MEMO TO:
Alexsei Demo US
RESEARCH ID:
#400057029417d3
JURISDICTION:
Federal
STATE/FORUM:
New York, United States of America
ANSWERED ON:
December 17, 2021
CLASSIFICATION:
Securities

Issue:

Do the heightened pleading standards for fraud apply to a control person liability claim under section 20(a) of the Securities Exchange Act?

Facts:

The plaintiff did not plead the culpable participation element of a control person liability claim.

Conclusion:

The Federal Rules of Civil Procedure do not, in general, mandate that the allegations in a pleading be stated with particularity. However, a heightened pleading standard exists for claims alleging fraud or mistake. Specifically, in those actions, the party must state with particularity the circumstances constituting the fraud or mistake. (Fed. Civ. Proc. Rule 8, Fed. Civ. Proc. Rule 9)

A person who controls, directly or indirectly, another person under any provision of the Securities and Exchange Act of 1934, is liable jointly and severally with the controlled person unless the controlling person acted in good faith and did not directly or indirectly induce the acts constituting the violation or cause of action. (Securities Exchange Act of 1934 section 20(a))

For a plaintiff to establish a prima facie case of the defendant's liability as a controlling person under section 20(a), the plaintiff must show not only a violation by the person controlled, but also that the controlling person was in a meaningful way a "culpable participant in the fraud" perpetrated by the controlled person. (In re Scottish re Group Securities Litigation, Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, S.E.C. v. First Jersey Securities, Inc., Doubleline Capital LP v. Construtora Norberto Odebrecht, S.A., In re Bioscrip, Inc. Sec. Litig.)

There is an ongoing debate in the Second Circuit as to whether culpable participation must be pled with particularity. (In re Bioscrip, Inc. Sec. Litig.)

In In re Parmalat Securities Litigation, the United States District Court for the Southern District of New York held that plaintiffs are not required to plead culpable participation in order to state a legally sufficient claim under section 20(a).

In In re Scottish re Group Securities Litigation, the District Court for the Southern District of New York held that allegations of control are not allegations of fraud. Therefore, the allegations of control do not have to be pleaded under the heightened pleading standard required for fraud. Rather, allegations of control set forth in the pleadings are governed by the regular pleading standard set forth in Rule 8 as compared to the heightened pleading standard for fraud set forth in Rule 9(b).

In Doubleline Capital LP v. Construtora Norberto Odebrecht, S.A., the District Court for the Southern District of New York reiterated that because allegations of control are not averments of fraud, the extent to which the control must be alleged in the pleading stage are governed by the less strict standard of Rule 8. However, the Court held that a heightened pleading standard applies to the culpable participation element of a section 20(a) claim.

Law:

The Federal Rules of Civil Procedure do not, in general, mandate that the allegations in a pleading be stated with particularity. Fed. Civ. Proc. Rule 8 sets forth the following pleading requirements for a claim for relief:

(a) Claim for Relief. A pleading that states a claim for relief must contain:

(1) a short and plain statement of the grounds for the court’s jurisdiction, unless the court already has jurisdiction and the claim needs no new jurisdictional support;

(2) a short and plain statement of the claim showing that the pleader is entitled to relief; and

(3) a demand for the relief sought, which may include relief in the alternative or different types of relief.

However, the Federal Rules of Civil Procedure impose a heightened pleading standard for claims alleging fraud. Specifically, under Fed. Civ. Proc. Rule 9(b), in an action alleging fraud or mistake the party must state with particularity the circumstances constituting the fraud or mistake:

(b) Fraud or Mistake; Conditions of Mind. In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.

Section 20(a) of the Securities and Exchange Act of 1934 ("the Act"), codified at 15 U.S.C. § 78t(a), provides that, in general, a person who controls, directly or indirectly, another person under any provision of the Act is liable jointly and severally with the controlled person unless the controlling person acted in good faith and did not directly or indirectly induce the acts constituting the violation or cause of action:

(a) Joint and several liability; good faith defense

Every person who, directly or indirectly, controls any person liable under any provision of this chapter 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 78u(d) of this title), 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.

