store Union Local 338 Retirement Fund v. Hewlett-Packard Co., 845 F.3d 1268, 1274 (9th Cir. 2017) (listing elements of claim). 

            See Instruction 18.1 (Securities—Purpose and Definitions) for definitions of “security,” “10b-5 claim,” “misrepresentation,” “omission,” “in connection with,” and “instrumentality of interstate commerce.” National security exchanges include the New York Stock Exchange and the NASDAQ Stock Market. 

            See 15 U.S.C. § 78j(b) (making it unlawful to use deceptive device in connection with purchase or sale of security) and 17 C.F.R. § 240.10b-5 (making it unlawful to use device to defraud, to make untrue statement or omission of material fact, or to engage in fraudulent act in connection with purchase or sale of security). In Gray v. First Winthrop Corp., 82 F.3d 877, 884 (9th Cir. 1996), the Ninth Circuit confirmed that the elements described in this instruction are required to prove a 10b-5 claim. 

            A defendant “makes” a statement if the defendant has ultimate authority over the statement, including its content and whether and how to communicate it. Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011). A plaintiff must show that a defendant had control over the statement; a defendant’s significant involvement in the preparation of a prospectus containing an untrue or misleading statement is not enough to show that the defendant “made” that statement. Id. 

            A defendant also may be liable if the defendant disseminates a false statement with the intent to defraud.  Lorenzo v. S.E.C., 587 U.S. 71, 74 (2019). Where a defendant does not “make” a statement but disseminates information that is “understood to contain material untruths,” such conduct can fall within the scope of a 10b-5 claim. Id. at 78; see also id. at 81 (“[U]sing false representations to induce the purchase of securities would seem a paradigmatic example of securities fraud.”).

Before 2017, these instructions phrased the fourth element as requiring that “the plaintiff reasonably relied” on the misrepresentation. Several Ninth Circuit cases, however, use the phrase “justifiable reliance.” See Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 950 (9th Cir. 2005) (“If [Plaintiff] justifiably relied on Defendants’ misrepresentation about the stock sale and, in turn, bought [company] stock based on this reliance, it incurred damages from Defendants’ fraud”); Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir. 1999); Gray, 82 F.3d at 884.

Revised September 2024

            The plaintiff must prove by a preponderance of the evidence that the defendant’s misrepresentation or omission was material.A factual representation concerning a security is material if there is a substantial likelihood a reasonable investor would consider the fact important in deciding whether to buy or sell that security.An omission concerning a security is material if a reasonable investor would have regarded what was not disclosed to [him] [her] [it] as having significantly altered the total mix of information [he] [she] [it] took into account in deciding whether to buy or sell the security.

            You must decide whether something was material based on the circumstances as they existed at the time of the statement or omission. 

Comment 

            In Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988), the Supreme Court adopted the standard for materiality developed in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976), (whether a reasonable shareholder would “consider it important” or whether the fact would have “assumed actual significance”) as the standard for actions under 15 U.S.C. § 78j(b). The Ninth Circuit describes this standard as “objective materiality.” In re Alphabet, Inc. Sec. Litig., 1 F.4th 687, 705 (9th Cir. 2021).

In discussing materiality, the Ninth Circuit has applied TSC Industries and Basic Inc. in various formulations. See, e.g., SEC v. Hui Feng, 935 F.3d 721, 736 (9th Cir. 2019) (applying TSC materiality test); Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 946-48 (9th Cir. 2005) (applying Basic Inc. materiality test); No. 84 Emp’r-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 934 (9th Cir. 2003) (declining to adopt bright line rule for materiality that would require immediate change in stock price and instead engaging in “fact-specific inquiry” under Basic Inc.); In re Stac Electrs. Sec. Litig., 89 F.3d 1399, 1408 (9th Cir. 1996) (applying test of whether there was substantial likelihood that omitted fact would have been viewed by reasonable investor as having significantly altered “total mix” of information made available); Kaplan v. Rose, 49 F.3d 1363, 1371 (9th Cir. 1994) (applying test of whether omission or misrepresentation would have misled reasonable investor about nature of his or her investment); McGonigle v. Combs, 968 F.2d 810, 817 (9th Cir. 1992) (applying test of whether there was substantial likelihood that, under all the circumstances, omitted fact would have assumed actual significance in deliberations of reasonable shareholder); see also In re Atossa Genetics Inc. Sec. Litig., 868 F.3d 784, 795-96 (9th Cir. 2017) (discussing relationship between materiality and reliance and noting that “materiality” may be different when plaintiff alleges direct reliance on misrepresentation, rather than fraud-on-the-market theory).For a discussion of the distinction between mere puffery, which is not material, and a statement that is materially misleading, see In re Quality Systems, Inc. Sec. Litig., 865 F.3d 1130, 1143-44 (9th Cir. 2017). See also In re Sorrento Therapeutics, Inc. Sec. Litig., 97 F.4th 634, 641 (9th Cir. 2024) (concluding that a biopharmaceutical company’s statements regarding a promising cure for COVID-19 was simply enthusiasm and corporate optimism rather than materially misleading).In evaluating materiality, courts may consider SEC interpretive guidance. See In re Alphabet, Inc. Sec. Litig., 1 F.4th at 700.The Ninth Circuit has held that stock price movements are relevant to reliance, and not to materiality. See Retail Wholesale & Dep’t Store Union Local 338 Retirement Fund v. Hewlett-Packard Co., 845 F.3d 1268, 1277 (9th Cir. 2017).

