Team R5

No. 873-1

In the Supreme Court of the United States

__________________________

RED RIVER JAMES WILSON,

Petitioners,

v.

TEACHER RETIREMENT SYSTEM OF FORDHAM FORDHAM MUNICIPAL RETIREMENT FUND, INDIVIDUALLY

ON BEHALF OF ALL OTHERS SIMILARLY SITUATED,

Respondents.

________________________

On Writ of Certiorari to the Court of Appeals for the Fourteenth Circuit

________________________

BRIEF FOR THE RESPONDENTS

_________________________

Counsel for Respondents

_________________________

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QUESTIONS PRESENTED

1. Whether hollow claims made by Red River and James Wilson regarding

Red River’s environmental commitments, practices, and risks are viable

under15 U.S.C. § 78j(b) as a matter of law, and whether the respondents

adequately plead scienter.

2. Whether a claim for control person liability under 15 U.S.C. § 78t(a)

requires an allegation that the control person was a culpable participant

in the primary violation.

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TABLE OF CONTENTS

QUESTIONS PRESENTED .......................................................................... i

TABLE OF CONTENTS ............................................................................. ii

TABLE OF AUTHORITIES ......................................................................... iv

STATUTES INVOLVED ........................................................................... viii

STATEMENT OF THE CASE ...................................................................... 1 I. FACTUAL BACKGROUND .................................................................. 1 II. PROCEDURAL HISTORY ................................................................... 5

SUMMARY OF THE ARGUMENT ................................................................ 5

ARGUMENT .............................................................................................. 7 I. THE RESPONDENTS ADEQUATELY ALLEGED MATERIALLY MISLEADING STATEMENTS AND PROPERLY PLEAD SCIENTER. ............ 7

A. Red River’s Disclosures Conveyed False Assertions, Inaccurate Representations And Misleading Misrepresentations To Unknowing Red River Investors. ........................................................................... 8

1. Red River’s Deceptive And Injurious Misrepresentations Are Actionable Under Section 10(b). ...................................................................................... 9

2. Red River Made Materially Misleading Statements That Far Exceeded Mere Opinions Regarding Reputation or Ethical Norms. ............................. 12

B. Red River Acted With Scienter, As It Acted With Intent To Deceive And Severe Recklessness. ................................................................. 15

1. Respondents’ Pleadings Give Rise To A Strong Inference That Red River Had An Intent To Deceive Those Who Were Relying On Red River’s Disclosures. ................................................................................................ 16

2. The Facts Pleaded Give Rise To A Strong Inference That Red River Acted With Severe Recklessness. ............................................................... 18

II. RESPONDENTS HAVE ADEQUATELY ESTABLISHED CONTROL PERSON LIABILITY UNDER SECTION 20(a) BECAUSE RESPONDENTS NEED NOT PLEAD PETITIONER WILSON’S “CULPABLE PARTICIPATION” IN RED RIVER’S PRIMARY VIOLATION TO STATE A SECTION 20(a) CLAIM. ................................................................................................ 20

A. An Individual Defendant’s Culpable Participation In The Primary Violation Is Not A Prima Facie Element Of A Section 20(a) Claim, And Thus, Respondents Are Not Required To Plead Petitioner Wilson’s Culpable Participation In Red River’s Violation. ................................ 21

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1. The Plain Text Of The Statute Does Not Require A Plaintiff To Plead Defendant’s Culpable Participation. ........................................................... 24

2. Congress Enacted This Section to Prevent Evasion Of Liability By The Controlling Persons And To Expand, Rather Than Restrict, The Scope Of Liability Under The Securities Law. ............................................................ 25

3. Requiring A Plaintiff To Plead Culpable Participation As A Prima Facie Element Renders The Affirmative Defense Prescribed By Section 20(a) Meaningless. ............................................................................................... 28

B. Absent The Requirement Of Pleading Culpable Participation, Respondents Sufficiently Established Control Person Liability Under Section 20(a) Because Respondents Have Adequately Alleged A Primary Violation By Petitioner Red River And Wilson’s Control Over Red River And Its Employees. ........................................................... 29

CONCLUSION ......................................................................................... 30

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TABLE OF AUTHORITIES

Supreme Court Cases

Ashcroft v. Iqbal, 556 U.S. 662 (2009) ............................................................ 18

Basic Inc. v. Levinson, 485 U.S. 224 (1988)…………………………………………….9

Dura Pharmaceuticals v. Broudo, 544 U.S. 336 (2005)……………………………….8

Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977) .................................... 9

The Wharf (Holdings) Ltd. v. United Int'l Holdings, Inc., 532 U.S. 589 (2001) ...... 8

TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976) ............................ 20

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007) ...... 16, 19

Federal Circuit Court Cases

Abbott v. Equity Group, Inc., 2 F.3d 613 (5th Cir. 1993) .................................. 22

ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 59 (1st Cir. 2008) .............. 16

Adams v. Baker Hughes, Inc., 292 F.3d 424 (5th Cir. 2002) ........................... 18

Frank v. Dana Corp., 646 F.3d 954 (6th Cir. 2011) ......................................... 19

G.A. Thompson & Co. v. Partridge, 636 F.2d 945 (5th Cir. 1981) ......... 22, 24, 28

Harrison v. Dean Witter Reynolds, Inc., 974 F. 2d 873 (7th Cir. 1992) ....... 21, 28

Helwig v. Vencor, Inc., 251 F.3d 540 (6th Cir. 2001) ......................................... 8

Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990) ........... 22, 26, 28

Howard v. Everex Systems, Inc., 228 F.3d 1057 (9th Cir. 2000) ................ 20, 29

IBEW Local Union No. 58 Pension Tr. Fund & Annuity Fund v. Royal Bank of

Scotland Grp., PLC, 783 F.3d 383 (2d Cir. 2015) ............................... 9, 12, 15

In re Morgan Stanley Info. Fund Sec. Litig., 592 F.2d 347 (2d Cir. 2010) 8, 10, 14

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In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694 (9th Cir. 2012) ............. 19

Lanza v. Drexel & Co., 479 F.2d 1277 (2d Cir. 1973) ................................ 23, 24

Lormand v. US Unwired, Inc., 565 F.3d 228 (5th Cir. 2009) ............................ 16

Lustgraaf v. Behrens, 619 F.3d 867 (8th Cir. 2010) .................................. 16, 20

Maher v. Durango Metals, Inc., 144 F.3d 1302 (10th Cir. 1998) ...................... 22

Metge v. Baehler, 762 F.2d 621 (8th Cir. 1985) .................................. 21, 22, 28

Novak v. Kasaks, 216 F.3d 300, 315 (2d Cir. 2000) ................................. 12, 13

Paul F. Newton & Co. v. Texas Commerce Bank, 630 F.2d 1111 (5th Cir. 1980)

...................................................................................................... 25, 26, 27

Pharo v. Smith, 621 F.2d 656 (5th Cir. 1980) ................................................. 26

Rochez Bros., Inc. v. Rhoades, 527 F.2d 880 (3d Cir. 1975) ...................... 23, 30

Sanders Confectionery Products, Inc. v. Heller Financial, Inc., 973 F.2d 474 (6th

Cir. 1992) ................................................................................................... 22

SEC v. Management Dynamics, Inc., 515 F.2d 801 (2d Cir. 1975) ............. 26, 27

Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87 (2d Cir.

