SECURITIES | 2026-10-26

Controlling-Person Liability Under Section 20(a): How Executives, Directors, and Parent Companies Can Be Liable for Securities Fraud They Did Not Personally Commit

Section 20(a) of the Securities Exchange Act lets investors reach the people and entities that control a company that committed securities fraud — even without proving the controlling person made a false statement. Understanding the two elements, and the good-faith defense, is essential for officers, directors, and California companies alike.

Most securities-fraud claims target the company and the executives who made the false statements. But federal law reaches further. Section 20(a) of the Securities Exchange Act , codified at 15 U.S.C. §78t(a) , imposes controlling-person liability : it allows investors to hold liable any person who c

Securities-fraud liability does not stop with the person who signed the misleading filing or spoke the false words. Congress built into the Securities Exchange Act a mechanism to reach those who stand behind a primary violator and have the power to control it. Section 20(a) is that mechanism. It reflects a policy judgment that those who control a company that defrauds investors should not escape responsibility simply because they did not personally utter the misstatement. But the doctrine is not limitless: it requires a predicate violation and genuine control, and it gives controlling persons a good-faith defense. This article walks through how Section 20(a) works and where its boundaries lie.

What Section 20(a) Says

Section 20(a), codified at 15 U.S.C. §78t(a), provides that every person who, directly or indirectly, controls any person liable under the Securities Exchange Act is liable jointly and severally with and to the same extent as the controlled person — unless the controlling person acted in good faith and did not directly or indirectly induce the acts constituting the violation. In plain terms, controlling-person liability is a form of secondary (or derivative) liability: it attaches to the controller because of a violation committed by the controlled person, not because the controller independently violated the law. This is what makes it such a powerful tool for investors — it extends the reach of a fraud claim up the chain of control to those with the deepest pockets and the greatest authority.

Element One: A Primary Violation

The first element of a Section 20(a) claim is a primary violation of the securities laws by the controlled person. There can be no controlling-person liability without an underlying violation to attach to — most commonly a violation of Section 10(b) and Rule 10b-5, the general antifraud provisions. If the plaintiff cannot establish that the controlled company or individual committed a primary violation, the Section 20(a) claim fails along with the primary claim. This dependency is important: it means a controlling person can defeat a Section 20(a) claim entirely by defeating the predicate fraud claim against the company, without ever reaching the questions of control or good faith. The primary violation is the foundation on which the entire secondary claim rests.

Element Two: Control

The second element is control. In the Ninth Circuit, whose law governs federal securities cases arising in California, the test was articulated in Howard v. Everex Systems, Inc. (9th Cir. 2000) 228 F.3d 1057. To state a claim, a plaintiff must allege (1) a primary violation of the federal securities laws and (2) that the defendant exercised actual power or control over the primary violator. "Control" is generally understood as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through ownership of voting securities, by contract, or otherwise. The inquiry is practical and fact-intensive: a title alone does not establish control, and conversely a person without a formal title may exercise control in fact. Officers, directors, and parent entities are frequent targets precisely because they often possess the requisite power.

The Good-Faith Defense

Section 20(a) contains a built-in good-faith defense. A controlling person is not liable if it proves that it acted in good faith and did not directly or indirectly induce the act or acts constituting the violation. This is an affirmative defense on which the controlling person bears the burden. Under Howard, the good-faith inquiry is closely tied to scienter: the court observed that a defendant who cannot establish an undisputed lack of scienter generally cannot establish good faith either, which can defeat summary judgment on the Section 20(a) claim. In practice, mounting a good-faith defense means showing that the controlling person maintained and enforced a reasonable system of supervision and internal controls and was not reckless or complicit in the underlying violation — a showing that depends heavily on the facts of the company's compliance structure and the controller's actual conduct.

Scienter and the Controlling Person

A frequently misunderstood point is the role of scienter in controlling-person claims. Under the Ninth Circuit's approach in Howard, a plaintiff does not bear the burden of proving the controlling person's own scienter separate and apart from the controlled corporation's scienter. In other words, the plaintiff need not show that the controller personally intended to defraud; the controller's state of mind becomes relevant principally through the good-faith defense, which the controller must raise and prove. This allocation is significant: it means a plaintiff can establish a prima facie Section 20(a) claim by showing a primary violation and control, shifting to the defendant the burden of demonstrating good faith and non-inducement. The result is a doctrine that is comparatively favorable to investors in the Ninth Circuit.