The Ninth Circuit has also held that when plaintiffs make claims about the effect of highly technical information on investment decisions, they must provide enough context to make clear why investors would find one set of technical information meaningfully different from another set of technical information. See In re Nektar Therapeutics Securities Litigation, 34 F.4th 828, 837 (9th Cir. 2022). 

Revised September 2024

           In considering whether the defendant [made an untrue statement of a material fact] [omitted a material fact necessary under the circumstances to keep the statements that were made from being misleading], you must distinguish between statements of fact and what the law calls “forward-looking statements.”  

            A prediction, projection, or other forward-looking statement, even if ultimately proven incorrect, generally is not statement of fact. Instead, it is merely a forecast about what may or may not occur in the future. 

            A prediction, projection, or other forward-looking statement may constitute a basis for a violation of Rule 10b-5 only if the plaintiff proves by a preponderance of the evidence that, at the time the forward-looking statement was made, (1) the defendant did not actually believe the statement, (2) there was no reasonable basis for the defendant to believe the statement, or (3) the defendant was aware of undisclosed facts tending to seriously undermine the accuracy of the statement. 

Comment 

           This instruction addresses “forward-looking statements” that fall outside the coverage of the safe harbor afforded to forward-looking statements by the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-5(c). The PSLRA’s safe harbor has several exclusions. For example, the safe harbor does not apply to statements contained in audited financial statements, nor does it apply to various other categories of statements, such as statements made in connection with a going private transaction, a tender offer, or an initial public offering. See generally 15 U.S.C. § 78u-5(b). When the PSLRA’s safe harbor does not apply, background judicial doctrines may nonetheless govern whether a statement of opinion or a statement accompanied by cautionary language is actionable under Rule 10b-5. See, e.g., Retail Wholesale & Dep’t Store Union Local 338 Retirement Fund v. Hewlett-Packard Co., 845 F.3d 1268, 1275-76 (9th Cir. 2017) (concluding that aspirational statements were not capable of being false); Inre Oracle Corp. Sec. Litig., 627 F.3d 376, 388 & n.2 (9th Cir. 2010) (applying materiality test to forward-looking statements when PSLRA safe harbor did not apply); In re Cutera Sec. Litig., 610 F.3d 1103, 1111 (9th Cir. 2010) (holding that “vague statements of optimism” are not actionable); Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 947 (9th Cir. 2005) (applying the “bespeaks caution” doctrine). 

            The term “forward-looking statements” refers generally to management projections of future economic performance, such as sales, revenues, or earnings per share forecasts. In the context of the PSLRA safe harbor, the term means “any statement regarding (1) financial projections, (2) plans and objectives of management for future operations, (3) future economic performance, or (4) the assumptions ‘underlying or related to’ any of these issues.” No. 84 Empl’r-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 936 (9th Cir. 2003) (quoting 15 U.S.C. § 78u-5(I)). 

            The Ninth Circuit has held that “transparently aspirational statements, as well as statements of ‘mere corporate puffery, vague statements of optimism . . . or other feel-good monikers’ are generally not actionable as a matter of law” unless the statements “provide [a] concrete description of the past and present that affirmatively create[s] a plausibly misleading impression of a state of affairs that differed in a material way from the one that actually existed.” In re Alphabet, Inc. Sec. Litig., 1 F.4th 687, 700 (9th Cir. 2021). 

            When a defendant makes mixed statements containing both non-forward-looking statements as well as forward-looking statements, the non-forward-looking statements are not protected by the safe harbor of the PSLRA. In re Quality Systems, Inc. Sec. Litig., 865 F.3d 1130, 1146-48 (9th Cir. 2017). 

