PJC Business

PJC 105.16

F RAUD AND N EGLIGENT M ISREPRESENTATION

Board’s rules do define “control” as “[t]he possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person or com pany, whether through the ownership of voting securities, by contract, or otherwise.” 7 Tex. Admin. Code § 107.2(9). The Securities and Exchange Commission defines “control” in the same way. 17 C.F.R. § 230.405. The following instruction, which tracks the language in the rules, may be appropriate: Deborah Dennis controlled Don Davis if she possessed, directly or indirectly, the power to direct or cause the direction of Don Davis ’s management and policies, whether through the ownership of voting securities, by contract, or otherwise. Texas cases on control-person liability. In deciding control-person liability cases under the Securities Act, Texas courts of appeals, while recognizing the breadth of the definition of “control,” have looked to federal court cases for further guidance. The result has been several non-jury cases with varying descriptions of the proof required to prove control. Until the Texas Supreme Court resolves the differences between the courts of appeals, or decides that nothing more than the definition of “control” is necessary in the charge to the jury, none of these descriptions can be added to pattern jury charges. In the meantime, the practitioner should be aware of these descriptions and their differences and, in particular, the formulation adopted in the jurisdiction in which the case is tried . Compare Frank v. Bear, Stearns & Co. , 11 S.W.3d 380, 384 (Tex. App.—Houston [14th Dist.] 2000, pet. denied) (person is a control person if it exercised control over the operations of the corporation in general and had the power to control the specific transaction or activity upon which the pri mary violation is predicated); Darocy v. Abildtrup , 345 S.W.3d 129, 137 (Tex. App.— Dallas 2011, no pet.) (same); Barnes v. SWS Financial Services , 97 S.W.3d 759, 763 (Tex. App.—Dallas 2003, no pet.) (same); with Fernea v. Merrill Lynch Pierce Fenner & Smith , 559 S.W.3d 537, 555 (Tex. App.—Austin 2011, no pet.) (“[T]he plaintiff must prove that the alleged controlling person (1) had actual power or influence over the controlled person, and (2) had the power to control or influence the specific trans action or activity that gave rise to the underlying violation.”); Texas Capital Securities, Inc. v. Sandefer , 80 S.W.3d 260, 268 (Tex. App.—Texarkana 2002, pet. struck) (con trolling person must also have induced or participated in the violation).

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