A Circuit Split on "Culpable Participation"

Not every federal circuit applies the same standard. A circuit split exists over whether a plaintiff must affirmatively plead and prove that the controlling person was a culpable participant in the fraud. Some circuits, including the Second Circuit, have required a showing of culpable participation as part of the plaintiff's prima facie case, making controlling-person liability harder to establish. The Ninth Circuit, by contrast, does not require the plaintiff to prove culpable participation; instead, culpability is addressed through the defendant's good-faith affirmative defense. For litigation arising in California, the Ninth Circuit's approach controls, and it places the burden on the controller to establish good faith rather than on the plaintiff to prove culpable participation. Parties should be mindful of this divergence when a case has connections to multiple circuits.

Who Can Be a Controlling Person

The category of potential controlling persons is broad. It commonly includes senior officers such as a CEO or CFO who direct the company's disclosures; directors who exercise board-level control; parent corporations that control a subsidiary primary violator; and large or majority shareholders with the power to direct management. Whether any particular person is a controlling person is a fact question turning on the reality of the power relationship, not merely on formal roles. A director with no meaningful influence over the fraudulent conduct may have a strong non-control or good-faith argument, while an officer who dominated the company's disclosure process faces a much harder path. Because the determination is fact-specific, controlling-person claims are often resolved on a developed record rather than at the pleading stage.

How Section 20(a) Interacts With Primary Liability

Section 20(a) is a complement to, not a substitute for, primary liability under Section 10(b). Plaintiffs typically plead both: a primary 10(b)/Rule 10b-5 claim against the company and the individuals who made the misstatements, and a Section 20(a) claim against those individuals and entities in their capacity as controlling persons. The two theories can reach the same defendant through different doors — a CEO who made false statements may be primarily liable under 10(b) and also secondarily liable under 20(a) as a controller. Because Section 20(a) depends on a primary violation, however, the viability of the controlling-person claim rises and falls with the strength of the underlying fraud claim. Defense strategy therefore often concentrates first on defeating the primary violation, which, if successful, eliminates the secondary claim as well.

Practical Implications for Officers, Directors, and Companies

For California executives and the companies they serve, controlling-person liability underscores the importance of robust disclosure controls and supervision. Because the good-faith defense turns on whether the controller maintained and enforced a reasonable system to prevent violations, a well-documented compliance program — an active disclosure committee, meaningful review of public statements, and prompt response to red flags — is both good governance and a legal safeguard. Directors should ensure they receive and scrutinize the information necessary to oversee disclosure, and officers should avoid dominating the process in ways that invite control findings without good-faith protections. For investors, Section 20(a) is a valuable tool to reach those truly responsible for a company's fraud. In either posture, the doctrine rewards careful attention to the realities of control and the quality of the compliance record.

Section 15 of the Securities Act: A Parallel Provision

Section 20(a) governs controlling-person liability for violations of the Securities Exchange Act of 1934, but a parallel provision exists for the Securities Act of 1933. Section 15 of the Securities Act, codified at 15 U.S.C. §77o, imposes controlling-person liability for primary violations of the registration and prospectus provisions — most importantly Section 11 (false registration statements) and Section 12 (unlawful offers and sales). The structure mirrors Section 20(a): a person who controls a primary violator is liable to the same extent as the controlled person, subject to a defense for a controller who had no knowledge of or reasonable ground to believe in the facts giving rise to the violation. Plaintiffs in offering-related cases often plead Section 15 alongside the underlying Section 11 or 12 claims, just as Exchange Act plaintiffs plead Section 20(a) alongside a Section 10(b) claim. Understanding which statute applies depends on the nature of the primary violation — a registration-and-offering violation triggers Section 15, while a fraud-on-the-market or reporting violation triggers Section 20(a) — and a complaint arising from a public offering may implicate both.

Pleading Standards and the Statute of Limitations

Because controlling-person liability is derivative, the heightened pleading and timing rules that govern the primary claim shape the secondary claim as well. A Section 10(b) primary violation must satisfy the Private Securities Litigation Reform Act (PSLRA) pleading requirements, including particularized allegations giving rise to a strong inference of scienter, and the fraud must be pleaded with the particularity that Federal Rule of Civil Procedure 9(b) demands. If the primary claim fails these standards and is dismissed, the Section 20(a) claim ordinarily falls with it. The statute of limitations likewise runs from the underlying violation: federal securities-fraud claims are generally subject to a limitations period measured from discovery of the facts constituting the violation, with an outer repose period, and the controlling-person claim is tied to the same timeline. For defendants, this means that attacking the sufficiency and timeliness of the primary claim is frequently the most efficient way to dispose of the controlling-person claim; for plaintiffs, it means the secondary theory is only as strong as the primary pleading on which it rests.

