                         PUBLISHED


UNITED STATES COURT OF APPEALS
                FOR THE FOURTH CIRCUIT


RICHMOND A. DELLASTATIOUS,             
               Plaintiff-Appellant,
                and
FRANK ROMANO,
                          Plaintiff,
                v.
DONALD F. WILLIAMS; RAY KELLY,            No. 00-1577
             Defendants-Appellees,
                and
ADRIAN GLUCK; CRAIG NOVAK;
HOWARD KESSEL; SURROUNDVISION
ADVANCED IMAGING; LASERVISION
TECHNOLOGIES, INCORPORATED,
                       Defendants.
                                       
RICHMOND A. DELLASTATIOUS, FRANK       
ROMANO,
              Plaintiffs-Appellees,
                v.
DONALD F. WILLIAMS; RAY KELLY,
           Defendants-Appellants,
                                          No. 00-1595
                and
ADRIAN GLUCK; CRAIG NOVAK;
HOWARD KESSEL; SURROUNDVISION
ADVANCED IMAGING; LASERVISION
TECHNOLOGIES, INCORPORATED,
                       Defendants.
                                       
2                    DELLASTATIOUS v. WILLIAMS
           Appeals from the United States District Court
         for the Eastern District of Virginia, at Alexandria.
                Leonie M. Brinkema, District Judge.
                          (CA-98-1656-A)

                     Argued: December 6, 2000

                    Decided: February 22, 2001

Before WILKINSON, Chief Judge, WIDENER, Circuit Judge, and
      William L. GARWOOD, Senior Circuit Judge of the
       United States Court of Appeals for the Fifth Circuit,
                      sitting by designation.



Affirmed by published opinion. Chief Judge Wilkinson wrote the
opinion, in which Judge Widener and Senior Judge Garwood joined.


                            COUNSEL

ARGUED: Michael Joseph, DYER, ELLIS & JOSEPH, P.C., Wash-
ington, D.C., for Appellant. Philip Richard Croessman, BASTIA-
NELLI, BROWN & KELLEY, CHARTERED, Washington, D.C., for
Appellees. ON BRIEF: Richard A. Kirby, DYER, ELLIS &
JOSEPH, P.C., Washington, D.C.; David S. Bracken, COHEN,
DUNN, CURCIO, KEATING & ROHRSTAFF, P.C., Alexandria,
Virginia, for Appellant. Tina S. Tisinger, BASTIANELLI, BROWN
& KELLEY, CHARTERED, Washington, D.C., for Appellees.


                             OPINION

WILKINSON, Chief Judge:

   Richmond Dellastatious brought this securities fraud action against
Donald Williams and Raymond Kelly claiming that they were liable
as "control persons" under the Securities Exchange Act of 1934 and
                     DELLASTATIOUS v. WILLIAMS                       3
the Virginia Securities Act. See 15 U.S.C. § 78t(a); Va. Code § 13.1-
522(C). The district court granted Williams and Kelly’s motion for
summary judgment, holding that they were not control persons and
that they satisfied the statutes’ good-faith defense. Because Williams
and Kelly were corporate directors who acted in good faith reliance
on a corporate decision-making process, we affirm the judgment of
the district court.

                                  I.

   LaserVision Technologies, Inc. developed a camera system that
created souvenirs for fans at sporting events. In 1997, LaserVision
formed SurroundVision Advanced Imaging, LLC, ("SAIL"), to
finance the marketing of the technology. LaserVision was SAIL’s
corporate parent and a managing member of SAIL. Adrian Gluck, the
president of LaserVision, served as CEO, president, and director of
SAIL. Defendant Donald Williams, a director of LaserVision, served
as a manager of SAIL. Defendant Raymond Kelly had no connection
to SAIL except by virtue of his role as an outside director of LaserVi-
sion. Despite its connections to LaserVision, SAIL also had some of
its own officers. For instance, Craig Novak served as SAIL’s execu-
tive vice president and director, and Howard Kessel served as SAIL’s
chief financial officer.

  In October 1997, Gluck invited plaintiff Richmond Dellastatious to
become an equity investor in SAIL. In November 1997, SAIL sent
Dellastatious offering documents regarding the sale of the SAIL
securities ("November Offering Memorandum"). On December 3,
1997, Dellastatious invested $201,000 in SAIL. He subsequently pur-
chased an additional $60,000 worth of SAIL’s shares.