2001) ............................................................................................................ 9

Taylor v. First Union Corp., 857 F.2d 240 (1988) ............................................. 19

Therasense, Inc. v. Becton, Dickinson & Co., 649 F.3d 1276, 1290 (Fed. Cir.

2011) (en banc) ........................................................................................... 16

Federal District Court Cases

Bricklayers & Masons Local Union No. 5 Ohio Pension Fund v. Transocean Ltd.,

866 F. Supp. 2d 223, 241 (S.D.N.Y. 2012) .................................................. 12

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Burtch v. Huston (In re USDigital, Inc.), 443 B.R. 22 (Bankr. D. Del. 2011) ...... 10

City of Westland Police & Fire Ret. Sys. v. MetLife, Inc., 928 F. Supp. 2d 705

(S.D.N.Y. 2013) ........................................................................................... 30

Derensis v. Coopers & Lybrand Chtd. Accountants, 930 F. Supp. 1003, 1013

(D.N.J. 1996) .............................................................................................. 23

Eisai Co. v. Teva Pharms. USA, Inc., 629 F. Supp. 2d 416, 431 (D.N.J. 2009) 16,

17

Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171 (S.D.N.Y. 2010) ........ 10

In re Donna Karan Int’l Sec. Litig., No. 97-CV-2011, 1998 WL 637547 (E.D.N.Y.

Aug. 14, 1998) ............................................................................................ 10

In re Massey Energy Co. Sec. Litig., 883 F. Supp. 2d 597 (S.D. W. Va. 2012) . 12,

13

In re MobileMedia Sec. Litig., 28 F. Supp. 2d 901 (D.N.J. 1998) ........................ 9

In re Parmalat Sec. Litig., 375 F. Supp. 2d 278 (S.D.N.Y. 2005) ...................... 29

Mulligan v. Impax Laboratories, Inc., 36 F. Supp. 3d 942 (N.D. Cal. 2014) ...... 13

State Court Cases

International Prods. Co. v Erie R. R. Co., 244 NY 331 (1927) .............................. 9

Heard v. City of New York, 623 N.E.2d 541 (1993) ........................................... 9

Marshall Durbin Farms, Inc. v. Landers, 470 So. 2d 1098 (Ala. 1985) ....... 16, 18

Southeastern Properties, Inc. v. Lee, 368 So. 2d 288 (Ala. 1979) ...................... 21

Walker v. Woodall, 262 So. 2d 756 (Ala. 1972) ......................................... 16, 18

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Statutes

15 U.S.C. § 77o ....................................................................................... 25, 27

15 U.S.C. § 78j(b) ............................................................................................ 5

15 U.S.C. § 78t(a) ................................................................................ 5, 20, 24

15 U.S.C. § 78u-4(b)(1) .................................................................................... 2

15 U.S.C. § 78u-4(b)(2) .................................................................................... 3

42 U.S.C § 1983 .......................................................................................... 3, 6

Rules

Fed. R. Civ. P. 9(b) ........................................................................................... 6

Regulations

17 C.F.R. § 240.10b-5 ..................................................................................... 6

17 C.F.R. § 240.12b-2 ................................................................................... 30

Other Authorities

H.R. Rep. No. 1383, 73d Cong., 2d Sess. 26 (1934) ........................................ 27

H.R.Conf.Rep. No. 152, 73d Cong., 1st Sess. 27 (1933) ............................ 26, 27

S.Rep. No. 47, 73d Cong., 1st Sess. 5 (1933) ................................................. 26

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STATUTES INVOLVED

15 U.S.C. § 78j. Manipulative and Deceptive Devices

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—

* * *

(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement[,] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

* * *

15 U.S.C. § 78t. Liability of Controlling Persons and Persons Who Aid and Abet Violations

(a) Joint and several liability; good faith defense. Every person who, directly or indirectly, controls any person liable under any provision of this title [15 USCS §§ 78a et seq.] or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable (including to the Commission in any action brought under paragraph (1) or (3) of section 21(d) [15 USCS § 78u(d)]), unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

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STATEMENT OF THE CASE

I. FACTUAL BACKGROUND

James Wilson (“Wilson”), a profit-chasing oilman, founded Red River, an

oil drilling company, in West Texas in 1962. Record (“R.”) at 2. Shortly after

the creation of Red River, the company began its long and toxic relationship

with the environment and environmental advocates. Id. In the earlier years of

Red River’s existence, the company’s aggressive and unconventional practices1

gave rise to abuses ranging from destructive oil fires to geological missed calls,

all of which created environmental problems. Id. It did not take long for

Wilson’s tactics to outpace the Houston banks’ appetite for risk. Id. In need of

additional investment capital, Wilson elected to take Red River public. R. at 2–

3. After taking Red River public, Wilson appointed himself as both the board

chairman and chief executive officer, ensuring that he would have maximum

control over the corporation. R. at 3.

Although Wilson claimed the most influential positions as his own, other

individuals filled-in the remaining C-suite and leadership roles. Id. Tension

quickly developed between Wilson and both Pamela Thompson (“Thompson”),

Red River’s chief operating officer, as well as Sandra Grimes (“Grimes”), Red

River’s senior vice president and general counsel. Id. Wilson, the oilman, was

not fond of Thompson and Grimes’ focus on the need to comply with

environmental laws and regulatory restrictions relating to disclosure. Id.

1 Wilson chose to drill for oil in “unpromising” areas that other companies had written off due to low levels of estimated reserves.

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Although both Thompson and Grimes were seasoned professionals, equipped

with years of experience in the oil industry, Wilson considered their adherence

to the governing rules as obsessive and overdone. Id. Wilson claimed that

outside actors that attempted to hold Red River to the industry standards were

“zealots” who were leading an endless assault on Red River. Id.

In the late 1990’s, trouble appeared on the horizon for Wilson and Red

River, as exploration prospects appeared dim. Id. While Wilson was grappling

with the Red River’s future appearing evermore treacherous, he learned about a

new, untested,2 and destructive method of oil extraction–hydraulic fracturing

(hereinafter “fracking”). Id. Wilson immediately sensed that this process would

be highly controversial. Id. He learned that fracking involved pulverizing shale

rock formations with millions of gallons of water, sand, and chemicals in order

to bring oil and gas to the surface. R. at 4. This method of extraction created

millions of gallons of waste water. Id. Wilson also learned that in addition to

the direct destruction caused by fracking, pre-extraction blasting was often

conducted as well to soften the shale rock. Id.

The Red River environmental team expressed hesitation with fracking, as

it would require the drilling of wells through West Texas aquifers. Id. Despite

the environmental team’s hesitance, Wilson chose to go “all in” on the untested

process. Id. The gamble paid-off for the oilman, as Red River made billions of

2 At the time that Wilson gambled on the hydraulic fracturing extraction method, the major exploration companies had not seriously considered that method of extraction.