            Regarding forward-looking statements that are not expressly protected under the PSLRA safe harbor, the Ninth Circuit has stated that such statements are potentially actionable under the theory that “[a] projection or statement of belief contains at least three implicit factual assertions: (1) that the statement is genuinely believed, (2) that there is a reasonable basis for that belief, and (3) that the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement.” In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir. 1989); see also In re Oracle, 627 F.3d at 388; Provenz v. Miller, 102 F.3d 1478, 1487 (9th Cir. 1996); Hanon v. Dataproducts Corp., 976 F.2d 497, 501 (9th Cir. 1992). Accordingly, “[f]or a forward-looking statement . . . to constitute a material misrepresentation giving rise to Section 10(b) or Rule 10b‑5 liability, a plaintiff must prove either ‘(1) the statement is not actually believed [by the speaker], (2) there is no reasonable basis for the belief, or (3) the speaker is aware of undisclosed facts tending seriously to undermine the statement’s accuracy.’” In re Oracle, 627 F.3d at 388 (quoting Provenz, 102 F.3d at 1487) (alteration in original). “The fact that [a] forecast turn[s] out to be incorrect does not retroactively make it a misrepresentation.” Id. at 389. “Risk disclosures that ‘speak [] entirely of as-yet-unrealized risks and contingencies’ and do not ‘alert [] the reader that some of these risks may already have come to fruition’ can mislead reasonable investors.” In re Alphabet, Inc. Sec. Litig., 1 F.4th at 703. 

            A forward-looking statement that is not affirmatively exempted from the safe harbor’s coverage under 15 U.S.C. § 78u-5(c), is afforded safe harbor protection “if it is forward-looking and either is accompanied by meaningful cautionary language or is made without actual knowledge that it is false or misleading.” Wochos v. Tesla, Inc., 985 F.3d 1180, 1190 (9th Cir. 2021) (quoting Quality Systems, 865 F.3d at 1141). 

            Regarding the first category, the PSLRA provides a safe harbor for identified forward-looking statements that are “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement[s].” 15 U.S.C. § 78u-5(c)(A)(i); see also id. § 78u-5(c)(2) (providing a conditional safe harbor for oral forward-looking statements). This prong of the PSLRA safe harbor codifies principles underlying the “bespeaks caution” doctrine. See Empl’rs Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Clorox Co., 353 F.3d 1125, 1132 (9th Cir. 2004). This instruction does not address the bespeaks caution doctrine because application of that doctrine is typically not a question for the jury. See id. (“The bespeaks caution doctrine provides a mechanism by which a court can rule as a matter of law [typically in a motion to dismiss for failure to state a cause of action or a motion for summary judgment] that defendants’ forward-looking representations contained enough cautionary language or risk disclosure to protect the defendant against claims of securities fraud.”) (alteration in original) (quoting In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1413-15 (9th Cir. 1994)) (internal quotation marks omitted). 

            Regarding the second category, the PSLRA provides a safe harbor for forward-looking statements that the speaker believed were true. See 15 U.S.C. § 78u-5(c)(1)(B). To avoid application of the safe harbor under this category, “plaintiffs must prove that ‘forward-looking’ statements were made with ‘actual knowledge’ that they were false or misleading.” In re Daou Sys., Inc., Sec. Litig., 411 F.3d 1006, 1021 (9th Cir. 2005) (quoting In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 993 (1999) (Browning, J., concurring in part and dissenting in part)).  By contrast, if the statement is not covered by the PSLRA safe harbor, “[t]he requisite state of mind, at a minimum, is deliberate or conscious recklessness.” Empl’rs Teamsters, 353 F.3d at 1134. 

            There also is a third statutory safe harbor, which is not mentioned in this instruction. This third safe harbor exculpates any forward-looking statement that is “immaterial.” See 15 U.S.C. § 78u‑5(c)(1)(A)(ii). It is not referred to in this instruction because “materiality” already is an express element of the claim (see Instruction 18.2, first element) and is defined separately (see Instruction 18.3).

Revised Sepember 2024

           [A defendant acts knowingly when [he] [she] [it] makes an untrue statement with the knowledge that the statement was false or with reckless disregard for whether the statement was true.] [A defendant acts knowingly when [he] [she] [it] omits necessary information with the knowledge that the omission would make the statement false or misleading or with reckless disregard for whether the omission would make the statement false or misleading.]

[“Reckless” means highly unreasonable conduct that is an extreme departure from ordinary care, presenting a danger of misleading investors, which is either known to the defendant or is so obvious that the defendant must have been aware of it.]                     

Comment

            This instruction addresses the element of “scienter,” which was developed in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, reh’g denied, 425 U.S. 986 (1976). In Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir. 1978), the court held that Congress intended Section 10(b) to reach both knowing and reckless conduct, and it interpreted the Ernst & Ernst decision as merely eliminating negligence as a basis for liability.

