The opinion of the court was delivered by: William C. Conner, District Judge:
This securities action is presently before the Court on the
motion of defendants First Interstate Bank, Ltd. and First
Interstate Services, Inc. to dismiss the complaint as against
them for failure to state a claim upon which relief may be
granted pursuant to Fed.R.Civ.P. 12(b)(6). For the following
reasons, defendants' motion is denied.
I. Motion to Dismiss Standard
A motion to dismiss for failure to state a claim tests only
the sufficiency of a complaint, see Scheuer v. Rhodes,
416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974), and should
not be granted "unless it appears beyond a doubt that the
plaintiff can prove no set of facts in support of his claim
which would entitle him to relief." Conley v. Gibson,
355 U.S. 41, 45-46, 78 S.Ct. 99, 102-103, 2 L.Ed.2d 80 (1957); Anderson
v. Coughlin, 700 F.2d 37, 40 (2d Cir. 1983). A court must
accept as true the allegations of the complaint and draw all
reasonable inferences in favor of the plaintiff. See Scheuer,
416 U.S. at 236, 94 S.Ct. at 1686. Viewing plaintiff's
complaint in such favorable light, the Court denies defendants'
motion to dismiss.
II. Sufficiency of the Allegation of "Controlling Person"
Liability under Section 20(a) of the Exchange Act
Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a),
[e]very person who, directly or indirectly,
controls any person liable under any provision of
[the Exchange Act] 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, unless the
controlling person acted in good faith and did not
directly induce the act or acts constituting the
violation or cause of action.
The purpose of this provision is to impose secondary liability
on one who controls a violator of the securities laws, and who
fails to show that he acted in "good faith." Defendants argue
that plaintiffs have failed to plead sufficiently the necessary
elements of scienter and culpable participation to establish a
prima facie claim of controlling person liability. Plaintiffs
first refute the necessity of pleading these elements and,
alternatively, maintain that they have satisfied those
requirements if they do exist. For the following reasons, the
Court agrees with plaintiffs that neither scienter nor culpable
participation must be pleaded to state a claim for controlling
person liability. Stating such a claim in the Second Circuit
requires the pleading only of control status, i.e., that the
controlling person directly or indirectly held the power to
exercise control over the primary violator.
This question was resolved authoritatively in this Circuit by
Marbury Management, Inc. v. Kohn, 629 F.2d 705, 716 (2d Cir.),
cert. denied, 449 U.S. 1011, 101 S.Ct. 566, 66 L.Ed.2d 469
(1980), which held that in controlling person liability cases,
once control status is established, it becomes the defendant's
burden to prove that he acted in good faith. On the basis of
this Second Circuit Court ruling, four district court decisions
have explicitly rejected the argument defendants now advance.
The most recent decision, In re Citisource, Inc. Secur.
Litigation, 694 F. Supp. 1069, 1076 (S.D.N.Y. 1988),
crystallized the impact of Marbury Management that "the burden
is on the defendant to show that he is not culpable, rather
than on the plaintiff to show that the defendant is culpable"
and rejected the alleged controlling party's claim that
scienter is a necessary pleading element of Section 20(a)
Another case which rejected defendants' proposition is
Terra Resources I v. Burgin, 664 F. Supp. 82 (S.D.N.Y. 1987), in
which Judge Sweet's response, later quoted with approval ...