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dollars in profit while the environment was ravaged, shale rock was

demolished, and millions of gallons of wastewater were created. Id. As a result

of Red River’s fracking operations, numerous concerns arose regarding air

pollution, ground water and soil contamination, and the destruction of

important natural habitats. Id. Those concerns materialized in 2017, when Red

River was notified that there was seismic activity identified directly in Eagle

Ford Shale, an area of active Red River fracking. R. at 5. Red River did not

respond to or investigate these concerns in any way, even though the toxic

wastewater storage facilities in that area were almost filled to capacity. Id.

In 2018, Wilson made clear that he wanted Red River’s environmental

disclosures to provide less information regarding seepage of toxic chemicals

into groundwater and methane-related air pollution, because it was bad for

business. R. at 5. Just weeks later, Wilson attended a Midland’s Petroleum

Club talk at which a speaker reiterated the importance of not omitting relevant

background information or including factual assertions when expressing

opinions related to environmental compliance. Id. One month after receiving

that reminder about the importance of separating opinions and factual

assertions, Red River’s Annual Report and 10-K were released. Id. Those

disclosures included numerous claims regarding both opinions and factual

assertions. R. at 6. Notably, the disclosure provided that Red River devoted “a

substantial budget to ensuring the protection of the environment” and that the

fracking process “involves no serious environmental issues not associated with

conventional drilling.” Id.

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Shortly after that disclosure, Red River received a second series of a

warnings about seismic activity in Eagle Ford Shale. R. at 7. Yet again, Red

River took no immediate action to address the concerns. Id. Despite the

repeated warnings about seismic activity, on May 15, 2018, Wilson told a group

of major institutional investors that he “honestly believe[d] a major

environmental event has about a zero percent chance of occurring on [Red

River] property.” Just thirteen days after that investor meeting, Red River

received a third series of warnings regarding seismic activity in the Eagle Ford

Shale and again did nothing. Id. Three days later, Red River filed its Form 10-Q

disclosure without citing the specific risks related to the three rounds of

warnings about seismic activity in Eagle Ford Shale. R. 6–7. In reliance on that

disclosure, the Teacher Retirement System of Fordham (“TRSF”) and the

Fordham Municipal Retirement Fund (“FMRF”) purchased $27 million and $31

million respectively of Red River stock. R. at 7. Less than a week after the

shares had been purchased, seismic activity in Eagle Ford Shale destroyed Red

River’s toxic wastewater storage facilities, causing an environmental disaster

that made international news and dumped millions of gallons of wastewater

into West Texas aquifers. Id. Red River’s common stock price plummeted,

causing millions of dollars of retirement savings to vanish. Id. In the aftermath

of this disaster, the federal investigators discovered that Red River had been

using excessive amounts of explosives to condition the shale rock and that the

fracking process was the proximate cause of the wastewater escaping the

storage site. Id.

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II. PROCEDURAL HISTORY

On August 10, 2018, the TRSF and the FMRF (collectively, the

“Respondents”), filed a putative class action on behalf of all purchasers of the

common stock of Red River between March 2, 2018 and August 2, 2018

against Red River and Wilson (collectively the “Petitioners”) in the district of

Fordham, seeking money damages for harm stemming from misleading

statements and omissions. The complaint asserted a securities fraud claim

against Red River under Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b),

and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (collectively,

“Section 10(b)”). In addition, the complaint asserted a control person liability

claim against Wilson under Section 20(a) of the Exchange Act, 15 U.S.C. §

78t(a).

On Motion from the Petitioners, the District Court for Fordham dismissed

both of the Respondents’ claims. The Respondents filed a timely appeal, which

was granted by the Court of Appeals for the Fourteenth Circuit. The Court of

Appeals went on to reverse the District Court’s holding, determining that the

Respondents had adequately pleaded that Petitioners had made severely

reckless statements, satisfy the scienter requirement and that the Respondents

had adequately stated a control person liability claim against Wilson under

section 20(a) of the Exchange Act. Petitioners sought a Writ of Certiorari, which

was granted by this court.

SUMMARY OF THE ARGUMENT

This Court must affirm the decision of the U.S. Court of Appeals for the

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Fourteenth Circuit because (1) the Respondents adequately pleaded that Red

River made material misstatements, which were misleading in the context in

which they were made, and that Red River made those statements with scienter

as required under the Private Securities Litigation Reform Act of 1995

(hereinafter “PSLRA”) and (2) a plaintiff is not required to plead the defendant’s

culpable participation in the primary violation under Section 20(a), and

therefore, Respondents adequately alleged that Wilson is liable as a controlling

person.

First, Respondents identified multiple statements that addressed

material issues related to Red River’s drilling operations that would mislead a

reasonable investor and Respondents have plead that Red River had the

requisite culpable state of mind at the time the misstatements were made.

Red River’s profits-over-precaution business tactics resulted in the company

delaying necessary inspections, failing to adequately protect against

groundwater contamination and providing disclosures regarding their business

that did not describe immediate threats to Red River’s operations. Had Red

River disclosed this information, it would have significantly altered the total

mix of information made available and reduced the going concern value of Red

River. The corporation’s repeated failure to so disclose this information

demonstrates a pattern of failed disclosure, which establishes Red River’s

intent to deceive.

Second, as recognized by most of the Circuits, “culpable participation” is

not a prima facie element for a control person liability claim because the

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statutory language of Section 20(a) does not support such a requirement, the

legislative intent was to prevent evasion of liability and to expand the scope of

liability, and requiring a plaintiff to plead culpable participation as a prima

facie element renders the affirmative defense prescribed by Section 20(a)

meaningless. Because Respondents have adequately alleged a Section 10(b)

violation by Red River and have sufficiently established Wilson’s control over

Red River and its employees, absent a requirement of pleading Wilson’s

culpable participation, Respondents have adequately established control

person liability under Section 20(a).

ARGUMENT

I. THE RESPONDENTS ADEQUATELY ALLEGED MATERIALLY MISLEADING STATEMENTS AND PROPERLY PLEAD SCIENTER.

Millions of dollars of hard-earned retirement savings have been lost as a

result of reasonable reliance on the misleading statements of a money-chasing

oilman. R. at 7-8. It is unlawful to “make any untrue statement of material fact

or omit to state a material fact necessary in order to make the statements

made, in light of the circumstances under which they were made, not

misleading.” 17 C.F.R. §240.10b-5. To sell a security without properly

disclosing an underlying risk of that security is misleading, because a buyer

normally presumes good faith. The Wharf (Holdings) Ltd. v. United Int'l Holdings,

Inc., 532 U.S. 588, 589 (2001).

In order for a Section 10(b) claim based on a misleading assertion to be

viable, a plaintiff must allege that the defendant (1) made material

misrepresentations or omissions; (2) with scienter; (3) in connection with the

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purchase or sale of a security; (4) upon which the plaintiff relied; (5) causing

economic loss as a result of the material misrepresentation. See Dura

Pharmaceuticals v. Broudo, 544 U.S. 336, 341–42 (2005). As claims made

under Section 10(b) involve allegations of fraud, both Rule 9 of the Federal

Rules of Civil Procedure and the PSLRA require plaintiffs to specify the

particular circumstances constituting fraud, including the defendants state of

mind. Fed. R. Civ. P. 9(b); 15 U.S.C. § 78u-4(b)(1). Although the Court of

Appeals for the Fourteenth Circuit easily identified that all of the elements of a

Section 10(b) claim have been adequately alleged, Petitioners challenge whether

the material misrepresentation and scienter components have been properly

pled. R. at 12.