In the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 109 Stat. 737, Congress added “[e]xacting pleading requirements,” among other things, as a “check against abusive litigation.” Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 313 (2007). For pleading purposes, a plaintiff must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Id. at 314 (quoting 15 U.S.C. § 78u–4(b)(2)). In Webb v. SolarCity Corp., 884 F.3d 844, 851 (9th Cir. 2018), the Ninth Circuit explained that the scienter standard requires facts demonstrating an intent to deceive, manipulate or defraud, or “deliberate recklessness.” The court defined “deliberate recklessness” as “an extreme departure from the standards of ordinary care, which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.” Id. (brackets, emphasis, and citation omitted); see also Glazer Cap. Mgmt. v. Forescout Techs., Inc., 63 F.4th 747,765 (9th Cir. 2023) (stating that deliberate recklessness “is a higher standard than mere recklessness and requires more than a motive to commit fraud,” and “only satisfies scienter under § 10(b) to the extent that it reflects some degree of intentional or conscious misconduct” (citation omitted)). See also Espy v. J2 Global, Inc., 99 F. 4th 527, 536-37 (9th Cir. 2024) (declining to hold that the complaint alleged facts giving rise to a strong inference of scienter where the “majority of [two witnesses’] statements fail to establish reliability or personal knowledge, or simply amount to criticisms of [the defendant’s] management practices and compensation structures,” and which, “even if . . . reliable,” were “simply negative opinions of [the defendant] . . . not statements which are themselves indicative of scienter”) (internal citations omitted)).

The PSLRA entitles a defendant in any private action arising under Rule 10b-5 to require the court to submit a written interrogatory to the jury regarding each defendant’s state of mind at the time of the alleged violation of the securities laws. 15 U.S.C. § 78u-4(d). For a discussion of when a corporate officer’s scienter can be imputed to a corporation, particularly if that officer also defrauds the corporation, see In re ChinaCast Education Corp. Securities Litigation, 809 F.3d 471 (9th Cir. 2015). 

Revised September 2024

            The plaintiff must prove by a preponderance of the evidence that [he] [she] [other pronoun] [it] justifiably relied on the alleged misrepresentation or omission in deciding to engage in the [purchase] [sale] of the [security] [securities] in question. The plaintiff may not intentionally close [his] [her] [other pronoun] [its] eyes and refuse to investigate the circumstances or disregard known or obvious risks.

Comment            

            Use this instruction unless the plaintiff relies on a fraud-on-the-market theory, in which case Instruction 18.7 (Securities—Justifiable Reliance—Fraud-on-the-Market Case) should be used. Even in a fraud-on-the-market theory case, however, this instruction may become applicable if the jury finds that the defendant rebutted the presumption of reliance on the market. 

            The element of “reliance [is] often referred to in cases involving public securities markets . . . as transaction causation.” Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341 (2005). 

            In Atari Corp. v. Ernst & Whinney, 981 F.2d 1025, 1030 (9th Cir. 1992), the court held that an investor cannot claim reliance on a misrepresentation if the investor already possessed information sufficient to call the representation into question. 

            A rebuttable presumption of reliance is deemed to arise when the fraud involves a material omission. Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54 (1972). In a “mixed case of misstatements and omissions,” the presumption will only apply if the case primarily alleges omissions. Binder v. Gillespie, 184 F.3d 1059, 1063-64 (9th Cir. 1999) (involving a case resolved on summary judgment). At trial, the court may resolve whether the presumption is applicable after considering the evidence. 

            To provide guidance to jurors required to determine whether the plaintiff’s reliance was justifiable, the judge may consider adding the following to this instruction: 

            In deciding whether a plaintiff justifiably relied on the defendant’s alleged misrepresentation[s] or omission[s,] you may consider evidence of:

1.         whether the plaintiff was sophisticated and experienced in financial and securities matters;

2.         whether the plaintiff and the defendant had a long-standing business or personal relationship, or a relationship in which the defendant owed a duty to the plaintiff to not interfere with or adversely affect the plaintiff’s interests;

3.         whether the plaintiff ignored or refused to investigate the circumstances surrounding the transaction;

4.         whether the plaintiff disregarded risks so obvious that they should have been known or risks so great as to make it highly probable that harm would follow;

5.         whether the defendant concealed the fraud;

6.         whether the plaintiff had access to the relevant material information;

7.         whether the misrepresentation was general or specific;

8.         whether the plaintiff initiated or sought to expedite the transaction;

9.         whether the defendant prepared or provided to the plaintiff materials that contained adequate warnings about the risks associated with the investment or adequate disclaimers describing limitations on the scope of the defendant’s representations or the defendant’s involvement; and

10.       any other evidence you find helpful in deciding whether the plaintiff justifiably relied on the defendant’s misrepresentation[s] or omission[s]. 

            For out-of-circuit cases listing these factors, see, e.g., Brown v. E.F. Hutton Grp., Inc., 991 F.2d 1020, 1032 (2d Cir. 1993); Davidson v. Wilson, 973 F.2d 1391, 1400 (8th Cir. 1992); Myers v. Finkle, 950 F.2d 165, 167 (4th Cir. 1991); Jackvony v. RIHT Fin. Corp., 873 F.2d 411, 416 (1st Cir. 1989); Bruschi v. Brown, 876 F.2d 1526, 1529 (11th Cir. 1989); Zobrist v. Coal-X, Inc., 708 F.2d 1511, 1518-19 (10th Cir. 1983). 