In S.E.C. v. First Jersey Securities, Inc., 101 F.3d 1450 (2d Cir. 1996) ("First Jersey Securities"), the United States Court of Appeals for the Second Circuit held that for a plaintiff to establish a prima facie case of a defendant's liability as a controlling person under section 20(a), the plaintiff must show not only a violation by the person controlled, but also that the controlling person was in a meaningful way a "culpable participant in the fraud" perpetrated by the controlled person (at 1472-1473):

Even if Brennan were not to be held primarily liable for his participation in First Jersey's fraudulent activity, the district court properly ruled that he was liable for violations of § 10(b) and Rule 10b-5 as a controlling person under § 20(a) of the 1934 Act. Section 20(a) provides that

[e]very person who, directly or indirectly, controls any person liable under any provision of this chapter 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 or indirectly induce the act or acts constituting the violation or cause of action.

15 U.S.C. § 78t. Since § 20(a) is available as an enforcement mechanism to "any person to whom such controlled person is liable," and the 1934 Act includes government agencies in the definition of "person," see 15 U.S.C. § 78c(a)(9), we have upheld the SEC's authority to pursue an enforcement action under § 20(a). See SEC v. Management Dynamics, Inc., 515 F.2d 801, 812 (2d Cir.1975). Contra SEC v. Coffey, 493 F.2d 1304, 1318 (6th Cir.1974), cert. denied, 420 U.S. 908, 95 S.Ct. 826, 42 L.Ed.2d 837 (1975).

In order to establish a prima facie case of controlling-person liability, a plaintiff must show a primary violation by the controlled person and control of the primary violator by the targeted defendant, see Marbury Management, Inc. v. Kohn, 629 F.2d at 715-16, and show that the controlling person was " 'in some meaningful sense [a] culpable participant[ ] in the fraud perpetrated by [the] controlled person[ ],' " Gordon v. Burr, 506 F.2d 1080, 1085 (2d Cir.1974) (quoting Lanza v. Drexel & Co., 479 F.2d 1277, 1299 (2d Cir.1973) (en banc)). Control over a primary violator may be established by showing

Page 1473

that the defendant possessed "the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise." 17 C.F.R. § 240.12b-2.

In In re Parmalat Securities Litigation, 375 F.Supp.2d 278 (S.D.N.Y. 2005), the United States District Court for the Southern District of New York held that the Second Circuit's decision in First Jersey Securities does not require plaintiffs to plead culpable participation in order to state a legally sufficient claim under section 20(a) (at 307-310):

The Second Circuit has not addressed the question whether a plaintiff must allege culpable participation in order to state a legally sufficient claim under Section 20(a). As this Court recently

Page 308

noted, whether culpable participation must be pleaded as well as proven "is an interesting question on which courts, both within and outside this circuit are deeply divided."

This question is one of statutory interpretation. The starting point therefore must be the plain language of the text.

In this case, the statutory language is clear upon its face. An individual who controls another is liable for the primary violation of the controlled person unless the controlling person acted in good faith and did not induce the cause of action. The interpretation most consistent with the text is that the defendant bears the burden of establishing good faith and lack of inducement, not that the plaintiff must allege the opposite in its pleadings. It accords also with the purpose of Section 20(a) which, as the Second Circuit observed, was enacted "to expand, rather than restrict, the scope of liability."

Nor are the Second Circuit cases inconsistent with the conclusion that plaintiff is not required to allege culpable participation. In one line of cases, beginning with Marbury Management, Inc. v. Kohn, the Court laid out the burden shifting aspect of Section 20(a) when it held that once plaintiff had established control, the burden of proving good faith shifted to the defendant. While Lanza v. Drexel & Co., SEC v. First Jersey Securities, Inc. and their progeny are relied upon by those district courts in this Circuit that have required the pleading of culpable participation, these cases are consistent with the burden shifting element of

Page 309

Marbury Management.

In Lanza, the Second Circuit stated that "[t]he intent of Congress in adding [Section 20(a)] ... was obviously to impose liability only on those directors ... who are in some meaningful sense culpable participants in the fraud perpetrated by controlling persons." This statement has no bearing on the question of pleading culpable participation. It merely reiterates that an individual must culpably have participated in the fraud in order ultimately to be held liable, a requirement that would be satisfied by the failure of a control person to establish the statutory good faith defense.

In First Jersey, the Second Circuit went a step further and said that culpable participation is an element in proving a prima facie case of control person liability, which of course seems to support defendants' argument. Having given with one hand, however, the First Jersey panel took away with the other. It then restated the burden shifting approach of Marbury Management, explaining "[o]nce the plaintiff makes out a prima facie case of § 20(a) liability, the burden shifts to the defendant to show that he acted in good faith, and that he did not ... induce the act or acts constituting the violation." As another court has stated in reference to this passage, the Second Circuit there "essentially rendered the culpable participation requirement meaningless." Another way to put the same point would be to say that the broad language to the effect that culpable participation is an element of a Section 20(a) plaintiff's prima facie case was a loosely stated dictum.

