On June 13, 2011, in Janus Capital Group, Inc. v. First Derivative Traders,1 the U.S. Supreme Court held that a mutual fund investment adviser and administrator could not be held liable under federal securities laws for alleged misrepresentations in the prospectuses issued by the mutual fund itself. The Supreme Court concluded that the only person or entity that may be held liable in a private action for having "ma[d]e any untrue statement of a material fact" within the meaning of Rule 10b-5 and Section 10(b) of the Securities Exchange Act2 is the one "with ultimate authority over the statement, including its content and whether and how to communicate it"—in this case: the mutual fund itself.3 Liability does not extend to "[o]ne who prepares or publishes a statement on behalf of another" or otherwise participates in the drafting of an allegedly false statement.4
In Janus, the mutual funds at issue were organized in a Massachusetts business trust (the "Fund"). The Fund's investment adviser and administrator (the "Fund Adviser") was a wholly owned subsidiary of the public company that also created the Fund. Nevertheless, and significantly, the Fund was a separate legal entity owned entirely by mutual fund investors. For example, while all of the Fund's officers were also officers of the Fund Adviser, only one member of the Fund's board of trustees was associated with the Fund Adviser.
The Fund issued prospectuses that: (1) represented that the funds were not suitable for market timing5 and (2) could be read to suggest that the Fund Adviser would implement policies to curb that practice.6 Notwithstanding these representations, the New York attorney general filed a complaint against the Fund Adviser and its parent company, contending that the parent entered into secret arrangements to permit market timing in several funds run by the Fund Adviser. When those allegations became public, investors withdrew significant amounts of money from the Fund's mutual funds.
The plaintiff in Janus represented a class of investors who claimed to have been misled into buying shares of stock at a premium by prospectuses misrepresenting the Fund's use of market timing. The plaintiff maintained that the Fund Adviser was liable under the federal securities laws because the Fund Adviser participated in the writing and dissemination of the prospectuses, thereby "mak[ing]" the misleading statements contained in the documents. The district court rejected the claim against the Fund Adviser, but the U.S. Court of Appeals for the Fourth Circuit reversed and reinstated it, finding that the Fund Adviser "ma[d]e" a misleading statement by creating and drafting the prospectuses.
The Supreme Court reversed, holding that one "make[s]" a statement by stating it. For purposes of Rule 10b-5, 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."7 While the Fund Adviser might have suggested what to say in the prospectuses, the Fund itself still "ma[d]e" the statements in its own right. As the Supreme Court explained, "Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit—or blame—for what is ultimately said."8 To rule otherwise, the Court held, would be inconsistent with recent Supreme Court precedent emphasizing that private causes of action may not be brought against persons or entities that contribute substantial assistance to the making of a statement, but do not actually make it.9
To avoid dismissal, the plaintiff invited the Supreme Court to recognize the "well-recognized and uniquely close relationship between a mutual fund and its investment adviser." Despite a compelling argument that investment advisers exercise significant influence over their client funds, the Court declined to disregard the corporate form, as the Fund and its Fund Adviser were legally separate entities that observed corporate formalities.10 Regardless of whatever advisory role the Fund Adviser played, the Fund itself filed the prospectuses, which contained nothing indicating that any statements came from the Fund Adviser rather than the Fund.11 Moreover, the fact that the Fund Adviser provided online access to the prospectuses on its website was not a basis for liability because "[m]erely hosting a document on a Web site does not indicate that the hosting entity adopts the document as its own statement or exercises control over its content."12