            To establish that a defendant adequately warned the plaintiff of the attendant risks in a transaction, the defendant’s disclosures must have been precise and relate directly to what the plaintiff alleges was misleading. See In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1414-15 (9th Cir. 1994).

Revised September 2024

            The plaintiff does not have to prove that [he] [she] [other pronoun] [it] justifiably relied on the alleged misrepresentation or omission in deciding to [purchase] [sell] the [security] [securities] in question if [he] [she] [other pronoun] [it] proves by a preponderance of the evidence that there was an active, open market in the [security] [securities] at the time of the transaction[s] in question. An “active, open market” means that there were a large number of traders, a high level of activity, and frequent trades, such that the price of the security immediately reflects all publicly available information. 

            If you find that the plaintiff has proved by a preponderance of the evidence that (1) an active, open market for the [security] [securities] existed at the time of the transaction[s] in question and (2) investors reasonably relied on that market as an accurate reflection of the current market value of the [security] [securities], you may find that the plaintiff has proved that [he] [she] [other pronoun] [it] justifiably relied on the defendant’s statements. 

            If, however, the defendant proves by a preponderance of the evidence either that (1) the plaintiff did not actually rely on the integrity of the market or (2) the alleged misrepresentation or omission did not affect the market price of the security, then the defendant has rebutted any presumption that the plaintiff relied on the market. In that event, the plaintiff must then prove that [he] [she] [other pronoun] [it] justifiably relied directly on the alleged misrepresentation or omission. 

Comment            

            Use this instruction when a theory of fraud on the market is involved. That theory is based on the premise that when persons buy or sell publicly-traded shares, they rely on the marketplace to ensure the integrity of the price, to the extent that price is a consideration in their decision. Basic Inc. v. Levinson, 485 U.S. 224, 245-49 (1988); see also Halliburton v. Erica P. John Fund, Inc., 573 U.S. 258, 271 (2014) (affirming Basic’s holding that “the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations”). Under the theory, a presumption of reliance is established “by demonstrating that a security is actively traded in an ‘efficient market,’ in which prices immediately reflect all publicly available information.” Miller v. Thane Int’l, Inc., 615 F.3d 1095, 1103 (9th Cir. 2010). As explained by the Ninth Circuit, Cammer v. Bloom, 711 F. Supp. 1264, 1286-87 (D.N.J. 1989), “outlined a test for market efficiency in the context of a section 10(b) securities fraud class action.” Miller, 615 F.3d at 1102; see also id. at 1103 (noting that the Cammer test “was developed in support of [the fraud-on-the-market] presumption” and “is not appropriate for assessing loss causation”). The Ninth Circuit in Miller observed that “Cammer sets out five well-recognized factors ‘designed to help make the central determination of efficiency in a particular market.’” Id. (quoting Binder v. Gillespie, 184 F.3d 1059, 1065 (9th Cir. 1999)). These factors are (1) whether the stock trades at a high weekly volume, (2) whether securities analysts follow and report on the stock, (3) whether the stock has market makers and arbitrageurs, (4) whether the company is eligible to file SEC registration form S-3, and (5) whether there are empirical facts showing a cause-and-effect relationship between new information about the corporation and an immediate response in the stock price. Binder, 184 F.3d at 1065. 

            When the plaintiff demonstrates market efficiency, the law presumes that the market itself has factored in relevant information and the plaintiff need not prove that he or she individually or the class of purchasers whom the plaintiff seeks to represent relied on the statements or omissions on which the action is based. In re Convergent Techs. Sec. Litig., 948 F.2d 507, 512 n.2 (9th Cir. 1991) (holding that in fraud-on-the-market case, plaintiff need not show actual reliance on misrepresentation or omission; instead, plaintiff must show reliance on integrity of price established by market, which was in turn influenced by misleading information or omission of information). However, the defendant may rebut evidence giving rise to the presumption of reliance. In re Apple Computer Sec. Litig.,886 F.2d 1109, 1115 (9th Cir. 1989).  The defendant may do so in a variety of ways too numerous to list here, and always dependent on the facts of the given case. In general, however, to rebut the presumption of reliance the defendant must show that there was no link between the plaintiff’s decision to trade at a fair market price and the alleged misrepresentation or omission. See Basic Inc., 485 U.S. at 248; see also Kaplan v. Rose, 49 F.3d 1363, 1376 (9th Cir. 1994) (holding that presumption can be rebutted by showing that information tending to refute misrepresentation had entered market through other channels). Even if some information was “out there,” however, corporate insiders “are not relieved of their duty to disclose material information when the information has received only brief mention in a few poorly-circulated, lightly-regarded publications.” In re Apple Computer, 886 F.2d at 1116. 