A. Red River’s Disclosures Conveyed False Assertions, Inaccurate Representations And Misleading Misrepresentations To Unknowing Red River Investors.

To levy a successful Section 10(b)-5 claim, “a plaintiff must show that the

statements were misleading as to a material fact.” Basic Inc. v. Levinson, 485

U.S. 224, 238 (1988). In accordance with Section 10(b), a statement is

misleading when it misrepresents a material fact or omits a material fact

necessary to make the statement, in the context in which it was made, not

misleading. 17 C.F.R. §240.10b-5; see also In re Morgan Stanley Info. Fund Sec.

Litig., 592 F.2d 347, 366 (2d Cir. 2010) (a company’s representations “must be

complete and accurate”). Whether a statement is material “depends on the

significance the reasonable investor would place on the withheld or

misrepresented information." Helwig v. Vencor, Inc., 251 F.3d 540, 555 (6th

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Cir. 2001). When evaluating materiality, courts consider whether an accurate

disclosure of the information would have "'significantly altered the ‘total mix’ of

information made available.” Basic, 485 U.S. at 231-32. To aid in the effective

administration of justice, as it pertains to questions of materiality, courts have

identified multiple categories of statements which cannot be used as the basis

for a Section 10(b) claim. See Santa Fe Industries, Inc. v. Green, 430 U.S. 462

(1977); see also IBEW Local Union No. 58 Pension Tr. Fund & Annuity Fund v.

Royal Bank of Scotland Grp., PLC, 783 F.3d 383 (2d Cir. 2015).

1. Red River’s Deceptive And Injurious Misrepresentations Are Actionable Under Section 10(b).

Deliberate misrepresentations are actionable under federal securities

laws. Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 99 (2d

Cir. 2001). When a representative of a business has violated their duty not to

mislead, those harmed by the representative’s misleading misrepresentations

may levy a viable Section 10(b) claim even if there was also corporate

mismanagement. See, e.g., In re MobileMedia Sec. Litig., 28 F. Supp. 2d 901,

927 (D.N.J. 1998). A duty to speak with care exists in the commercial context

when “the relationship of the parties, arising out of contract or otherwise, [is]

such that in morals and good conscience the one has the right to rely upon the

other for information" International Prods. Co. v Erie R. R. Co., 244 NY 331, 338

(1927). When there is knowledge, or its equivalent, that the information

disclosed is desired for a serious purpose; that he to whom it is given intends

to rely and act upon it; that if false or erroneous he will because of it be injured

in person or property, one has a right to rely on the provided information and

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misstatements contained therein are actionable. Heard v. City of New York, 623

N.E.2d 541, 545, (1993). The fact that alleged conduct could be construed as

mismanagement does not defeat a claim under federal securities law, as

allegations that involve deception related to the mismanagement can give rise

to a Section 10(b) claim. In re Donna Karan Int’l Sec. Litig., No. 97-CV-2011,

1998 WL 637547, at *10 (E.D.N.Y. Aug. 14, 1998); see also Freudenberg v.

E*Trade Fin. Corp., 712 F. Supp. 2d 171, 193 (S.D.N.Y. 2010).

Red River made numerous misleading disclosures pertaining to the

safety of its drilling operations. See Stmts. 2–4. These statements were made to

both the public at large through regulatory disclosures and to groups of

institutional investors at investor meetings. R. 6–8. As a corporate entity with

countless shareholders, Red River owed fiduciary duties to those shareholders,

including the duty of loyalty which encompasses the duty to act in good faith.

Burtch v. Huston (In re USDigital, Inc.), 443 B.R. 22, 41 (2011). This duty is

breached when a fiduciary violates positive law or demonstrates a conscious

disregard for their duties. Id. Red River, through multiple agents, breached the

duty of loyalty in both of the aforementioned ways, recklessly ignored warning

signs and mislead those who relied on Red River’s disclosures. R. 6–8.

When Red River released statements about its environmental

commitments and practices, those statements were required to be complete

and accurate. In re Morgan Stanley Info. Fund, 592 F.2d at 366. Without

question, Red River made multiple disclosures through the release of its Form

10-K on March 1, 2018, and via Red River’s chief executive officer directly, that

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were incomplete, inaccurate and deliberate misrepresentations. Red River

asserted that it conducted its drilling activity in “a manner consistent with

protecting the environment and preventing or remediating damage resulting

from an environmental occurrence.” R. at 6. This disclosure was released

despite the fact that Red River had ignored three series of warnings about

seismic activity within its drilling territory that could cause environmental

damage, utilized excessive blasting techniques, and deliberately delayed

necessary wastewater containment inspections. R. at 5-8. Red River claimed to

devote “a substantial budget to ensure protection of the environment,” R. at 6,

when in reality Red River did not pay what was required to increase waste-

water holding facilities in Eagle Ford Shale, as was recommended due to those

holding containers approaching full capacity. R. at 5. Similarly, Red River

stated in its March Form 10-K that the corporation adopted the “latest

technology in order to minimize water or soil contamination” and that the focus

on such investments “differentiate[d] [Red River] from [their] competitors.” R. at

6. Again, this claim was patently untrue, as when it came time for Red River to

invest in new wastewater technology to minimize water or soil contamination,

Red River failed to do so. R. at 5.

These misrepresentations were material, as had they been disclosed

accurately, they would have “significantly altered the 'total mix' of information

made available[.]” Basic, 485 U.S. at 231-32. If the total mix of information had

not been tainted with falsities about Red River’s drilling practices, R. at 5-7, the

shareholders and investors would have been able to make informed decisions

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regarding the purchase of Red River securities. It is clear that Red River had

knowledge that the information disclosed by its Form 10-K and CEO were

desired for a serious purpose, in that it would be used for large-scale

investment transactions on the NYSE; that the investors who received the

information intended to rely and act upon it; and that if false or erroneous, the

misleading disclosure would injure those who relied on it. R. at 3, 6–7; Heard,

623 N.E.2d at 545. Therefore, the Respondents had a right to rely on the

disclosed information and the misstatements contained therein are now

actionable. Id. While there was indeed severe mismanagement by Red River,

the Respondents claim must be permitted to proceed as the allegations also

involve multiple instances of deception. R. at 5-7; In re Donna Karan, 1998 WL

at *10.

2. Red River Made Materially Misleading Statements That Far Exceeded Mere Opinions Regarding Reputation or Ethical Norms.

Statements made by a company that “misrepresent existing facts,” “tie

company commitments to the company’s success,” or “amount to a guarantee

to investors” are actionable. Novak v. Kasaks, 216 F.3d 300, 315 (2d Cir.

2000); In re Massey Energy Co. Sec. Litig., 883 F. Supp. 2d 597, 618 (S.D. W.

