On August 1, 2011, in the case of SEC v. Daifotis, the District Court for the Northern District of California issued an order in response to the defendants’ motion for reconsideration of their earlier motions to dismiss and strike in light of the June 2011 Supreme Court decision in Janus Capital Group, Inc. v. First Derivative Traders. The order in this case is noteworthy because it is among the first to consider the recent Janus decision. The SEC’s complaint in this case focused on events during the market crisis in 2007 and 2008 regarding Schwab YieldPlus Fund and alleged that Kimon Daifotis, the former lead portfolio manager for the Fund, and Randall Merk, an Executive Vice President at Charles Schwab & Co., made a series of misstatements in connection with the operation of the Fund and that Mr. Daifotis aided and abetted the Fund’s deviation from disclosed concentration policies.
The court found, among other things, that certain alleged misstatements were sufficiently pleaded under Janus, while others failed to sufficiently plead that the defendants “made” the misstatements for purposes of liability under Rule 10b-5 under the Securities Exchange Act of 1934. Separately, the court declined to broadly apply the Janus decision to limit the SEC’s claims regarding alleged misstatements under Section 17(a) of the Securities Act of 1933 and Section 34(b) of the 1940 Act, finding that the Janus decision was limited to claims of primary violations of Rule 10b-5. The court noted that the word “make,” which was the central focus of the Janus decision, is absent from Section 17(a). The court also observed that, while Section 34(b) does include the word “make,” the Janus decision’s stringent reading of the word “make” followed from the Supreme Court’s prior decisions limiting the scope of implied private rights of action under Rule 10b-5; the court thus determined that the same rationale does not apply to Section 34(b) because there is no implied private right of action for Section 34(b) claims. The court’s order is available here.