            If the jury finds in a fraud-on-the-market case that the defendant rebutted the presumption of reliance, use Instruction 18.6 (Securities—Justifiable Reliance—Generally) to instruct the jury on what the plaintiff must prove. 

            The Ninth Circuit has recognized that “[t]he burden of pleading loss causation is typically satisfied by allegations that the defendant revealed the truth through ‘corrective disclosures” which ‘caused the company's stock price to drop and investors to lose money.’” Lloyd v. CVB Financial Corp., 811 F.3d 1200, 1209 (9th Cir. 2016) (quoting Halliburton Co. v. Erica. P. John Fund, Inc., 573 U.S. at 264). “[T]he ultimate issue is whether the defendant’s misstatement, as opposed to some other fact, foreseeably caused the plaintiff's loss.” Id. at 1210. Although a defendant’s announcement of a government investigation does not, without more, qualify as a corrective disclosure, such an announcement can form the basis for a viable loss causation theory if accompanied by a subsequent corrective disclosure by the defendant. Id. Thus, in Lloyd, the Ninth Circuit concluded that the following allegations adequately pleaded loss causation: (1) the defendant disclosed that it had received a subpoena from the Securities and Exchange Commission, causing its stock price to drop 22 percent, (2) the market and analysts viewed the subpoena as related to the defendant's alleged earlier misrepresentations that there was no reason for “serious doubts” about a major borrower’s ability to repay loans issued by the defendant, (3) the market’s fears about the subpoena were confirmed when the defendant made a subsequent disclosure that it was writing off the bulk of the loans and classifying the remainder as nonperforming, and (4) the subsequent disclosure had a minimal effect on the defendant’s stock price, indicating that the earlier 22 percent drop reflected the market’s concern about the loans. Id. 

            In a case in which a plaintiff alleges a fraud-on-the-market theory, the definition of “materiality” may be different than when a plaintiff alleges direct reliance on a misrepresentation. See In re Atossa Genetics Inc. Sec. Litig., 868 F.3d 784, 795-96 (9th Cir. 2017). 

 Revised September 2024

            The plaintiff must prove by a preponderance of the evidence that the alleged material misrepresentations or omissions were the cause of [his] [her] [its] economic injury. To establish economic injury or loss, the plaintiff must prove that the alleged misrepresentation[s] or omission[s] artificially inflated the price of the security. To establish causation, the plaintiff must prove that the alleged misrepresentation[s] or omission[s] played a substantial part in causing the injury or loss the plaintiff suffered. The plaintiff need not prove that the alleged misrepresentation[s] or omission[s] [was] [were] the sole cause of the economic injuries.

Comment            

            The Private Securities Litigation Reform Act of 1995 ("PSLRA") imposed the requirement that a private plaintiff prove that the defendant’s fraud caused an economic loss. 15 U.S.C. § 78u-4(b)(4). This element of causation has been referred to as “‘loss causation,’ i.e., a causal connection between the material misrepresentation and the loss.” Dura Pharms., Inc. v. Broudo,544U.S. 336, 342 (2005); see also In re Genius Brands Int’l, Inc. Sec. Litig., 97 F.4th 1171, 1183 (9th Cir. 2024) (“[I]n the end, loss causation is simply a variant of proximate cause, [and] the ultimate issue is whether the defendant’s misstatement, as opposed to some other fact, foreseeably caused the plaintiff’s loss.”). In Dura, the Supreme Court held that the PSLRA “makes clear Congress’ intent to permit private securities fraud actions for recovery where, but only where, plaintiffs adequately allege and prove the traditional elements of causation and loss.” Id. at 346. The Supreme Court reversed the Court of Appeals’ ruling that a plaintiff may establish loss causation if the plaintiff merely shows that the price paid on the date of purchase was inflated because of the defendant’s misrepresentation. The Supreme Court held that a plaintiff’s mere purchase of stock at an inflated price is not sufficient to establish loss causation for a number of reasons, such as that at the moment of purchase the plaintiff has suffered no loss because the inflated price paid is offset by the value of the shares he or she acquired, which at that instant possess equivalent market value. Also, the purchaser could later sell those shares at a profit. Conversely, if the price drops, the cause of the decline could be attributable to a host of factors other than that the stock price previously had been inflated as a result of the defendant’s misrepresentation or omission. The Court held that under the plaintiff’s theory of liability, the complaint failed adequately to allege causation because it did not allege that the defendant corporation’s share price fell significantly after the truth became known, did not specify the relevant economic loss, and did not describe the causal connection between that loss and the misrepresentation. Id. at 346-48. 