Since First Jersey, the Second Circuit has addressed Section 20(a) liability, albeit briefly, in four cases. At no point has the Second Circuit applied First Jersey to conclude that culpable participation must be pleaded to state a legally sufficient Section 20(a) claim. Nor has it overruled Marbury Management. Suez Equity Investors is the only decision that substantively addressed the pleading requirements, and it supports the view that alleging culpable participation is not required. The Second Circuit there held that plaintiffs had alleged control person liability adequately without any discussion of culpable

Page 310

participation.

In sum, if the Second Circuit had held that a Section 20(a) claim is insufficient absent an allegation of culpable participation, this Court of course would follow it. But it has not. With the plain language of the statute unambiguous, this Court holds that plaintiffs state a legally sufficient claim under this statute if they plead (1) a primary violation by a controlled person and (2) control of the primary violator by the defendant.

However, in Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 750 F.3d 227 (2nd Cir. 2014) the United States Court of Appeals for the Second Circuit held that to allege a claim for control person liability under section 20(a), the plaintiff must show, among other things, that the defendant was a culpable participant in the controlled person's fraud in a meaningful way (at 236):

To state a claim of control person liability under § 20(a), “a plaintiff must show (1) a primary violation by the controlled person, (2) control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled person's fraud.” ATSI, 493 F.3d at 108. Because we vacate the District Court's dismissal of plaintiffs' 10b–5 claims with respect to Barclays's 2007–2009 submission rates and defendant Diamond's 2008 remarks, we also vacate the District Court's dismissal of plaintiffs' § 20(a) control person liability claim as to these issues. And, because we affirm the District Court's dismissal of plaintiffs' 10b–5 claim relating to Barclays's internal control statements, we also affirm the dismissal of plaintiffs' § 20(a) claim with respect to these statements.

In In re Bioscrip, Inc. Sec. Litig., 95 F. Supp. 3d 711 (S.D.N.Y. 2015), the District Court for the Southern District of New York noted the ongoing debate in the Second Circuit as to whether culpable participation must be pleaded with particularity or whether it is an affirmative defense, with the burden on the defendant in establishing the absence of such participation. The Court, in finding that the plaintiffs adequately alleged culpable participation and were therefore able to state a control person claim under section 20(a) as against all but one of the defendants, stated (at 740-742):

Plaintiffs allege control person liability under § 20(a) of the Exchange Act against Kohlberg and the Individual Exchange Act Defendants. See 15 U.S.C. § 78t(a); CCAC ¶¶ 247–255. In order to establish a prima facie case of liability under § 20(a), a plaintiff must show: (1) a primary violation by a controlled person; (2) control of the primary violator by the defendant; and (3) that the controlling person was in some meaningful sense a culpable participant in the primary violation. See In re Alstom SA, 406 F.Supp.2d 433, 486 (S.D.N.Y.2005) (citing Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir.1998)). Plaintiffs have pled a primary violation of Rule 10b–5 and § 10(b) by a controlled person, namely BioScrip and the Individual Exchange Act Defendants, thus meeting the requirements of the first element of control person liability under § 20(a).

Plaintiffs next must allege control of the primary violator by Kohlberg or the Individual Exchange Act Defendants. For purposes of control person liability, control is defined as “the power to direct or cause the direction of the management and policies of [the primary violators], whether through the ownership of voting securities, by contract, or otherwise.” S.E.C. v. First Jersey Sec., Inc., 101 F.3d 1450, 1473 (2d Cir.1996) (quoting 17 C.F.R. § 240.12b–2). The power to influence managerial decisions is not the same as “power to direct the management and policies of the primary violator.” In re Tronox, Inc. Sec. Litig., 769 F.Supp.2d 202, 208 (S.D.N.Y.2011) (quoting Fezzani v. Bear, Stearns & Co., Inc., 384 F.Supp.2d 618, 645 (S.D.N.Y.2004) ). Rather, “[a]ctual control is essential to control person liability.” In re Blech Sec. Litig., 961 F.Supp. 569, 586 (S.D.N.Y.1997) (emphasis added).