   In reaching his decision to invest in SAIL, Dellastatious relied, at
least in part, on the November Offering Memorandum. An earlier
draft of this offering document had been prepared for SAIL by Gluck,
Novak, Kessel, and Isaac Cohen, LaserVision’s attorney. Sometime
prior to November 1997, one of LaserVision’s directors, Larry Ber-
kowitz, reviewed and criticized the draft memorandum. Berkowitz
had previously been a securities lawyer with the Securities and
Exchange Commission. LaserVision’s directors were informed that
the problems with the memorandum were technical in nature and
4                     DELLASTATIOUS v. WILLIAMS
would be corrected in accordance with Berkowitz’s wishes. The
memorandum was then revised effective November 12, 1997. This
was the November Offering Memorandum that SAIL sent to Dellasta-
tious. There is no evidence that, after this revision, Berkowitz had any
further objections to the November Offering Memorandum.

   Sometime near the beginning of December 1997, SAIL’s offering
memorandum was revised again. At the previous month’s meeting, a
committee had been formed to review SAIL’s offering memorandum.
Gluck, Berkowitz, and Williams were named to serve on the commit-
tee. According to the minutes from LaserVision’s December meeting,
the memorandum was revised so that SAIL could raise an additional
$2 million in equity capital. The final revision to the offering memo-
randum was completed in March 1998. It was mailed to Dellastatious
at this time. Shortly thereafter, however, SAIL ceased operations.
Dellastatious’ shares are now worthless.

   On November 18, 1998, Dellastatious and Frank Romano, another
SAIL shareholder, sued in federal district court. Named as defendants
in the complaint were SAIL, three of SAIL’s officers (Gluck, Novak,
and Kessel), LaserVision, and two outside directors of LaserVision
(Williams and Kelly). The gravamen of plaintiffs’ complaint was that
SAIL’s November Offering Memorandum was misleading in several
material respects. First, plaintiffs alleged that the memorandum mis-
represented the closeness of the relationship between LaserVision and
SAIL. Plaintiffs argued that SAIL was essentially a shell corporation
run by LaserVision and LaserVision’s directors. Plaintiffs also
alleged that the November Offering Memorandum grossly overstated
SAIL’s projected revenues and misrepresented the nature of SAIL’s
assets. Finally, plaintiffs alleged that Williams and Kelly, although
perhaps not directly responsible for the securities fraud, were liable
as "control persons" under Section 20 of the Securities Exchange Act
of 1934, 15 U.S.C. § 78t(a), and the Virginia Securities Act, Va. Code
§ 13.1-522(C).

   On October 15, 1999, the district court granted Williams and
Kelly’s motion for summary judgment. The court assumed that plain-
tiffs could prove that one of the other defendants was primarily liable
for securities fraud violations. However, the court determined that
neither Williams nor Kelly were control persons of any liable party.
                         DELLASTATIOUS v. WILLIAMS                          5
The court also held that Williams and Kelly lacked the requisite cul-
pability for control person liability. Williams and Kelly subsequently
moved for sanctions and attorneys’ fees against plaintiffs and their
counsel. The district court denied this motion.

   In October 1999, Dellastatious and Romano settled their claims
against the three SAIL officers, Novak, Gluck, and Kessel. On April
13, 2000, the court ordered that judgment against SAIL and LaserVi-
sion be entered in favor of Dellastatious. The court awarded Dellasta-
tious $285,801.97 for his claims under § 13.1-522 of the Virginia
Code and $156,694.70 for his common law fraud claim. In addition,
the court granted judgment against Romano in favor of SAIL and
LaserVision.

   Dellastatious now appeals the district court’s holding that Williams
and Kelly were not liable as control persons under either the state or
federal securities laws. Williams and Kelly cross-appeal the district
court’s denial of their motion for sanctions.

                                      II.

                                      A.

   Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C.
§ 78t(a), provides for derivative liability of persons who "control"
those who are primarily liable under the Exchange Act.1 However,
control persons may escape liability by proving that they acted in
good faith with regard to the securities violation. See 15 U.S.C.
§ 78t(a). To determine whether the good-faith affirmative defense has
been satisfied under section 20(a), defendants must show that they did
  1
   Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C.
§ 78t(a), provides:
      Every person who, directly or indirectly, controls any person lia-
      ble under any provision of this chapter or of any rule or regula-
      tion 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 per-
      son acted in good faith and did not directly or indirectly induce
      the act or acts constituting the violation or cause of action.
6                           DELLASTATIOUS v. WILLIAMS
not act recklessly. Negligence on the part of defendants is insufficient
to establish liability. See Carpenter v. Harris, Upham & Co., 594
F.2d 388, 394 (4th Cir. 1979). "[O]ur task is to examine what the
defendants could have done under the circumstances to prevent the
violation, and then ask whether the defendants — aware that they
could take such measures — decided not to. This is just to say that
we are to determine whether there is a genuine issue of fact regarding
the defendants’ recklessness." Donohoe v. Consolidated Operating &
Prod. Corp., 30 F.3d 907, 912 (7th Cir. 1994); see also G.A. Thomp-
son & Co. v. Partridge, 636 F.2d 945, 960 (5th Cir. 1981) (to qualify
for the good-faith defense, controlling persons must establish that
they did not act recklessly).

   The Virginia Securities Act, Va. Code § 13.1-522(C), also estab-
lishes a defense for control persons. The statute allows control per-
sons to avoid liability if they can prove that they "did not know, and
in the exercise of reasonable care could not have known, of the exis-
tence of the facts by reason of which the liability is alleged to exist."
Va. Code § 13.1-522(C).2 Dellastatious argues that the Virginia good-
faith defense is stricter than its federal counterpart because it requires
defendants to prove that they were not negligent, as opposed to not
reckless. For purposes of this appeal we will assume that defendants
must show that they acted reasonably in order to satisfy Virginia’s
good-faith defense.

                                         B.

  Dellastatious contends that Williams and Kelly are liable as control
persons under both federal and Virginia law for the fraud committed
by SAIL. See 15 U.S.C. § 78t(a); Va. Code § 13.1-522(C). We shall
    2
   The Virginia Securities Act, Va. Code § 13.1-522(C), provides in
part:
        Every person who directly or indirectly controls a person liable
        under . . . this section, including every partner, officer, or direc-
        tor of such a person, . . . shall be liable jointly and severally with
        and to the same extent as such person, unless able to sustain the
        burden of proof that he did not know, and in the exercise of rea-
        sonable care could not have known, of the existence of the facts
        by reason of which the liability is alleged to exist.
                        DELLASTATIOUS v. WILLIAMS                          7
assume, without deciding, that Williams and Kelly were control per-
sons under both the federal and state laws. See 15 U.S.C. § 78t(a)
(extending liability to "[e]very person who, directly or indirectly, con-
trols" one liable for securities violations); Va. Code § 13.1-522(C)
(extending liability to "[e]very person who directly or indirectly con-
trols" one liable for securities violations, "including every partner,
officer, or director of such a person").

   Dellastatious argues that, at the very least, there is a genuine issue
of fact regarding whether Williams and Kelly acted in good faith. We
disagree. Williams and Kelly have carried their burden of proving that
they acted reasonably. As a result, they are entitled to the good-faith
affirmative defense under both federal law and Virginia’s allegedly
more-exacting standard.