Still, the Ninth Circuit has held that “loss causation begins with the allegation that the defendant’s misstatements (or other fraudulent conduct) artificially inflated the price at which the plaintiff purchased [the] share.” In re BofI Holding, Inc. Sec. Litig., 977 F.3d 781, 789 (9th Cir. 2020). In Genius Brands, the court emphasized that initial price inflation and initial price increase are not the same and that while a price increase following the fraudulent conduct is one way to demonstrate that the price is higher than it would have been, it is not the only way. Genius Brands, 97 F.4th at 1185. Indeed, as the court noted, inflation can be shown by plausibly alleging that the price remained stable but would have gone down if the misstatement had not been made. Id. Similarly, where the price dropped, a plaintiff can allege that the drop would have been more significant had the misstatement not been made. Id. In either case, the court explained, “the plaintiff would plausibly allege that the stock’s price was higher ‘than it would have been had the false statements not been made,’ even though the misstatements did not increase the stock’s price.” Id. (quoting BofI Holding, 977 F.3d at 789).

The Ninth Circuit has stated that “[t]ypically, ‘to satisfy the loss causation requirement, the plaintiff must show that the revelation of that misrepresentation or omission was a substantial factor in causing a decline in the security’s price, thus creating an actual economic loss for the plaintiff.’” Nuveen Mun. High Income Opportunity Fund v. City of Alameda, 730 F.3d 1111, 1119 (9th Cir. 2013) (quoting McCabe v. Ernst & Young, LLP, 494 F.3d 418, 425-26 (3d Cir. 2007)). While “an outright admission of fraud” is not required, “a mere ‘risk’ or ‘potential’ for fraud is insufficient to establish loss causation.” Loos v. Immersion Corp., 762 F.3d 880, 888-89 (9th Cir. 2014) (quoting Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1064 (9th Cir. 2008) (holding that revelation of investigation, on its own, amounts only to notice of potential disclosure of fraudulent conduct and thus does not satisfy causation element of § 10(b) and Rule 10b-5 claims). However, “[d]isclosure of the fraud is not a sine qua non of loss causation, which may be shown even where the alleged fraud is not necessarily revealed prior to the economic loss.” Nuveen, 730 F.3d at 1120. Accordingly, “a plaintiff can satisfy loss causation by showing that ‘the defendant misrepresented or omitted the very facts that were a substantial factor in causing the plaintiff’s economic loss.” Id. (quoting McCabe, 494 F.3d at 425). For example, in Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 949 (9th Cir. 005), the Ninth Circuit held that loss causation was sufficiently alleged when the plaintiff alleged that the very facts concealed by the defendants — facts concerning the company’s dire financial situation — resulted in its going bankrupt, which caused the plaintiff to lose the entire value of its investment in the company. See also id. at 949 n.2 (concluding that Dura did not require plaintiff to allege corrective disclosure because plaintiff alleged “private sale of privately traded stock and . . . not only asserted that it purchased the security at issue at an artificially inflated price, but pled that the [d]efendants’ misrepresentation was causally related to the loss it sustained”). See also Wochos v. Tesla Motors, Inc., 985 F.3d 1180, 1198 (9th Cir. 2021) (upholding dismissal with prejudice when modest stock price drop quickly rebounded because “[t]o adequately plead loss causation . . . a plaintiff must allege that the ‘share price fell significantly after the truth became known’” (quoting In re Oracle Corp. Sec. Litig., 627 F.3d 376, 392 (9th Cir. 2010)).“To establish loss causation in a fraud-on-the-market case, the plaintiff must show that after purchasing her shares and before selling, the following occurred: (1) ‘the truth became known,’ and (2) the revelation caused the fraud-induced inflation in the stock’s price to be reduced or eliminated.” In re BofI Holding, Inc. Sec. Litig., 977 F.3d 781, 789 (9th Cir. 2020) (quoting Dura Pharms., Inc., 544 U.S. at 347). A plaintiff may prove that “the truth became known” by identifying one or more “corrective disclosures.” Id. at 790. “A corrective disclosure occurs when ‘information correcting the misstatement or omission that is the basis for the action is disseminated to the market.’” Id. (quoting 15 U.S.C. § 78u-4(e)(1)); see also Grigsby v. BofI Holding, Inc., 979 F.3d 1198 (9th Cir. 2020) (holding news article with information from FOIA request can be corrective disclosure, but Internet article with publicly available information from whistleblower was not corrective disclosure). The Ninth Circuit offered guidance on what constitutes a corrective disclosure in In re BofI Holding, Inc. Sec. Litig., 977 F.3d 781, 790 (9th Cir. 2020), explaining that “a corrective disclosure need not consist of an admission of fraud by the defendant or a formal finding of fraud by a government agency”; rather, it may “come from any source, including knowledgeable third parties such as whistleblowers, analysts, or investigative reporters.” Id. A corrective disclosure also “need not reveal the full scope of the defendant’s fraud in one fell swoop; the true facts concealed by the defendant’s misstatements may be revealed over time through a series of partial disclosures.” Id. A corrective disclosure “need not precisely mirror the earlier misrepresentation,” id. (internal quotation marks omitted), as it “is enough if the disclosure reveals new facts that, taken as true, render some aspect of the defendant's prior statements false or misleading.” Id. Against this backdrop, the Ninth Circuit rejected the district court’s conclusion that, “to adequately plead loss causation, the shareholders had to identify an additional disclosure that confirmed the truth of [the] allegations” in the corrective disclosure. Id. at 792. Rather, the court noted that “short of an admission by the defendant or a formal finding of fraud—neither of which is required—any corrective disclosure will necessarily take the form of contestable allegations of wrongdoing.” Id. (citations omitted). Although the “plaintiff must, of course, prove that the defendant’s misstatements were false, . . . that can be done through proof other than the corrective disclosure itself.” Id.

