11th Cir. Clarifies Parent Cos.’ Liability under the PSLRA in Vesta Insurance Case

Holding:

In this appeal arising from a securities class action, the U.S. Court of Appeals for the Eleventh Circuit affirmed a district court’s denial of plaintiff-appellant investors’ motion to strike affirmative defenses. In its motion, plaintiffs-appellants argued that such defenses of parent company Torchmark Corporation sought to improperly apply the “proportionate liability” rule under the Private Securities Litigation Reform Act (PSLRA) of 1995 because as a parent company, Torchmark should be jointly and severally liable with and to the same extent as the principal violator. In rejecting this argument, the Eleventh Circuit held that under Section 21(D)(f), a controlling person, like a parent company, shall be jointly and severally liable for all the damages only if a court specifically determines that such controlling person knowingly committed the violation. In this regard, if the controlling person fails to affirmatively demonstrate good faith and lack of inducement under section 20(a) but the court is not able to find a knowing violation, the controlling person’s liability is only proportionate, not joint and several.

Detailed Summary:

This case presented what the Eleventh Circuit called “an issue of first impression in the circuit courts.”  Specifically, the issue was “whether and to what extent the proportionate liability scheme of section 21(D)(f) of the Securities Exchange Act of 1934 (the “Act”), enacted as part of the PSLRA, 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.”

Put in another way, the question is, is a parent company liable for damages arising from securities fraud committed by primary parties,…

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