Va. 2012); IBEW Local Union No. 58 Pension Tr. Fun & Annuity Fund, 783 F.3d

at 392. Courts are encouraged to favor restraint when a litigant requests that a

statement be deemed inactionable puffery at the motion to dismiss stage, as

the inquiry is fact-intensive and better left to a jury. Bricklayers & Masons

Local Union No. 5 Ohio Pension Fund v. Transocean Ltd., 866 F. Supp. 2d 223,

241 (S.D.N.Y. 2012). Such a motion should be granted only in the event that

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the challenged statements are “so obviously unimportant to a reasonable

investor that reasonable minds could not differ on the question of their

unimportance.” Mulligan v. Impax Laboratories, Inc., 36 F. Supp. 3d 942, 967

(N.D. Cal. 2014) (citing In re Ford Motor Co. Sec. Litig., 381 F. 3d 563, 570 (6th

Cir. 2004)).

Red River asserted that “[t]here is no higher priority” than preventing

environmental damage, in direct contravention of the undisputed fact that its

management was disregarding obvious environmental risks posed by reports of

seismic activity, wastewater storage capacity issues and the excessive use of

explosives during the fracking process. R. at 5–7. Due to the inherent conflict

between the factual underpinning and the inaccurate disclosure, Red River’s

“no higher priority” assertion misrepresented existing facts, making the

misrepresentation actionable. Novak, 216 F.3d at 315. The corporation also

claimed that its investment in the latest technology differentiated them from

their competitors. R. at 6. While Petitioners would have you believe that this is

puffery, it unequivocally links Red River’s environmental commitments to the

corporation’s success, thereby qualifying this disclosure as a material

representation. In re Massey Energy Co. Sec. Litig., 883 F. Supp. 2d at 618.

Red River’s deception did not end there. The company went on to claim

that “fracking involves no serious environmental issues not associated with

conventional drilling” and that their operations may be subject to disruption

from an indiscriminate laundry-list of factors, including terrorist attacks. R. at

6. These claims were sufficiently definite to have engendered shareholder

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reliance, as they purported to explicitly reference important information about

business practices and address a number of specific threats that could impact

Red River.3 Mulligan, 36 F. Supp. 3d at 967. As these assertions could have

been reasonably relied upon by Red River shareholders, and accepted as

accurate and complete, Red River’s failure to provide any warning regarding the

repeated seismic activity events on their property constituted a material

omission. In re Morgan Stanley Info Fund, 592 F. 3d at 366; Basic, 485 U.S. at

231–32. Namely, the omission of the dangers posed by seismic activity certainly

would have influenced a reasonable investor’s decision to invest. This would be

particularly true for an industry that is recognized as a notoriously risky one,

as investors in fracking operations would need to rely-on and pay close

attention to information regarding potential environmental hazards.

While the aforementioned assertions were materially misleading,

deceptive and inaccurate, they pale in comparison when measured against the

duplicity of the statements made by Red River’s CEO to Red River investors.

While speaking from a position of authority, in the context of an informational

meeting with serious investors, the oilman claimed, “I honestly believe a major

environmental event has about a zero percent chance of occurring on our

property.” R. at 7. The relationship between the oilman and the Red River

investors, paired with the setting in which the statements were made and the

contractual obligations that exist between a CEO and shareholders of a CEO’s

3 These topics could clearly have been interpreted by the reasonable investor as being important considerations related to investing in Red River.

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public company, all demonstrate that Red River had a duty to be accurate

when it claimed to have a “zero percent chance” of an environmental event. Id.;

International Prods. Co., 244 NY at 338. A reasonable investor could have

interpreted the statements by Red River’s CEO as a guarantee that Red River

actively monitored potential risks to its operations and that the monitoring had

revealed no meaningful threats. IBEW Local Union No. 58 Pension Tr. Fun &

Annuity Fund, 783 F.3d at 392. This could not have been further from the

truth. R. at 5–8. Not only had Red River’s CEO been informed of wastewater

capacity issues, he also was aware of the fact that fracking operations already

were experiencing seismic activity events. Id. The stark contrast between the

risks Red River was facing in actuality and the assertion by Red River’s CEO

effectively guaranteeing that there was zero risk of an environmental event

illuminates how severely misleading the CEO’s disclosure was. Compare R. at

5–7 with R. at 7.

B. Red River Acted With Scienter, As It Acted With Intent To Deceive And Severe Recklessness.

After receiving notice of wastewater storage containers reaching capacity,

the need for inspections to protect against groundwater contamination and

concerns about seismic activity affecting Red River’s fracking operations, Red

River did not alert their shareholders of the specific risks that the company had

identified or take action to address the imminent threats. R. at 5, 7–8. Instead,

the company maintained the status quo whilst painting a picture of progress,

promise and profit. R. at 7–8. In order for a Section 10(b) claim to succeed, the

injured party must allege with particularity that the defendant acted with the

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required state of mind. 15 U.S.C. §78(u)-4(b)(2). The state of mind that must be

pleaded for a viable Section 10(b) claim is “an intent to deceive, manipulate, or

defraud, or severe recklessness.” Lormand v. US Unwired, Inc., 565 F.3d 228,

251 (5th Cir. 2009). The plaintiff must state facts that give rise to a strong

inference that the defendant merely had one of the four culpable mindsets. Id.

When pleading under the particularized pleading standard, it is essential that

plaintiffs “indicate why the alleged misstatements were false when made.”

Lustgraaf v. Behrens, 619 F.3d 867, 874 (8th Cir. 2010). To establish a strong

inference of scienter, the plaintiff must plead a cogent inference of scienter that

is “at least as compelling as any opposing inference one could draw from the

facts alleged. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324

(2007); see also ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 59 (1st Cir.

2008).

1. Respondents’ Pleadings Give Rise To A Strong Inference That Red River Had An Intent To Deceive Those Who Were Relying On Red River’s Disclosures.

An alleged pattern of non-disclosure can be used to establish intent to

deceive, if proven and if material. Eisai Co. v. Teva Pharms. USA, Inc., 629 F.

Supp. 2d 416, 431 (2009). When the specific intent to deceive is the most

reasonable inference from the evidence, that inference can be used to establish

that there was in fact an intent to deceive. Therasense, Inc. v. Becton, Dickinson

& Co., 649 F.3d 1276, 1290 (Fed. Cir. 2011) (en banc). The issue of a

defendant's intent to deceive is a matter "peculiarly within the province of the

trier of facts,” and is not best determined as a matter of law. Walker v. Woodall,

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262 So. 2d 756, 759 (Ala. 1972). A plaintiff may meet their burden to prove a

defendant's intent to deceive by circumstantial evidence. Marshall Durbin

Farms, Inc. v. Landers, 470 So. 2d 1098 (Ala. 1985).

The most reasonable inference from the record underlying this case is

that although Red River received multiple warnings about a host of potential

risks facing their operations, R. at 5–7, Red River did not disclose those

dangers to potential investors to ensure there was a steady inflow of investment

into the corporation. R. at 8. As demonstrated by the warnings about seismic

activity and wastewater container over flow, Red River unquestionably had

been notified prior to June 10, 2018 of tangible risks that could negatively

impact Red River’s business. R. at 5–7. Red River’s repeated failure to divulge

information about potential risks illuminates a vibrant pattern of material non-

disclosure which can establishes the corporation’s intent to deceive. Eisai Co.,

629 F. Supp. 2d at 431. Over the span of just two months in late 2017, “Red

River received phone calls from several university geology departments”

reporting seismic activity that could impact active Red River fracking. R. at 5.