Plaintiffs have not plausibly plead control as to Kohlberg. Their argument against Kohlberg is premised on the fact that, at its zenith, Kohlberg controlled approximately 26 percent of BioScrip stock and had the right to designate two directors on BioScrip's eight-person board. CCAC ¶ 252. Plaintiffs also cite to media reports noting that, as BioScrip's largest shareholder, Kohlberg exercised “substantial influence” over BioScrip. Id. ¶ 208. Plaintiffs' claim on this point fails as a matter of law for this very reason.

Substantial influence is not the same as actual control, and “[a]ctual control is essential to control person liability.” In re Blech Sec. Litig., 961 F.Supp. at 586. Certainly the ability to appoint a quarter of BioScrip's board and owning about a quarter of the company's common stock afforded Kohlberg a great deal of sway over BioScrip, but that alone does not rise to the level of actual control. “Minority stock ownership and the ability to appoint a minority of the board do not create power to direct management and policies, and thus do not constitute sufficient control ...” In re Alstom SA, 406 F.Supp.2d at 492 (citing

[95 F.Supp.3d 741]

In re Flag Telecom Holdings, Ltd. Sec. Litig., 352 F.Supp.2d 429, 458–59 (S.D.N.Y.2005) (concluding plaintiff failed to allege control where defendant possessed 30 percent of voting shares and ability to appoint three of nine board members)). See also In re China Valves Tech. Sec. Litig., 979 F.Supp.2d 395, 414 (S.D.N.Y.2013) (plaintiffs failed to state a claim of control person liability where defendant had 30 percent stock ownership); In re Deutsche Telekom AG Sec. Litig., 00–cv–9475 (SHS), 2002 WL 244597, at *6 (S.D.N.Y. Feb. 20, 2002) (allegation that defendant possessed 22 percent of company's common stock and therefore possessed control of the company was a conclusory allegation insufficient to survive motion to dismiss); Silsby v. Icahn, 17 F.Supp.3d 348 (S.D.N.Y.2014) (allegation that defendant was largest shareholder, possessed 14 percent of common stock, and had ability to appoint two members of the board was insufficient to allege control). Therefore, the Plaintiffs § 20(a) claim against Kohlberg must be dismissed because they have failed to allege that Kohlberg possessed actual control of BioScrip.

The same is not the case for the Individual Exchange Act Defendants. Determining an individual defendant's liability as a control person is a “fact-intensive inquiry[ ] [that] generally should not be resolved on a motion to dismiss.” In re Tronox, 769 F.Supp.2d at 208. Indeed, Defendants raise no counter-arguments as to whether the Individual Exchange Act Defendants possessed actual control over BioScrip. See Def.'s Br. at 23–25.

The “[s]tatus of defendants as directors, ‘standing alone, is insufficient to establish their control.’ ” Id. (quoting Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc., 05–cv–1898, 2005 WL 2148919, at *7 (S.D.N.Y. Sept. 6, 2005) ). Nonetheless, “corporate officers usually are presumed to possess the ability to control the actions of their employees [and][d]irectors and officers who sign registration statements or other SEC filings are presumed to control those who draft those documents.” City of Westland Police & Fire Ret. Sys. v. MetLife, Inc., 928 F.Supp.2d 705, 721 (S.D.N.Y.2013) (concluding that “where a plaintiff alleges that the directors and officers participated in the alleged primary conduct, that is sufficient to state a claim for control person liability.”). Because each one of the Individual Exchange Act Defendants had authority over the SEC filings at issue, see CCAC ¶¶ 250, 254, Plaintiffs have adequately alleged that they possessed actual control over BioScrip.

Finally, it is a matter of ongoing debate in this Circuit whether culpable participation must be pled with particularity or whether it is an affirmative defense, with the burden on the defendant in establishing the absence of such participation. See In re Parmalat Sec. Litig., 594 F.Supp.2d 444, 449 n. 32 (S.D.N.Y.2009) (collecting cases). Regardless, Plaintiffs have adequately alleged the Individual Exchange Act Defendants' culpable participation—each of the Defendants was responsible for reviewing BioScrip's SEC filings, see CCAC ¶ ¶ 250, 254 and thus, according to the allegations, “knew or should have known that the primary violator, over whom [they] had control, was engaging in

[95 F.Supp.3d 742]

fraudulent conduct.” Lapin v. Goldman Sachs Grp., Inc., 506 F.Supp.2d 221, 247 (S.D.N.Y.2006). Accordingly, Plaintiffs are able to state a control person claim under § 20(a) as against the Individual Exchange Act Defendants, but not Kohlberg.

