Section 20A Liability Must Be Based on a Violation That Involves Insider Trading
 
June 16, 2008
 

A federal district court granted a defendant’s motion to dismiss a claim brought against the defendant under Section 20A of the Securities Exchange Act of 1934 (the “Exchange Act”), which provides a private right of action against persons engaged in insider trading. To create potential liability under Section 20A, a plaintiff must show that a defendant violated a provision of Title 15 of the United States Code (which includes the Exchange Act) by purchasing or selling a security while in possession of material, non-public information.

The plaintiffs argued that the defendant was a “control person” under the Exchange Act and that this satisfied the independent violation requirement. The defendant argued that the underlying violation of the Exchange Act must be based on a violation that involves insider trading. The court agreed with the defendant, stating that Section 20A must be read in its entirety. Section 20A states that a person will be liable if the person violates a provision of the Exchange Act “by purchasing or selling a security while in possession of material, non-public information … .” Finding that the defendant did not engage or control anyone who engaged in insider trading, the court dismissed the Section 20A claim against the defendant.

(Makor Issues & Rights, Ltd. v. Tellabs, Inc., 2008 WL 2178150 (N.D. Ill. May 22, 2008))