Red River did not make a disclosure to their investors at that time, warning

them of the potential risks. Id. In early May of 2018, Red River received

additional warnings from local geology departments, alerting Red River of

increased seismic activity in an area where Red River was engaging in fracking.

R. at 7. After this additional round of warnings, Red River still did not disclose

the material risks to their investors. Id. On May 28, 2018, Red River received a

third round of warnings regarding frequent seismic activity that was

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impacting an area where they were conducting fracking operations. Id. Even

after receiving a third round of warnings, Red River did nothing, alerted no one

and provided no public disclosure about the risks. Id.

While the very real risks that Red River was grappling with were not

pointed out for investors, the pattern of Red River’s nondisclosure is hard to

miss. R. at R. at 5–7. The corporation’s conduct and the related circumstantial

evidence show Red River’s intent to deceive. R. at 5–8; Marshall Durbin Farms,

Inc., 470 So. 2d 1098. As Red River’s intent to deceive has been demonstrated

through the pleaded circumstantial evidence and pattern of material

nondisclosure, the claim to relief is plausible on its face and dismissal is

inappropriate. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp.

v. Twombly, 550 U.S. 544, 570 (2007); 15 U.S.C. §78(u)-4(b)(2) Not only are the

pleadings sufficient to advance this case beyond dismissal, but the issue of a

defendant's intent to deceive is one that is most appropriately decided by a jury

and this dispute should be so decided. Walker, 262 So. 2d at 759.

2. The Facts Pleaded Give Rise To A Strong Inference That Red River Acted With Severe Recklessness.

Severe recklessness involves “an extreme departure from the standard of

ordinary care” that presents a danger of misleading shareholders “that is either

known to the defendant or is so obvious that the defendant must have been

aware of it.” Adams v. Baker Hughes, Inc., 292 F.3d 424, 430 (5th Cir. 2002). A

plaintiff can establish this level of scienter by pleading that a defendant

recklessly ignored the falsity of their assertions in light of contrary reports. In

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re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 708 (9th Cir. 2012); Frank

v. Dana Corp., 646 F.3d 954, 961 (6th Cir. 2011). In evaluating whether a

plaintiff has adequately pleaded scienter, a court must assume that the

allegations are true and “assess all the allegations holistically.” Tellabs, Inc.,

551 U.S. at 326.

Petitioners received multiple warnings concerning seismic activity, their

insufficient wastewater storage facilities and the effect that their fracking

operations were having on the environment. See supra Section I.B.1; R. at 5–7.

A public company is expected to take reasonable steps to protect against

potential harm and be transparent with shareholders about headwinds that are

affecting business operations–they are not supposed to use silence to mislead

their shareholders. Taylor v. First Union Corp., 857 F.2d 240, 243 (4th Cir.

1988). A company is being reckless and materially misleading when it hides

information which would be important to shareholders when making decisions

regarding their equity in that company. TSC Industries, Inc. v. Northway, Inc.,

426 U.S. 438, 449 (1976). This is particularly true when the company has

reports that largely contradict the public disclosures that are being provided. In

re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d at 708; Frank, 646 F.3d at 961.

Red River made disclosures that were contradicted by their own internal

reports, demonstrating the corporation’s reckless disregard of the truth. Id.; R.

at 7. This reckless disregard, as pleaded by the Respondents, establishes

scienter under the PSLRA. 15 U.S.C. §78(u)-4(b)(2).

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II. RESPONDENTS HAVE ADEQUATELY ESTABLISHED CONTROL PERSON LIABILITY UNDER SECTION 20(a) BECAUSE RESPONDENTS NEED NOT PLEAD PETITIONER WILSON’S “CULPABLE PARTICIPATION” IN RED RIVER’S PRIMARY VIOLATION TO STATE A SECTION 20(a) CLAIM.

Section 20(a) of the Exchange Act confers liability on “[e]very person who,

directly or indirectly, controls any person liable under any provision of this

chapter or of any rule or regulation there under … unless the controlling

person acted in good faith and did not directly or indirectly induce the act or

acts constituting the violation or cause of action.” 15 U.S.C. § 78t(a). To

establish a prima facie case of control person liability under Section 20(a), a

plaintiff must prove: (1) a primary violation of federal securities law; and (2)

that the defendant exercised actual power or control over the primary violator.

Howard v. Everex Systems, Inc., 228 F.3d 1057, 1065 (9th Cir. 2000); see also

Lustgraaf, 619 F.3d AT 873-74 (discussing the prima facie elements of a

Section 20(a) claim). Culpable participation need not be pleaded to establish a

prima facie case under Section 20(a). Howard, 228 F.3d at 1065. As recognized

by the Court of Appeals, Respondents have sufficiently alleged a primary

violation by a controlled person and adequately established Wilson’s control

over Red River and its employees, including those who prepared the disclosure

documents. R. at 23. Therefore, absent the requirement of pleading culpable

participation, Respondents have sufficiently established Wilson’s Liability as a

control person under Section 20(a).

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A. An Individual Defendant’s Culpable Participation In The Primary Violation Is Not A Prima Facie Element Of A Section 20(a) Claim, And Thus, Respondents Are Not Required To Plead Petitioner Wilson’s Culpable Participation In Red River’s Violation.

When determining whether a defendant is a controlling person, a

majority of the circuits apply the two-point test set forth by the Eighth Circuit

in Metge v. Baehler. 762 F.2d 621, 630-31 (8th Cir. 1985). This test, known as

the potential influence test, requires a plaintiff to establish that the defendant

exercised control over the operations of the corporation in general and that he

possessed the power to control the specific activity upon which the primary

violation is predicted, but he need not prove that this power was exercised. See

id. at 631 (emphasis added) (affirming the test applied by the District Court for

the Southern District of Iowa). Under this test, the court focuses on whether

the defendant has the potential to control the primary violator. The Eighth

Circuit reasoned that “the [control person liability] statute is remedial and is to

be construed liberally. It has been interpreted as requiring only some indirect

means of discipline or influence short of actual direction to hold a ‘controlling

person’ liable.” Id. at 630 (quoting Myzel v. Fields, 386 F.2d 718, 738 (8th Cir.

1967)). The Metge test does not require the plaintiff to prove the defendant’s

culpable participation in the primary violation and is accepted by most circuits.

In Harrison v. Dean Witter Reynolds, Inc., the Seventh Circuit expressly

adopted the Metge test because it distinguishes between actual exercise of

control and potential control over the violations. 974 F. 2d 873, 877 (7th Cir.

1992). The court expressly rejected the culpable participant test or any similar

test that “stingily limit[s] the definition of control person.” Id. at 880. The Sixth

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Circuit also applied the Metge two-point test in Sanders Confectionery Products,

Inc. v. Heller Financial, Inc., where the court held that the plaintiff failed to

establish control person liability because the first prong of the “least rigorous”

Metge standard was not met. 973 F.2d 474, 486 (6th Cir. 1992). In Hollinger v.

