SEC Rule 10b-5(b), 17 CFR § 240.10b-5(b), makes it unlawful for “any person, directly or indirectly … [t]o make any untrue statement of a material fact” (emphasis added) in connection with the sale or purchase of securities and implicitly provides a private right of action against a person who makes a statement that violates the rule. On June 13, 2011, the Supreme Court held that under Rule 10b-5(b), “the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” Janus Cap. Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2302 (June 13, 2011). “Without control, a person or entity can merely suggest what to say, not ‘make’ a statement in its own right.” Janus Cap. Group, Inc., 131 S. Ct. at 2302. “One who prepares or publishes a statement on behalf of another is not its maker. And in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by—and only by—the party to whom it is attributed.” Janus Cap. Group, Inc., 131 S. Ct. at 2302. The Court accordingly held in Janus that Rule 10b-5(b) did not provide a private right of action for securities fraud against a mutual fund investment adviser and administrator who allegedly participated in writing and disseminating misleading statements in mutual fund prospectuses because only the mutual fund itself actually made the statement.
Two August 2011 federal court decisions held that Janus does not bar Rule 10b-5 claims against corporate officers alleged to have made false statements for which they had ultimate authority. In re Merck & Co., Inc. Securities, Derivative & “ERISA” Litig., 2011 WL 3444199 (D.N.J. Aug. 8, 2011) (concerning, inter alia, allegedly false statements in SEC forms signed by an officer); Local 703, I.B. of T. Grocery and Food Employees Welfare Fund v. Regions Financial Corp., 10-cv-2847 (N.D. Ala. Aug. 23, 2011) (concerning allegedly fraudulent Sarbanes-Oxley certifications signed by officers).
A September 2011 federal court decision has further defined the scope of Rule 10b-5 liability for corporate executives by holding that Janus protects executives alleged to have internally reported false financial results—at the direction of other executives—against Rule 10b-5 liability for false statements, but not against Rule 10b-5 liability for deceptive conduct. Hawaii Ironworkers Annuity Trust Fund v. Cole, 10-cv-371 (N.D. Ohio Sept. 1, 2011).
In Hawaii Ironworkers Annuity Trust Fund, a former shareholder of a bankrupt corporation filed Rule 10b-5 claims in federal court in Ohio, asserting that corporate officers internally reported false financial results that contributed to the corporation issuing false financial statements. Plaintiff’s complaint alleges, however, that defendants falsified the financial results to comply with “a mandatory 6% profit margin” the corporation’s CEO and CFO had imposed. The court accordingly held that Janus barred the Rule 10b-5(b) claims because defendants did not have ultimate authority for the allegedly false financial reports. Hawaii Ironworkers Annuity Trust Fund, 10-cv-371, slip op. at 1, 6-8.
The court also held, however, that Janus did not bar the plaintiff’s Rule 10b-5(a) and (c) claims asserting deceptive conduct. The court rejected defendants’ arguments that Janus (1) interpreted Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008), as imposing a specific attribution requirement upon deceptive conduct allegations, and (2) applied the “ultimate authority” rule to deceptive conduct claims. Hawaii Ironworkers Annuity Trust Fund, 10-cv-371, slip op. at 8-11.
Defendants based their arguments on the following sentence from Janus: “We see no reason to treat participating in the drafting of a false statement differently from engaging in deceptive transactions, when each is merely an undisclosed act preceding the decision of an independent entity to make a public statement.” Janus Cap. Group, Inc., 131 S. Ct. at 2304. The court rejected defendants’ argument that Janus required specific attribution because it held that defendants’ conduct was not an undisclosed act and that “[t]his case does not involve independent entities.” The corporation had “touted [the falsified financial] results in its press releases,” and employees are not, as defendants asserted, “independent entities from the corporation.” Hawaii Ironworkers Annuity Trust Fund, 10-cv-371, slip op. at 10. The court also disagreed with defendants that an “ultimate authority” rule applies to deceptive conduct claims because, the court concluded, defendants’ argument interpreted Janus in a “strained (and illogical) way” that “would have the effect of eviscerating 10b-5(a) and (c),” and, contrary to principles of statutory interpretation, would render these provisions superfluous. Hawaii Ironworkers Annuity Trust Fund, 10-cv-371, slip op. at 9-10 fn. 6. Notwithstanding the court’s conclusions, however, it appears likely that defendants in other cases will raise similar arguments, as the court’s conclusions regarding these issues do not appear free from doubt.
Hawaii Ironworkers Annuity Trust Fund further establishes that the scope of the protection Janus provides requires detailed analysis. It also suggests that defendants in other cases are likely to present similar arguments relating to the application of Janus to deceptive conduct claims.