   A defendant can satisfy the good-faith defense by demonstrating
that he used reasonable care to prevent the securities violation. See
Donohoe, 30 F.3d at 912 (interpreting 15 U.S.C. § 78t(a)); see also
Va. Code § 13.1-522(C). One way to determine whether Williams and
Kelly acted with "reasonable care" pursuant to Va. Code § 13.1-
522(C), is to consider whether they complied with the duties estab-
lished for directors under state law.3 Virginia Code § 13.1-690 estab-
lishes "the standard by which to evaluate a director’s discharge of
duties in Virginia." Willard v. Moneta Bldg. Supply, Inc., 515 S.E.2d
277, 284 (Va. 1999).4 If a director acts in accordance with that stan-
  3
     While Dellastatious brought several different claims against Williams
and Kelly in their different capacities, all of Dellastatious’ claims revolve
around Williams and Kelly’s roles as directors of LaserVision. The key
to Dellastatious’ theory is that SAIL is a shell corporation and that Laser-
Vision and its officers are the bad actors. As a result, we assess the rea-
sonableness of Williams and Kelly’s conduct with an eye toward the
duties owed by corporate directors.
   4
     Section 13.1-690 states, in relevant part:
      A. A director shall discharge his duties as a director, . . . in
      accordance with his good faith business judgment of the best
      interests of the corporation.
      B. Unless he has knowledge or information concerning the mat-
      ter in question that makes reliance unwarranted, a director is
8                     DELLASTATIOUS v. WILLIAMS
dard, Va. Code § 13.1-690(C) provides a "safe harbor" that shields a
director from liability "for any action taken as a director, or any fail-
ure to take any action." Va. Code § 13.1-690(C); see also Willard,
515 S.E.2d at 284 (discussing § 13.1-690(C)’s safe harbor provision);
WLR Foods, Inc. v. Tyson Foods, Inc., 65 F.3d 1172, 1183 (4th Cir.
1995) (same). Although the few cases interpreting section 13.1-690
have concerned protections afforded directors under the business
judgment rule, the statutory text is in no way limited to that. In light
of 13.1-690(C)’s expansive safe harbor provision, it seems unlikely
that section 13.1-522(C) would hold directors to a higher standard of
care than that set forth under section 13.1-690.

   Pursuant to section 13.1-690(B), as long as directors have no
knowledge that makes reliance unwarranted, they may rely on finan-
cial statements prepared by corporate officers, legal counsel, or public
accountants. See Willard, 515 S.E.2d at 285. In cases such as this,
where shareholders allege that directors have insufficiently supervised
the corporation’s affairs, directors can avoid liability by showing that
they attempted in good faith to ensure that an adequate corporate
information-gathering and reporting system was in place. In In re
Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 969-70 (Del. Ch.
1996), the leading case in this area, the Delaware Court of Chancery

    entitled to rely on information, opinions, reports or statements,
    including financial statements and other financial data, if pre-
    pared or presented by:
       1. One or more officers or employees of the corporation whom
    the director believes, in good faith, to be reliable and competent
    in the matters presented;
      2. Legal counsel, public accountants, or other persons as to
    matters the director believes, in good faith, are within the per-
    son’s professional or expert competence; or
     3. A committee of the board of directors of which he is not a
    member if the director believes, in good faith, that the committee
    merits confidence.
    C. A director is not liable for any action taken as a director, or
    any failure to take any action, if he performed the duties of his
    office in compliance with this section.
                      DELLASTATIOUS v. WILLIAMS                       9
held that directors are not liable under a failure to monitor theory
where they did not know of the specific bad acts within the corpora-
tion and they made a good faith attempt to assure that a reasonable
decision-making process existed. As Caremark indicates, mishaps
within a corporation do not alone entitle a plaintiff to bring suit
against directors in their personal capacities. Chancellor Allen point-
edly described claims for failure to adequately monitor corporate
activities as "possibly the most difficult theory in corporation law
upon which a plaintiff might hope to win a judgment." Id. at 967. His
statement reflects the reality that service as director of a corporation
should not be a journey through liability land mines.

   Here, Williams and Kelly complied with Virginia’s standards for
directorial duties, and they likewise acted with reasonable care under
§ 13.1-522(C). Williams and Kelly were outside directors who served
on LaserVision’s board because they had invested $2.2 million in
LaserVision. They were not experts on the LaserVision technology
and they had no role in SAIL’s plan to market the technology. It was
reasonable for Williams and Kelly to delegate the creation and review
of SAIL’s offering documents to SAIL’s officers, Gluck, Novak, and
Kessel, and their attorney, Isaac Cohen. Gluck, SAIL’s CEO and
president, was a professional engineer who understood the LaserVi-
sion technology that SAIL would be marketing. Gluck was also a suc-
cessful entrepreneur who was experienced in raising capital for
companies. Novak, SAIL’s executive vice president, had a masters
degree in finance and previously had been a Managing Director at
Merrill Lynch. Kessel, SAIL’s chief financial officer, was a certified
public accountant who earlier had worked at a major accounting firm.
Cohen was an attorney experienced in drafting offering documents.
The offering documents then were also reviewed by Larry Berkowitz,
who previously had worked as an attorney for the Securities and
Exchange Commission.