In In re Scottish re Group Securities Litigation, 524 F.Supp.2d 370 (S.D.N.Y. 2007), the District Court for the Southern District of New York stated that in order to plead a prima facie case under section 20(a), the plaintiff must allege that the defendant, in some meaningful way, was a culpable participant in the controlled person's fraud. However, the Court made clear that allegations of control are not allegations of fraud. Therefore, the allegations of control do not have to be pleaded under the heightened pleading standard required for fraud. Rather, allegations of control set forth in the pleadings are governed by the regular pleading standard set forth in Rule 8 as compared to the heightened pleading standard for fraud set forth in Rule 9(b) (at 386):

In order to plead a prima facie case of control person liability under section 20(a), a plaintiff must allege "(1) a primary violation by the controlled person, (2) control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled person's fraud." A plaintiff must plead "actual control, not merely control person status."

"Allegations of control are not averments of fraud and therefore need not be pleaded with particularity." Thus, "`[a]t the pleading stage, the extent to which the control must be alleged will be governed by Rule 8's pleading standard'" and "`[a] short, plain statement that gives the defendant fair notice of the claim that the defendant was a control person and the ground on which it rests its assertion that a defendant was a control person is all that is required.'"

In Doubleline Capital LP v. Construtora Norberto Odebrecht, S.A., 413 F. Supp. 3d 187 (S.D.N.Y. 2019), the United States District Court for the Southern District of New York reiterated that because allegations of control are not averments of fraud, the extent to which the control must be alleged at the pleading stage is governed by the less strict standard of Rule 8. However, the Court held that a heightened pleading standard applies to the third-prong of a section 20(a) claim, in that the plaintiffs are required to allege facts demonstrating that the defendant was a culpable participant (at 219-221):

Plaintiffs also assert that OSA is liable under Section 20(a) for CNO's misstatements. To prevail under Section 20(a), " ‘a plaintiff must show (1) a primary violation by the controlled person, (2) control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled person's fraud.’ "

[413 F.Supp.3d 220]

Carpenters Pension Tr. Fund, 750 F.3d at 236 (quoting ATSI , 493 F.3d at 108). As to the second element, control over a primary violator, "a plaintiff must allege ‘that the defendant possessed the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.’ " In re BISYS Sec. Litig., 397 F. Supp. 2d 430, 451 (S.D.N.Y. 2005) (quoting SEC v. First Jersey Sec. Inc. , 101 F.3d 1450, 1472-73 (2d Cir. 1996)). The third element, culpable participation, requires that plaintiff show "actual involvement in the making of the fraudulent statements by the putatively controlled entity." In re Refco, Inc. Sec. Litig. , 503 F. Supp. 2d 611, 663 (S.D.N.Y. 2007) (quotation omitted). Some cases have described this third requirement—"a regular fixture of the Second Circuit's jurisprudence" but not identified in Section 20(a)'s statutory language—as a description of the "degree of control" necessary to "render a person liable" under Section 20(a). See SEC v. Lek Sec. Corp., 276 F. Supp. 3d 49, 63 (S.D.N.Y. 2017). This can result in collapsing the distinction between the second and third prongs—as Defendants do here —but these elements require distinct analytical attention.

Courts within the Second Circuit broadly construe the control person provisions "as they ‘were meant to expand the scope of liability under the securities laws.’ " CompuDyne Corp. v. Shane, 453 F. Supp. 2d 807, 829 (S.D.N.Y. 2006) (quoting Dietrich v. Bauer, 126 F. Supp. 2d 759, 765 (S.D.N.Y. 2001) ). "Allegations of control are not averments of fraud and therefore need not be pleaded with particularity." In re Parmalat Sec. Litig., 414 F. Supp. 2d 428, 440 (S.D.N.Y. 2006); see also In re Scottish Re Group Sec. Litig., 524 F. Supp. 2d 370, 386 (S.D.N.Y. 2007) ("[A]t the pleading stage, the extent to which the control must be alleged will be governed by Rule 8's pleading standard."). The heightened pleading standards of the PSLRA, however, apply with respect to the third-prong of a Section 20(a) claim, which requires plaintiffs to allege facts demonstrating that the defendant was a culpable participant. See Special Situations Fund III QP, L.P. v. Deloitte Touche Tohmatsu CPA, Ltd., 33 F. Supp. 3d 401, 439 (S.D.N.Y. 2014) (surveying district courts' interpretation of "culpable participation" and concluding that the Second Circuit requires Section 20(a) plaintiffs to plead "facts indicating that the controlling person knew or should have known that the primary violator, over whom that person had control, was engaging in fraudulent conduct" (quoting Burstyn v. Worldwide Xceed Group, Inc., 2002 WL 31191741, at *8 (S.D.N.Y. 2002) )); see also In re ForceField Energy Inc. Sec. Litig., No. 15-cv-3020 (NRB), 2017 WL 1319802, at *16 (S.D.N.Y. Mar. 29, 2017) (further surveying cases and finding that "most judges in th[is] District [have] found that a plaintiff must plead culpable participation with scienter").