Revised September 2024

            If you find for the plaintiff on the 10b-5 claim, then you must consider and decide the amount of money damages, if any, to be awarded to the plaintiff. You may award only actual damages in an amount that will reasonably and fairly compensate the plaintiff for the economic loss [he] [she] [other pronoun] [it] sustained. Your award must be based on evidence and not upon speculation, guesswork, or conjecture. The plaintiff has the burden of proving damages by a preponderance of the evidence.

Comment 

            Section 10(b) claims for damages are governed by Section 28(a), which limits all claims brought under the Exchange Act to actual damages.  See 15 U.S.C. § 78bb(a) (providing that no person maintaining a suit for damages under the Exchange Act may recover "a total amount in excess of his actual damages"); see also Randall v. Loftsgaarden, 478 U.S. 647, 661-62 (1986).            

            “The usual measure of damages for securities fraud claims under Rule 10b-5 is out-of-pocket loss; that is, the difference between the value of what the plaintiff gave up and the value of what the plaintiff received. Consequential damages may also be awarded if proved with sufficient certainty. . . . The district court may apply a rescissory measure of damages in appropriate circumstances.” Ambassador Hotel Co., Ltd. v. Wei-Chuan Inv., 189 F.3d 1017, 1030 (9th Cir. 1999) (citing DCD Programs v. Leighton, 90 F.3d 1442, 1449 (9th Cir. 1996)). The Supreme Court’s decision in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), highlights the difficulty in framing an instruction premised on a theory that the price on the date of purchase was inflated because of a misrepresentation. See Comment to Instruction 18.8 (Securities—Causation). Comparable difficulties could arise when there are several different transaction dates or multiple plaintiffs, or when the lawsuit is brought as a class action.  In such cases, computations based on average prices during the applicable trading period might prove necessary. 

            Because of the above-described complications, expert testimony is often used when calculating damages in 10b-5 actions. See In re Imperial Credit Indus., Inc. Sec. Litig., 252 F. Supp. 2d 1005, 1014-15 (C.D. Cal. 2003); In re Oracle Sec. Litig., 829 F. Supp. 1176, 1181 (N.D. Cal. 1993). 

Revised September 2024

            Under the Securities Exchange Act of 1934, a defendant may be liable if during the period that someone else defrauded the plaintiff, the defendant had the authority to control that person or company.

            The plaintiff claims that the defendant is a controlling person and is therefore liable under the securities laws. On this claim, the plaintiff has the burden of proving by a preponderance of the evidence that the defendant [identify the alleged controlling person] possessed, directly or indirectly, the actual power to direct or cause the direction of the management and policies of [identify the alleged controlled person].

Comment            

            See Instruction 18.1 (Securities—Purpose and Definitions) for the definition of “controlling person.” 

            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. § 230.405 (defining “control”); Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1578 (9th Cir. 1990) (en banc) (holding that broker-dealer is “controlling person” within meaning of 1934 Act and could be liable for its stockbroker-employee’s conduct, even if broker-dealer and stockbroker contractually agreed that stockbroker would be independent contractor). See also No. 84 Empl’r-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 945 (9th Cir. 2003) (discussing traditional indicia of “control”). 

            See Instruction 18.11 (Securities—Good Faith Defense to Controlling Person Liability). 

            It may be necessary to supplement this instruction with instructions regarding respondent superior liability. See Instructions 4.4 (Agent and Principal—Definition); 4.5 (Agent—Scope of Authority Defined); 4.8 (Act of Agent Is Act of Principal—Scope of Authority Not in Issue); 4.9 (Both Principal and Agent Sued—No Issue as to Agency or Authority); 4.10 (Principal Sued but Not Agent—No Issue as to Agency or Authority); 4.11 (Both Principal and Agent Sued—Agency or Authority Denied); and 4.12 (Principal Sued, but Not Agent—Agency or Authority Denied). 

Revised September 2024

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

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

Second, the defendant acted in good faith. 

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

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

Comment 

            See 15 U.S.C. § 78t(a) (Section 20(a) of the 1934 Act (Liability of Controlling Persons)); 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