form of securities class action plaintiffs, a corporation has
hell (and usually a great deal of money) to pay. Third, most
securities class action recoveries are funded not by the
corporate insiders, but by the corporate issuer and insurance
proceeds from policies paid for by the issuer. Taking the
corporation out of the class action for want of allegations of
corporate benefit might well endanger these sources of recovery.
Fourth, there is the matter of what appears to be the law of
this circuit. A corporate entity can be vicariously liable under
section 10(b) for the fraud of its officers. See McKesson,
126 F. Supp.2d at 1277 (citing Hollinger v. Titan Capital Corp.,
914 F.2d 1564, 1576-78 (9th Cir. 1990)). So long as scienter is
appropriately alleged for the officers and directors of a
company, then it is appropriately alleged for the company
itself. Plaintiffs rely on Nordstrom, Inc. v. Chubb & Son,
Inc., 54 F.3d 1424, 1435-36 (9th Cir. 1995), for this
proposition, although the case affords weak support.
In Nordstrom, an insurance company attempted to avoid paying
a portion of a settlement based on its assertion that the
uninsured corporate entity was exclusively responsible for some
of the conduct at issue. See id. at 1429-30. The crucial
issue, therefore, was whether the corporation could possess
intent even if none of the officers and directors had such
intent. See id. at 1435. This issue is the mirror image of the
question triggered by the ACC in the case at bar, namely,
whether the corporate entity must possess the intent held by
its officers. Indeed, the Nordstrom court noted that
"corporate scienter relies heavily on the awareness of directors
and officers," id. at 1435-36, but this language merely
restates the principle of vicarious liability for corporations
that the court discussed above. As defendants point out, general
agency law suggests that the state of mind of an officer may not
be imputed to the corporate entity under certain circumstances,
specifically, when the officer is not alleged to have acted for
the benefit of the company.
Plaintiffs' attempt to imply that Cylink's scienter can
alternatively be found in Cylink's independent duty to prepare
corporate disclosures misses the point. See Pl Opp B.R. (Doc # 94)
at 5-6. Defendants do not dispute that statements in Cylink's
SEC filings are attributable to Cylink; rather, the inquiry is
whether the state of mind of the individuals who prepared the
statements is attributable to Cylink. Judge Walls recognized in
Cendant that imputation of an officer's knowledge may only
occur "when the officer's fraudulent conduct was (1) in the
course of his employment, and (2) for the benefit of the
corporation * * *." Cendant, 109 F. Supp.2d at 233 (citation
In sum, the court finds the presentations on both sides of
this issue unconvincing. The motion to dismiss must, therefore,
be DENIED and the issue possibly revisited later in the
litigation. What it may all come down to is damages. If a
misleading corporate dissemination benefits the issuer, then
presumably its shareholders were benefitted at least indirectly.
How many of those beneficiaries are class members in an open
market securities fraud class action depends on the timing of
their purchases of stock. But if the corporation benefitted by
the alleged misstatement, that may be a reason to dismiss the
shareholders' claim. If the corporation did not benefit, the
shareholders presumably are net losers. In any event, neither
the allegations or arguments at bar afford answers and so Cylink
must — for now, at least — remain in the case.
Plaintiffs also assert claims for "controlling person"
liability against the
individual defendants under section 20(a) of the Exchange Act,
15 U.S.C. § 78t(a). See ACC (Doc # 81), ¶¶ 67-69. In order to state
a claim for liability under section 20(a), plaintiffs must
allege (1) that a "primary violation" of Rule 10b-5 or other
provision was committed and (2) that each defendant "directly or
indirectly" controlled the violator. Paracor Finance, Inc. v.
General Electric Capital Corp., 96 F.3d 1151, 1161 (9th Cir.
1996). "In general, the determination of who is a controlling
person * * * is an intensely factual question." Id. (citation
omitted). Despite the urging of at least one of the individual
defendants, plaintiffs need not allege the controlling person's
scienter or that they "culpably participated" in the alleged
wrongdoing. Id. (citation omitted).
First, under the allegations of the ACC, Cylink is the only
possible "violator" because plaintiffs allege that the
individual defendants are controlling persons "of the Company."
ACC (Doc #81), ¶ 10. In light of the court's conclusion that
plaintiffs' claim under Rule 10b-5 against Cylink survives,
plaintiffs have satisfied the first element of a section 20(a)
Second, plaintiffs allege that the individual defendants, "by
virtue of their executive and managerial positions had the power
to control and influence [Cylink], which they exercised * * *."
The court finds these allegations sufficient to support an
inference that the individual defendants controlled Cylink and
its operations. As noted, plaintiffs need not allege that the
individual defendants actually participated in the wrongful
conduct or exercised actual power to be derivatively liable
under section 20(a). Howard v. Everex Systems, Inc.,
228 F.3d 1057, 1065 (9th Cir. 2000); Paracor, 96 F.3d at 1161. To be
sure, to the extent plaintiffs present evidence at a later stage
of the proceedings demonstrating such control, the individual
defendants will be given the opportunity to assert good faith
defenses or lack of participation. Howard, 228 F.3d at 1065.
At the current time, however, the court concludes that
plaintiffs have sufficiently alleged control to state a claim
against Sarrat, Butler and Daws.
Accordingly, to the extent these motions address section
20(a), they are DENIED.
In sum, the motions to dismiss filed by Cylink, Sarrat, Butler
and Daws (Docs # 84, 85 and 88) are DENIED IN PART and GRANTED
IN PART. Specifically, to the extent Butler and Sarrat seek
dismissal of plaintiffs' section 10(b) claims against them,
their motions (Docs # 85 and 88) are GRANTED. To the extent
these motions address the section 20(a) claims, however, they
are DENIED. In addition, the motions to dismiss filed by Cylink
and Daws attacking plaintiffs' claims under section 10(b) and
20(a) (Docs # 84 and 88) are DENIED in their entirety.
IT IS SO ORDERED.
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