The federal courts have recently addressed two related liability questions under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5: first, what exactly constitutes the “making” of a purported misstatement for purposes of those provisions, and second, to what extent can a party be held responsible for a statement not explicitly attributed to it? A number of Courts of Appeals have taken a literal approach to these issues, limiting liability to those who actually make statements, or to whom statements are attributed at the time of their public dissemination. Others have taken less literal approaches, imposing liability based on a person’s “substantial participation or intricate involvement” in a statement, even if the statement was not made by, or explicitly attributed to, that person.1

In Wiggins v. Janus Capital Group (In re Mutual Funds Investment Litigation), No. 07-1607, 2009 U.S. App. LEXIS 9829 (4th Cir.May 7, 2009), the Fourth Circuit recently weighed in on both issues, taking a potentially less strict, “investors decide” approach. Judge Michael, writing for the panel, held that:

(1) for purposes of Fed. R. Civ. P. 9(b), allegations that a defendant “participat[ed] in the writing and dissemination” of a prospectus sufficiently identify that defendant as the “maker” of supposed misstatements in the prospectus; and

(2) such a defendant may be liable under Section 10(b) or Rule 10b-5 if “interested investors would attribute to the defendant a substantial role in preparing or approving . . . allegedly misleading statement[s]” in the prospectus.

Id. at *21, *29.


Plaintiff in Mutual Funds asserted federal securities claims on behalf of a purported class of investors in Janus Capital Group (“JCG”), a public company whose wholly-owned subsidiary Janus Capital Management LLC (“JCM”) served as investment adviser to a group of mutual funds known as the Janus Funds. The prospectuses for certain of the Janus Funds stated that the funds were “not intended for market timing or excessive trading,” and that “Janus had measures in place to stop th[is] trading.” According to plaintiff, these statements were inaccurate because, at the time the prospectuses were disseminated, the funds in question actually permitted preferred customers to engage in market timing and excessive trading. Plaintiff further alleged that, when the falsity of these statements came to light, the price of JCG’s publicly-traded common stock fell and the members of the purported class suffered damages.

The individual mutual funds themselves — rather than JCM or JCG — had issued the allegedly misleading prospectuses. Plaintiff alleged, however, that the prospectuses were disseminated to potential investors on a website,, operated jointly by Janus Funds, JCG and JCM. Plaintiff sought to hold JCG and JCM responsible, under Section 10(b) and SEC Rule 10b-5, for the alleged misrepresentations contained in the Janus Funds’ prospectuses. Plaintiff also asserted a claim against JCG for “control person” liability under section 20(a) of the Securities Exchange Act.

The district court granted a motion to dismiss by JCG and JCM. As to JCG, the district court reasoned that the complaint “contains no allegations that JCG [as opposed to the Janus Funds] actually made or prepared the prospectuses, let alone that any statements contained therein were directly attributed to it.” Id. at *12-*13. The district court dismissed plaintiff ’s claim against JCM, finding that there was no nexus between the purported class of JCG shareholders and JCM, because a mutual fund adviser owes no duty to its corporate parent’s shareholders. Finally, absent a viable Section 10(b) claim against JCM, the district court ruled that the Section 20(a) control person claim against JCG failed as a matter of law.

The Fourth Circuit’s Decision

The Fourth Circuit reversed the district court’s dismissal of both JCG and JCM, and remanded. First, the appellate court found that plaintiff had satisfied the requirement, under Fed. R. Civ. P. 9(b), to identify the speaker who made the supposed actionable misstatements. Plaintiff alleged that, although the fund prospectuses were “unattributed on their face,” both JCG and JCM helped draft the misleading prospectuses, represented that their mutual funds were designed to be long-term investments for buy and hold investors, and made prospectuses containing the misleading statements available through the joint Janus website and via filings with the SEC. The panel reasoned that “[t]hese statements, taken together, allege that JCG and JCM, by participating in the writing and dissemination of the prospectuses, made the misleading statements contained in the documents.”Mutual Funds, 2009 U.S. App. LEXIS 9829 at *21.

Judge Michael then considered whether JCG and/or JCM could be liable under Section 10(b) and Rule 10b-5 for alleged misstatements in the Janus Funds’ prospectuses. After surveying current variations in circuit law on the degree of attribution required to ground liability, the court adopted a broader standard than Wright’s literal attribution requirement. The court held that, in order to establish a federal securities fraud claim against a defendant who did not actually make a statement, the plaintiff “must ultimately prove that interested investors . . . would attribute the allegedly misleading statement to the defendant.” Id. at *28-*29 (emphasis added). Thus, the court concluded that to survive a motion to dismiss, a complaint must “alleg[e] 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.” Id. at *29.2

Using this standard, the court concluded that, given JCM’s role as investment adviser and the use of a common website, “interested investors would have inferred that if JCM had not itself written the policies in the Janus fund prospectuses regarding market timing, it must at least have approved these statements” and found these allegations sufficient to survive JCM’s motion to dismiss. Id. at *38-*39. The court did not, however, extend liability to JCG (the public holding company), reasoning that since JCG did not act as an investment adviser to the funds, the common website alone was insufficient to “infer that interested investors would believe JCG had prepared or approved the Janus fund prospectuses.” Id. at *40-*41. JCG did not escape the case, however. Based on its conclusion that plaintiff had stated a viable claim against JCM under Section 10(b) and Rule 10b-5, and in light of plaintiff ’s allegations that JCG controlled JCM, the panel held that plaintiff had sufficiently pleaded a claim against JCG for control person liability under Section 20(a).

Judge Shedd concurred with Judge Michael’s conclusion, but noted that he would have also held that plaintiff properly alleged that JCG was primarily liable for the supposed false statements in the Janus Funds’ prospectuses under Section 10(b) and Rule 10b-5. Judge Shedd argued that JCG’s alleged involvement and facilitating access to purported false statements, if proved, would be sufficient to render JCG liable as a maker of the statements.


Courts continue to interpret in varying ways the limits on primary liability in civil fraud cases under the federal securities laws. The Second Circuit has recently re-affirmed its stricter standard, under which specific public attribution of a statement is a prerequisite for primary liability. See Lattanzio v. Deloitte &Touche LLP, 476 F.3d 147, 155 (2d Cir. 2007) (affirming Wright and rejecting notion that the public’s “understanding” of who created a statement can create primary liability in the absence of specific attribution). Mutual Funds, however, serves as a reminder that liability under Section 10(b) and Rule 10b-5 may, at least in the Fourth Circuit (which includes Maryland, North Carolina, South Carolina, Virginia, andWest Virginia), extend beyond the entities or individuals to whom a purported misstatement is explicitly attributed. Public companies and their counsel therefore should continue to carefully monitor statements emanating from a company’s affiliated or related entities.