Because the Court has found that most of CNO's underlying primary violations of Section 10(b) and Rule 10b-5 survive Defendants' motion to dismiss, Plaintiffs

[413 F.Supp.3d 221]

sufficiently meet the first prong of the control person test. See In re: EZCorp, Inc. Sec. Litigs., 181 F. Supp. 3d 197, 214 (S.D.N.Y. 2016) (finding that shareholders had made out the "control" prong against a defendant because he was the sole shareholder of voting stock in the company). Plaintiffs' complaint describes OSA as directly owning 100% of CNO's voting shares, and cites to CNO's disclosures in the Odebrecht Finance offering memoranda where the company stated that "[a]ll of our total voting capital is owned by Odebrecht which, in turn, is ultimately controlled by the Odebrecht family.... Accordingly, the Odebrecht family has the ability to ... exercise overall control of our management." TAC ¶¶ 31-33.

Defendants challenge Plaintiffs' characterization of OSA as a "culpable participant," given that OSA did not make the alleged misstatements. MTD at 33-35. Viewing the allegations of the third amended complaint in the light most favorable to Plaintiffs suggests that this third prong, too, has been adequately pleaded. According to the third amended complaint, OSA's Division of Structured Operations was established as the Odebrecht entities' "bribe department," managing the illicit payments to government officials, and concealing them from the reported financial reports of both CNO and OSA. TAC ¶ 63-69. The Division ensured that CNO's reported financials did not reveal the massive illicit payments that OSA was making to politicians by entering all bribery transactions into a "shadow" accounting database rather than CNO or OSA's regular accounting system. This ensured that CNO's financial statements reflecting strong EBIDTA were materially false or misleading. The head of Structured Operations reported to Marcelo Odebrecht, OSA's CEO, and provided periodic updates of the Division's work. TAC ¶ 66. Marcelo Odebrecht was also the CEO directing OSA's road shows and sale of the Odebrecht Finance Notes that incorporated CNO's false and misleading statements into its offering memoranda. TAC ¶ 92.

Plaintiffs have sufficiently pleaded that OSA had both the ability to affect CNO's financial reports and that it took the opportunity to do so. Cf. Arkansas Teacher Ret. Sys., 18 F. Supp. 3d at 486 (internal quotation marks omitted) (finding no control person liability where complaint "alleged no particularized facts suggesting that the [defendant] had control over the alleged misrepresentations at issue"). Marcelo Odebrecht was involved in both the concealment of the funds from CNO's reporting, and spreading the misstatements in the Odebrecht Finance Notes. Accordingly, Plaintiffs' federal claims against OSA survive Defendants' motion to dismiss.

Authorities:
Fed. Civ. Proc. Rule 8
Fed. Civ. Proc. Rule 9
Securities Exchange Act of 1934 section 20(a), 15 U.S.C. § 78t
S.E.C. v. First Jersey Securities, Inc., 101 F.3d 1450 (2d Cir. 1996)
In re Parmalat Securities Litigation, 375 F.Supp.2d 278 (S.D.N.Y. 2005)
Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 750 F.3d 227 (2nd Cir. 2014)
In re Bioscrip, Inc. Sec. Litig., 95 F. Supp. 3d 711 (S.D.N.Y. 2015)
In re Scottish re Group Securities Litigation, 524 F.Supp.2d 370 (S.D.N.Y. 2007)
Doubleline Capital LP v. Construtora Norberto Odebrecht, S.A., 413 F. Supp. 3d 187 (S.D.N.Y. 2019)