Titan Capital Corp., the Ninth Circuit held that a plaintiff is not required to

show culpable participation to establish that a broker-dealer was a controlling

person under Section 20(a). 914 F.2d 1564, 1575 (9th Cir. 1990).4 The court

reasoned that Congress did not intend to burden the plaintiff to prove

defendant’s culpable participation and under the plain text of Section 20(a), the

defendant should bear the burden of proving his good faith. Id. at 1575.

The Fifth Circuit expressly rejected the culpable participation standard

for control person liability in G.A. Thompson & Co. v. Partridge, 636 F.2d 945

(5th Cir. 1981). See also Abbott v. Equity Group, Inc., 2 F.3d 613 (5th Cir. 1993)

(recognizing G.A. Thompson & Co.’s rejection of culpable participation

standard).5 The Tenth Circuit also expressly rejected the culpable participation

standard in Maher v. Durango Metals, Inc., holding that in order to establish

prima facie control person liability, the plaintiff must establish a federal

securities violation and the defendant’s control over the primary violator. 144

F.3d 1302, 1305 (10th Cir. 1998). The Tenth Circuit further decided that once

4 The court noticed that this holding is reached in the context of the broker-dealer/registered representative relationship exclusively. Hollinger, 914 F.2d at 1575 n.24. However, the court also noted that “a person may, of course, be a controlling person without being a broker-dealer.” Id. 5 The Abbott court disagreed with the previous Fifth Circuit case Dennis v. General Imaging, Inc., where the court seemed to require the plaintiff to prove defedant’s culpable participation. 918 F.2d 469 (5th Cir. 1990).

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the plaintiff establishes the prima facie case, the burden shifts to the defendant

to show lack of culpable participation or knowledge. Id.

Inconsistent with the majority of circuits, the Second and Third Circuits

require that plaintiffs plead the defendant’s culpable participation as a third

element of a Section 20(a) claim. See, e.g., Lanza v. Drexel & Co., 479 F.2d

1277, 1299 (2d Cir. 1973) (establishing the culpable participation standard and

requiring a plaintiff to plead three elements under Section 20(a)); Rochez Bros.,

Inc. v. Rhoades, 527 F.2d 880, 889-90 (3d Cir. 1975) (concluding that culpable

participation must be shown before liability could attach). However, there is an

overwhelming trend in the Second Circuit that culpable participation does not

have to be pleaded to survive a motion to dismiss. See Derensis v. Coopers &

Lybrand Chtd. Accountants, 930 F. Supp. 1003, 1013 (D.N.J. 1996) (“there is

‘an overwhelming trend in this circuit to allow section 20(a) actions to

withstand rule 9(b) motions based on a simple pleading of control.’”).

This Court should follow the majority’s analysis and hold that a plaintiff

is not required to plead culpable participation to establish control person

liability under Section 20(a) because: (1) the statutory language does not

support such requirement and expressly shifts the burden of proving good faith

to the defendant; (2) the legislative intent was to prevent evasion of liability by

controlling persons and to expand the scope of liability; and (3) posing the

burden of proving culpable participation on plaintiff would negate the purpose

of the possible affirmative defense prescribed by Section 20(a).

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1. The Plain Text Of The Statute Does Not Require A Plaintiff To Plead Defendant’s Culpable Participation.

Section 20(a) of the Exchange Act provides: “[a control person shall be

liable] … unless the controlling person acted in good faith and did not directly or

indirectly induce the act or acts constituting the violation or cause of action.” 15

U.S.C. § 78t(a) (emphasis added). As correctly pointed out by the Court of

Appeals, the term “culpable participation” originated in the Second Circuit and

does not appear anywhere in the statute. R. at 25. See Lanza, 479 F.2d at 1299

(requiring controlling persons culpably participate in securities violation); see

also In re Initial Public Offering Sec. Litig., 241 F. Supp. 2d 281, 393 (S.D.N.Y.

2013) (pointing out that “culpable participation” is a term that does not appear

anywhere in Section 20(a)). The Lanza court reasoned that if proving “culpable

participation” is not required, Section 20(a) would render directors and officers

insurers against false or misleading statements that they did not make. Lanza,

479 F.2d at 1299. Such “culpable participation” element is similar to scienter,

as “it seem[s] to imply a culpable state of mind.” In re Stone & Webster, Inc.,

Sec. Litig., 414 F.3d 187, 196 n.6 (1st Cir. 2005).

However, the plain meaning of the statutory language does not require

such a showing of scienter. G.A. Thompson, 636 F.2d at 958. Section 20(a) does

not require a plaintiff to show participation in the wrongful action by the

controlling person. Id. Rather, the statute confers a liability on a control person

the primary violation of securities laws, unless that person acted in good faith.

15 U.S.C. § 78t(a). In other words, the statute premises liability solely on the

control relationship, subject to the good faith defense. Hollinger, 914 F.2d at

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1575. According to the statutory language, once the plaintiff establishes that

the individual defendant is a controlling person, the burden then shifts to the

defendant to prove that he acted in good faith. Id. See also Paul F. Newton &

Co. v. Texas Commerce Bank, 630 F.2d 1111, 1119-20 (5th Cir. 1980)

(explaining statutory language and posing the burden of proving good faith on

the defendant). Therefore, the provision of proving good faith in Section 20(a)

should be viewed as an affirmative defense to be raised by a defendant, not a

required element of establishing a prima facie case under Section 20(a) to be

proved by a plaintiff. Id.

Here, this Court should follow the plain meaning of the statutory

language. To establish control person liability, Respondents must prove that

there is a primary violation of securities laws by Red River, who is the

controlled person, and Wilson has the actual or potential control over Red River

and its employees, including those who prepared the disclosure documents.

Once Respondents have established Red River’s primary violation and Wilson’s

control over Red River, the Petitioner, Wilson, bears the burden to prove that

he “acted in good faith and did not directly or indirectly induce the act or acts

constituting the violation.”

2. Congress Enacted This Section to Prevent Evasion Of Liability By The Controlling Persons And To Expand, Rather Than Restrict, The Scope Of Liability Under The Securities Law.

Section 20(a) of the Exchange Act was modeled upon Section 15 of the

Securities Act of 1933. Paul F. Newton, 630 F.2d at 1115; see also 15 U.S.C. §

77o. Thus, Section 15 of the Securities Act and Section 20(a) of the Exchange

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Act are analogous provisions that should be interpreted similarly. Pharo v.

Smith, 621 F.2d 656, 673-74 (5th Cir. 1980). Congress enacted Section 15 to

impose liability upon persons who controlled corporations committing

violations of the Securities Act but who might “attempt to evade liability under

common law principles by utilizing ‘dummies’ that would act in their place and

under their control.” Paul F. Newton, 630 F.2d at 1115. See also SEC v.

