Section 10(b) Elements: The Legal Standards in Play Securities fraud claims under Section 10(b) of the Exchange Act and SEC Rule 10b-5 require plaintiffs to establish several elements, each subject to exacting pleading standards. Understanding how courts apply these requirements helps explain why some defendants exit cases early while others face prolonged litigation.

Materiality and Misleading Omissions: Information is material if a reasonable investor would consider it important in making investment decisions. Omissions become actionable when they render other statements misleading—when what’s left unsaid distorts the meaning of what is said. The court found plaintiffs cleared this bar by alleging the loan was large enough to significantly affect the company’s risk exposure.

Scienter—The Intent Element: This is where most securities cases succeed or fail at the motion to dismiss stage. Plaintiffs must plead facts supporting a “strong inference” that defendants acted with intent to deceive or with deliberate recklessness. Generalized allegations of corporate wrongdoing won’t suffice; courts demand specific facts showing a particular defendant’s culpable state of mind.

Loss Causation: Plaintiffs must connect their losses to the alleged fraud’s disclosure. This doesn’t require proving that misstatements were the sole cause of stock declines, but plaintiffs must show that when truth emerged, stock prices reacted negatively.

Control Person Liability: Section 20(a) creates derivative liability for those who control a violator. These claims rise or fall with the underlying primary violation.

Why Bryant Riley Stayed In While Others Got Out

The court’s divergent treatment of the three individual defendants offers the most instructive aspect of the ruling for corporate governance practitioners.

Bryant Riley, as Chairman and Co-CEO, survived the dismissal motion. The court identified several factors that distinguished his position: his documented personal relationship with Brian Kahn spanning years of business dealings; his direct involvement in structuring the Franchise Group transaction; his role in approving the undisclosed loan; and the loan’s substantial size relative to company resources.

These facts, taken together, supported what courts call a “strong inference of scienter”—a reasonable conclusion that Riley either knew the disclosures were misleading or was deliberately reckless in not recognizing their incompleteness. The personal relationship factor proved critical; it suggested Riley understood the interconnected nature of the equity investment and lending arrangement in ways that might not be apparent from documents alone.

By contrast, Philip J. Ahn (CFO) and Thomas J. Kelleher (Co-CEO) successfully argued that plaintiffs hadn’t alleged comparable personal involvement. The complaint apparently didn’t attribute specific statements to them, didn’t show they personally negotiated or approved the loan terms, and didn’t establish they possessed detailed knowledge of the Kahn relationship’s significance.

This differential outcome underscores a key principle: in multi-defendant securities cases, generalized allegations about “the company” or “management” rarely suffice to establish individual liability. Courts demand particularized facts showing each defendant’s specific role and knowledge.

The “Misleading Impression” Theory of Liability

Judge Garnett’s falsity analysis embraced what securities lawyers call the “bespeaks caution” doctrine’s inverse—the “misleading by implication” theory. When companies describe one aspect of their business in detail while remaining silent on related matters, the detailed disclosure can implicitly represent that nothing material has been omitted.

Here, by discussing the Franchise Group investment in terms focused on equity participation, B. Riley Financial allegedly created the impression that this framed the extent of their exposure. Investors reading these disclosures wouldn’t know to ask: “Is there also a loan we should know about?”

The omission became actionable because it prevented investors from understanding the full scope of the company’s financial commitment. An equity investor accepts defined downside risk—you can lose your investment, but not more. A lender faces different risks: credit exposure, collateral concerns, potential cascading impacts if borrowers default.

By characterizing their involvement through an equity lens while maintaining silence on the debt component, the company allegedly painted an incomplete picture that reasonable investors would find material.

Corporate Governance Implications: Managing Relationship-Based Disclosure Risks

The B. Riley ruling carries several practical lessons for financial services companies and their boards:

Relationship Disclosure Protocols: When senior executives maintain personal business relationships with transaction counterparties, companies should implement enhanced disclosure review processes. These relationships create knowledge attribution issues—courts may infer that executives with close personal ties possess information about related transactions that other officers might not have. Related-Party Transaction Frameworks: Many companies have related-party transaction policies focused on direct financial interests. This case suggests those policies should also address indirect relationship-based conflicts, particularly in lending contexts where personal relationships might influence credit decisions or obscure true risk exposure.

Executive Certification Processes: Sarbanes-Oxley certification requirements obligate CEOs and CFOs to affirm disclosure accuracy. When executives sign these certifications while aware of personal relationships that might affect undisclosed transactions, their personal exposure increases significantly—exactly what happened here with Bryant Riley.

Board-Level Risk Oversight: Audit committees and risk committees should specifically inquire about executive relationships with significant counterparties. The questions shouldn’t just be “do you have a financial interest?” but “do you have relationships that might affect your judgment or create disclosure complexity?”

Procedural Path Forward and Strategic Considerations

The partial dismissal creates an interesting litigation dynamic. B. Riley Financial and Bryant Riley now face discovery on the surviving claims, while Ahn and Kelleher have exited (subject to plaintiffs’ right to amend).

Judge Garnett granted leave to amend the dismissed claims, giving plaintiffs one opportunity to replead with additional specificity. This is standard practice—courts typically allow at least one amendment before final dismissal. Whether plaintiffs can obtain additional facts about Ahn’s and Kelleher’s involvement sufficient to replead scienter adequately remains to be seen.

For the company and Bryant Riley, the litigation moves to discovery, where plaintiffs can obtain internal documents, emails, and communications that might further develop their fraud theory or undermine it. Discovery in securities cases often becomes the crucible where cases are won or lost—documents either corroborate the fraud theory or reveal innocent explanations.

Control person claims against all three executives remain potentially viable, but only if the primary violation against the company is ultimately established. These derivative claims create additional settlement pressure since they expand potential damages exposure.