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Section 20(a) of the Securities Exchange Act imposes liability on corporate executives and shareholders for acts of the companies they oversee. Under federal law, corporate officers and major shareholders can be held responsible for their companies’ actions — even without direct involvement in fraudulent conduct.
Congress adopted the Securities Exchange Act in 1934. Under Section 20(a), any party exercising “control” over a party committing securities fraud faces liability, regardless of their involvement in the actual violation.
5 Key Takeaways About Control Person Liability
1. “Control Person” is Broadly Defined
The SEC and federal courts define “control person” expansively under the Securities Exchange Act, exposing corporate executives and major shareholders to substantial federal liability. Control means the possession of power to direct management and policies of a person, whether through voting securities, contract, or other means.
2. Control Person Liability Extends to Corporate Executives and Major Shareholders
Corporate executives (directors and officers) and major shareholders can incur vicarious liability for securities fraud committed by their companies. In practice, the SEC aggressively pursues charges against corporate executives and major shareholders without specific evidence of direction or control.
3. Liability Extends to ALL Securities Law Violations
Section 20(a) is not limited to certain violations. Control person liability extends to all securities law violations — civil or criminal. This includes securities fraud, insider trading, accounting fraud, and other offenses.
4. There is a “Good Faith” Defense
Section 20(a) establishes a “good faith” defense. The statute provides: “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.”
5. Control Person Liability Can Lead to Both Civil and Criminal Prosecution
The SEC and DOJ aggressively pursue charges against individuals accused of causing or permitting Securities Exchange Act violations. While SEC jurisdiction focuses on civil enforcement, the DOJ can pursue criminal charges when warranted.
FAQs: Defending Control Person Liability
Can Corporate Executives Face Personal Liability for Securities Fraud?
Yes. Under Section 20(a), corporate executives face personal liability for securities law violations committed by their companies.
Can Shareholders Face Personal Liability?
Yes. If shareholder holdings are significant enough to provide direction or control, shareholders face personal liability.
What Are the Penalties?
Penalties depend on whether the SEC pursues civil or criminal enforcement. Civil enforcement can include disgorgement, fines, and loss of public company status. Criminal prosecution can result in substantial fines and years of federal imprisonment.
Reduction in pretrial jail population since NJ bail reform implementation.
Source: NJ Judiciary Annual ReportApproval rate for properly filed expungement petitions in NJ.
Source: NJ Courts Statistical ReportCommon Mistakes to Avoid
Actually Stay Silent
Most people know they have the right to remain silent but still talk to police. Anything you say can and will be used against you. Politely decline to answer questions until your attorney is present.
Bail Conditions Are Enforceable
Violating bail conditions, even minor ones, can result in immediate re-arrest and make it much harder to obtain bail again. Follow every condition to the letter.
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Frequently Asked Questions
New Jersey reformed its bail system in 2017. Instead of a cash-based system, judges now use a Public Safety Assessment (PSA) to determine whether a defendant should be released pretrial. Most defendants are released with conditions, while those deemed high-risk may be detained. An experienced attorney can argue for favorable release conditions at your detention hearing.
No. You have the constitutional right to remain silent and to have an attorney present during questioning. Anything you say to police can be used against you in court. Politely invoke your rights by saying "I want to speak with my attorney before answering any questions." This cannot be held against you.
Attorney fees vary based on the complexity of the case, the charges involved, and whether the case goes to trial. At Spodek Law Group, we offer transparent pricing and flexible payment plans. We provide a free initial consultation to discuss your case and give you an honest assessment of costs. Investing in quality representation often saves far more in the long run than choosing the cheapest option.
An arraignment is your first court appearance after being charged with a crime. The judge will read the charges against you, and you'll enter a plea (usually not guilty at this stage). The judge will also set bail or release conditions. Having an attorney at your arraignment is critical, as they can advocate for favorable bail terms and begin building your defense strategy from day one.
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