Management Dynamics, Inc., 515 F.2d 801 (2d Cir. 1975); S.Rep. No. 47, 73d

Cong., 1st Sess. 5 (1933); H.R.Conf.Rep. No. 152, 73d Cong., 1st Sess. 27

(1933). The legislative history of Section 20(a) discloses that Congress

deliberately patterned if after Section 15, with the identical purpose of

preventing persons from avoiding liability under the provisions of the Exchange

Act by utilizing “dummies” to commit prohibited acts. Id. at 1115-16. That

history does not reflect any congressional intent to restrict secondary liability

for violations of the acts to the controlled persons formula. Id. at 1118.

Therefore, the Section 20(a) “control person” provisions were enacted to

expand, rather than restrict, the scope of liability under the securities laws.

Management Dynamics, 515 F.2d at 812. Section 20(a) was intended to impose

liability on controlling persons, such as controlling shareholders and corporate

officers, who would not be liable under common law agency principles,

including the doctrine of respondeat superior, because they were not the actual

employers. Hollinger, 914 F.2d at 1577. See also Paul F. Newton, 630 F.2d at

1118 (explaining that Sections 20(a) and 15 were enacted to expand liability).

The statute must be construed broadly to reach prospective wrongdoers, rather

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than to permit the escape of those who would otherwise be responsible for the

acts of their employees. Management Dynamics, 515 F.2d at 812-13. See also

Paul F. Newton, 630 F.2d at 1118 (“[t]he federal securities statutes are remedial

legislation and must be construed broadly, not technically and restrictively);

H.R. Rep. No. 1383, 73d Cong., 2d Sess. 26 (1934) (defining “control” in a

broad fashion). Therefore, legislative history evidently indicates that Section

20(a) was enacted to prevent evasion of liability by the controlling persons and

to expand the scope of liability under the securities law.

Judge McDonnel-Lewis, in dissent, stated that Congress adopted the

House version of Section 15 of the Securities Act, where the House proposed a

“fiduciary standard” based on a duty of care, and therefore intended Section

20(a) liability to depend on the state of mind and behavior of the control

person. R. at 33. However, the legislative history does not indicate that

Congress intended to burden a plaintiff in a securities law claim with proving a

defendant’s culpable mind and behavior. See generally H.R.Rep. No. 85, 73d

Cong., 1st Session. 5 (1933); H.R.Conf.Rep. No. 152, 73d Cong., 1st Sess. 27

(1933). In fact, Congress provided an affirmative “good faith” defense in Section

20(a) and, when enacting the Exchange Act, amended Section 15 to provide a

similar defense as included in Section 20(a). Paul F. Newton, 630 F.2d at 1116.

See also 15 U.S.C. § 77o (“…unless the controlling person had no knowledge of

or reasonable ground to believe in the existence of the facts by reason of which

the liability of the controlled person is alleged to exist”). This provision for a

good faith defense indicated that Congress intended to expand the scope of

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liability under securities laws so that “those who, under common law principles

of respondeat superior, would have faced no liability at all.” Hollinger, 914 F.2d

at 1577. Congress, through providing such an affirmative defense, indicated

that a defendant in a Section 20(a) claim should bear the burden of proving

good faith.

3. Requiring A Plaintiff To Plead Culpable Participation As A Prima Facie Element Renders The Affirmative Defense Prescribed By Section 20(a) Meaningless.

As presented in sections supra, once a plaintiff has established a primary

violation of a controlled person and the control of the wrongful conduct by a

controlling person, a defendant bears the burden to prove that he acted in good

faith. See Harrison, 974 F.2d at 881 (holding that defendant bears the burden

of proving good faith). Good faith and lack of participation are affirmative

defenses under Section 20(a). Metge, 762 F.2d at 631. Requiring a plaintiff to

prove culpable participation as an element of prima facie case while allowing

lack of participation and good faith as affirmative defenses “confuses the

parties’ responsibilities and unnecessarily burdens plaintiffs contrary to the

plan meaning of the statute.” Id. See G.A. Thompson, 636 F.2d at 958 (“[i]t is

important to separate control from the good faith defense since the burden of

proof with respect to the latter is on the defendant, while the burden of

establishing control is on the plaintiff).

As correctly pointed out by the Court of Appeals, “culpable participation”

is an element of proving ultimate liability, not an element of establishing prima

facie liability in the pleadings. R. at 25. This interpretation is reasonable

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because under the requirement of plaintiff proving culpable participation, once

a plaintiff has pleaded and proven culpable participation, a defendant cannot

conceivably prove good faith or lack of inducement. In re Parmalat Sec. Litig.,

375 F. Supp. 2d 278, 308 n.200 (S.D.N.Y. 2005) (citation omitted). This result

is illogical and renders the good faith defense provided by Section 20(a)

meaningless. Id. Accordingly, a defendant’s prima facie liability depends on

plaintiff’s ability to show control only. Therefore, Respondents are not required

to plead Wilson’s culpable participation in Red River’s primary violation of the

securities law. It is the Petitioner’s burden to prove that he acted in good faith

and lack of inducement.

B. Absent The Requirement Of Pleading Culpable Participation, Respondents Sufficiently Established Control Person Liability Under Section 20(a) Because Respondents Have Adequately Alleged A Primary Violation By Petitioner Red River And Wilson’s Control Over Red River And Its Employees.

Absent the requirement of pleading culpable participation, a plaintiff

alleging control person liability under Section 20(a) need only prove: (1) a

primary violation of federal securities law; and (2) that the defendant exercised

actual power or control over the primary violator. Howard, 228 F.3d at 1065. In

the present case, Respondents have adequately alleged a Section 10(b) violation

by Red River and thus, have sufficiently established a primary violation by a

controlled person, pursuant to Section 20(a).

In the context of Section 20(a), “control” is defined as “the power to direct

or cause the direction of the management and policies of a person [or

corporation], whether through ownership of voting securities, by contract, or

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otherwise.” 17 C.F.R. 240.12b-2. Corporate officers are “presumed to possess

the ability to control the action of their employees.” City of Westland Police &

Fire Ret. Sys. v. MetLife, Inc., 928 F. Supp. 2d 705, 721 (S.D.N.Y. 2013).

Directors or officers who sign SEC disclosure documents are presumed to

control those who draft those documents. Id. Therefore, allegations that a

defendant signed the SEC disclosure documents are sufficient to establish that

the defendant had control over those who drafted those documents. Id.

Furthermore, in Rochez Bros., Inc. v. Rhoades, the Third Circuit held that

Rhoades, as the chairman of the board, the chief executive officer, and the

person who ran day-to-day business activities of the corporation, was the

controlling person for Section 20(a) purposes. 527 F.2d at 891.

Here, similar to Rochez Bros., Wilson was the board chairman, the chief

executive officer, and the person who ran the day-to-day business of Red River.

Similar to City of Westland Police & Fire Ret. Sys., Wilson had signed Red

River’s disclosure documents. These facts are sufficient to establish Wilson’s

control over Red River and its employees, including those who prepared the

disclosure documents. By adequately pleading these facts, Respondents have

sufficiently proven that Wilson is a control person within the context of Section

20(a). Therefore, Respondents have adequately established control person

liability under Section 20(a) of the Exchange Act.

CONCLUSION

For the foregoing reasons, Respondents respectfully ask this court to

affirm the decisions of the Court of Appeals for the Fourteenth Circuit.