The Supreme Court will review a Fourth Circuit decision holding that an investment adviser who “helped draft the misleading prospectuses [of various funds] . . . by participating in the writing and dissemination of those prospectuses” can be primarily liable in a private securities fraud action even if the statements are not directly attributed to the adviser. All secondary actors in the securities markets, including banks, financial advisors, accountants, lawyers and others who provide services to issuers of securities should be aware that this may significantly impact their exposure to liability under the anti-fraud provisions of the securities laws.
Shareholders of Janus Capital Group Inc. (“JCG”) brought a securities fraud class action against JCG and Janus Capital Management LLC (“JCM”), the investment advisor to the Janus mutual funds, alleging that JCG and JCM were responsible for certain misleading statements regarding the funds’ rules prohibiting market timing appearing in prospectuses for certain individual Janus funds. The shareholders allege that they purchased JCG shares at inflated prices, and subsequently suffered significant losses on their investments when the funds’ market timing arrangements became public.
Courts have differed over the degree of attribution required to sufficiently plead a securities fraud claim under Rule 10b-5 (the main fraud provision of the Securities and Exchange Act of 1934, as amended), however most have refused to hold persons liable for misrepresentations based on statements that were not explicitly attributed to them. The Fourth Circuit, however, held that the plaintiff must prove that “interested investors (and therefore the market at large) would attribute the . . . misleading statement to the defendant . . . by alleging facts from which a court could plausibly infer that interested investors would have known that the defendant was responsible for the statement at the time it was made, even if the statement on its face is not directly attributed to the defendant.” The plaintiffs alleged that, as a practical matter, JCM ran the Janus funds, and that it disseminated the prospectuses on its website. The court found this to be sufficient to conclude that the public would attribute the misstatements in the prospectus to JCM and JCG.
In addition to this case’s potential to expand primary securities fraud liability of parties who provide services to issuers of securities, the recently enacted Dodd-Frank Act has expanded aiding and abetting liability under the securities laws. The Act provides that any person who “knowingly or recklessly” provides substantial assistance to a violator of any provision of the Securities Act of 1933, the Exchange Act of 1934, the Investment Advisers Act of 1940, or the Investment Company Act of 1940 will be subject to aiding and abetting liability.
Janus Capital Group v. First Derivative Traders, 566 F.3d 111 (4th Cir. May 7, 2009)