Indemnification, D&O Insurance, and Settlement Dynamics

Controlling-person exposure shapes how securities cases are defended and resolved in practice. Officers and directors named as controlling persons typically look to two protections: corporate indemnification and directors-and-officers (D&O) liability insurance. Corporate bylaws and indemnification agreements commonly provide that the company will indemnify officers and directors for liabilities incurred in their corporate capacity, subject to statutory limits, and D&O policies are designed to respond to securities claims, including controlling-person claims, by funding defense costs and settlements. These protections, however, have conditions and exclusions — for example, coverage may be unavailable for deliberate fraud established by final adjudication — so the strength of a controlling person's real-world protection depends on the specific indemnity and policy terms. In settlement, the joint and several nature of Section 20(a) liability means a controlling person can be exposed to the full measure of the primary violator's liability, which increases settlement pressure. Because the controlling-person claim rises and falls with the primary violation, settlement negotiations frequently address the company and its controlling persons together, and the allocation of any settlement among insurers, the company, and individuals becomes a central part of the resolution. Understanding these dynamics early helps officers and directors assess their genuine exposure rather than reacting only to the face of the complaint. A careful early review of the indemnification agreements, the D&O tower and its exclusions, and the strength of the primary claim gives a controlling-person defendant a realistic picture of both the worst case and the most likely path to resolution.

Related Guides

• California Securities & Corporate Governance Lawyers
• SOX Sections 302 and 906: CEO and CFO Certifications
• Matrixx and Materiality in Securities Disclosure

Frequently Asked Questions

What is controlling-person liability under Section 20(a)?

Section 20(a) of the Securities Exchange Act, 15 U.S.C. §78t(a), makes a person who controls a primary violator of the securities laws jointly and severally liable with the controlled person — even if the controller did not personally make a false statement — unless the controller acted in good faith and did not induce the violation.

What are the elements of a Section 20(a) claim in the Ninth Circuit?

Under Howard v. Everex Systems, Inc. (9th Cir. 2000) 228 F.3d 1057, a plaintiff must allege (1) a primary violation of the federal securities laws, and (2) that the defendant exercised actual power or control over the primary violator. Ninth Circuit law governs federal securities cases arising in California.

Does the plaintiff have to prove the controlling person's scienter?

No. In the Ninth Circuit, the plaintiff does not bear the burden of proving the controlling person's scienter separate from the controlled company's. The controller's state of mind comes in through the good-faith affirmative defense, which the controller must raise and prove. Call Trembach Law Firm at (818) 514-7680.

What is the good-faith defense?

Section 20(a) exempts a controlling person who proves it acted in good faith and did not directly or indirectly induce the violation. It is an affirmative defense; under Howard, a defendant who cannot show an undisputed lack of scienter generally cannot show good faith. It typically requires a reasonable system of supervision and controls.

Who can be held liable as a controlling person?

Senior officers (such as a CEO or CFO), directors, parent corporations controlling a subsidiary, and large or majority shareholders with power to direct management. Whether a person is a controlling person is a fact question about the reality of the power relationship, not just formal titles.

Is there a difference among the federal circuits?

Yes. A circuit split exists over whether a plaintiff must prove the controlling person was a "culpable participant." Some circuits, like the Second, require it as part of the prima facie case; the Ninth Circuit does not, addressing culpability through the good-faith defense. California cases follow the Ninth Circuit approach.

Does Section 20(a) require a primary violation?

Yes. Controlling-person liability is derivative — it attaches to an underlying violation by the controlled person, usually a Section 10(b)/Rule 10b-5 violation. If no primary violation is established, the Section 20(a) claim fails with it. Call Trembach Law Firm at (818) 514-7680.

How can officers and directors protect themselves?

Maintain and enforce a reasonable system of disclosure controls and supervision, keep an active disclosure committee, review public statements meaningfully, and respond promptly to red flags. A well-documented compliance program supports the good-faith defense and is strong governance in its own right.

Talk to a California Securities Lawyer About Controlling-Person Liability

Section 20(a) can extend securities-fraud liability to officers, directors, parents, and controlling shareholders who never made a false statement themselves. Trembach Law Firm, led by Anatolii Trembach (LL.M.; admitted in California), advises controlling persons and investors on the control element, the primary-violation requirement, and the good-faith defense that decides these claims. Call (818) 514-7680 for a confidential consultation.

Contact Trembach Law Firm at (818) 514-7680 for a confidential consultation.

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