   Furthermore, the evidence shows that SAIL’s system for drafting
and reviewing offering documents functioned properly. In October
1997, after Cohen had drafted the original offering documents, Ber-
kowitz reviewed them. When Berkowitz expressed concern regarding
the documents, this fact was communicated to LaserVision’s board.
The board was informed that the problems were technical in nature
and would be corrected. As far as Williams or Kelly knew, the offer-
10                   DELLASTATIOUS v. WILLIAMS
ing documents were redrafted to accommodate Berkowitz’s concerns.
After the offering memorandum was revised, Williams stated that he
was unaware of any further complaints from Berkowitz. The very
fact, however, that Berkowitz’s concerns were presented to the board
suggests that a effective policy was in place and the reviewers were
scrutinizing what the drafters wrote.

   Dellastatious can hardly suggest that Williams or Kelly should not
have relied on SAIL’s officers and legal counsel, all of whom by vir-
tue of their position or expertise were more intimately involved with
the production of the offering documents. Nevertheless, in an effort
to defeat summary judgment Dellastatious points to (1) Kelly’s prac-
tice of occasionally not reading the materials that LaserVision sent to
him; (2) Williams and Kelly’s knowledge that Berkowitz voiced con-
cerns about the original draft of the offering memorandum; (3)
Kelly’s general statement that he thought Gluck’s projections were
"pretty grandiose at times"; and (4) the fact that Williams was a mem-
ber of the committee charged with revising the November Offering
Memorandum.

   However, none of these facts suggest that Williams and Kelly acted
unreasonably. The first three facts are subsumed by the presence of
SAIL’s system for identifying and correcting any errors in the offer-
ing documents. Williams and Kelly were neither negligent nor reck-
less in relying on those methods and on the experience of the other
directors. See Va. Code § 13.1-690(B). The fact that Williams served
on a revision committee also fails to raise a jury question regarding
his good faith. The minutes from LaserVision’s December meeting
state that the offering memorandum was revised so that SAIL could
raise an additional $2 million in equity capital. Williams saw the
offering documents for the first time near the beginning of December,
and SAIL sent Dellastatious the final version when it was completed
in March, 1998.

   Williams and Kelly have presented sufficient evidence to show
they acted in good faith and diligently carried out their duties. At
most, the evidence reveals that Williams and Kelly had only a tangen-
tial relationship to SAIL and its efforts to raise capital. There is no
evidence that Williams and Kelly were aware of any irregularities in
the materials that were sent to Dellastatious. They were never charged
                      DELLASTATIOUS v. WILLIAMS                       11
with drafting or revising any of the documents before SAIL submitted
them to Dellastatious in November. Nor did they ever meet or com-
municate with Dellastatious. Furthermore, none of the money that
Dellastatious invested in SAIL was dispersed to Williams or Kelly.
The district court aptly described their relationship with SAIL’s
efforts to raise capital as "on the far periphery."

   A jury could not infer from their positions as outside directors of
LaserVision and SAIL that Williams and Kelly acted in bad faith.
Because Williams and Kelly have satisfied the standard of Virginia’s
good-faith defense, see Va. Code § 13.1-522(C), they also qualify for
the defense under section 20(a) of the Exchange Act. See 15 U.S.C.
§ 78t(a). We therefore affirm the district court’s grant of summary
judgment in Williams and Kelly’s favor.5

                                  III.

  For the foregoing reasons, the judgment of the district court is

                                                           AFFIRMED.

  5
   Williams and Kelly cross-appeal the district court’s denial of their
motion for sanctions under Fed. R. Civ. P. 11 and the Private Securities
Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(c) ("PSLRA"). The
district court denied defendants’ motion for sanctions but failed to make
the specific factual findings required under the PSLRA. See 15 U.S.C.
§ 78u-4(c)(1); see also Simon DeBartolo Group, L.P. v. Richard E.
Jacobs Group, Inc., 186 F.3d 157, 166-67 (2d Cir. 1999). Because the
PSLRA "does not in any way purport to alter the substantive standards
for finding a violation of Rule 11," Simon DeBartolo, 186 F.3d at 167,
and because our own review of the record provides no basis for awarding
sanctions in this instance, a remand here would be unnecessary.
