During the past month, the Eleventh Circuit ruled on two novel issues in securities fraud class actions. In Berman v. Blount Parrish & Co., Inc., 2008 WL 1805753 (April 23, 2008), the court held that the Sarbanes-Oxley Act’s five-year statute of limitations does not apply retroactively. The alleged securities violations took place in May 1998, and the plaintiffs initiated their suit in March 2003. In a succinct opinion, the court found that the Act, which was enacted in 2002, did not “revive” the plaintiffs’ claims.
Laperriere v. Vesta Ins. Group, Inc., 2008 WL 1883482 (April 30, 2008), involved an issue of first impression for a federal appellate court: whether the proportionate liability provisions of the Private Securities Litigation Reform Act (“PSLRA”) superseded the joint-and-several liability provision of Section 20(a) of the Securities Exchange Act of 1934 (the “1934 Act”). The plaintiffs argued that Section 20(a) should govern, while the defendants argued that the PSLRA “trumped” Section 20(a).
Under the PSLRA, a controlling person is jointly and severally liable for the plaintiff’s damages only if it commits a knowing violation of the 1934 Act. Under Section 20(a), a controlling person is jointly and severally liable unless the controlling person acted in good faith and did not directly or indirectly induce the acts constituting the violation.
As a threshold matter, the court found that the PSLRA’s proportionate liability scheme applies to Section 20(a) claims against controlling persons because controlling persons are “covered persons” within the meaning of the PSLRA. Moving on to the core issue, the court construed these two sections “in harmony” and developed a two-step process for determining a controlling person’s share of damages:
First, determine the control person’s liability in accordance with Section 20(a). A controlling person is liable to the same extent as the controlled person unless the controlling person affirmatively establishes that it acted in good faith and did not induce the violation by the controlled person. Second, if a controlling person is found liable under Section 20(a), it is jointly and severally liable only if the fact-finder concludes that the controlling person “knowingly” committed the violation.
The standard for liability is the same as before enactment of the PSLRA, but if the controlling person’s violation is without knowledge, then its damages are proportionate to its conduct. Because the court preserved both the joint-and-several liability provision of Section 20(a) and the proportionate allocation of damages under the PSLRA, it is unclear whether the ruling will favor plaintiffs or defendants.