The U.S. Supreme Court recently has agreed to hear Janus Capital Group Inc. v. First Derivative Traders, a case involving the scope of “primary liability” in private securities actions. The case arises as a result of a decision of the U.S. Court of Appeals for the Fourth Circuit, which found that an investment adviser to a group of mutual funds could be held primarily liable in a private securities fraud action under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder for “helping” or “participating” in the preparation of false or misleading prospectuses for the funds, even though the alleged misleading statements were not directly and contemporaneously attributed to the adviser. The Fourth Circuit’s decision highlights a split of authority in the Courts of Appeals over the scope of “primary liability” in private securities actions. The Second Circuit, for example, has concluded that a service provider can be held primarily liable only for statements that were directly and contemporaneously attributed to the service provider.

In 2003, First Derivative Traders, individually and on behalf of certain shareholders of Janus Capital Group Inc. (JCG), brought a class action lawsuit against JCG and its whollyowned subsidiary Janus Capital Management LLC (JCM). JCM is the investment adviser to the Janus mutual funds. The complaint alleges that the defendants were responsible for misleading statements in prospectuses for certain Janus funds during the class period. The allegedly misleading statements represented that the Janus funds’ managers did not permit, and took active measures to prevent, market timing in the funds. Plaintiffs further allege that, when it came to light that the funds in fact permitted select investors to engage in market timing, other investors withdrew assets from the funds. As a result, according to plaintiffs, the value of JCM’s advisory and management business, and hence JCG’s stock price, declined and caused them injury.

The district court dismissed the complaint. It held that because JCM did not prepare the prospectuses or directly make the statements, the claims against JCM and JCG were therefore merely ones for “aiding and abetting” a securities law violation. “Aiding and abetting” is a form of “secondary” liability that cannot be enforced by a private plaintiff under the Supreme Court’s 1994 decision in Central Bank of Denver v. First Interstate Bank of Denver.

Plaintiffs appealed to the Fourth Circuit, which reversed the district court’s decision. It held that plaintiffs asserted a viable claim for “primary liability” under Section 10(b) of the Exchange Act by alleging that by “participating in the writing and dissemination of the prospectuses, [JCM and JCG] made the misleading statements contained in the documents.” The Fourth Circuit then analyzed whether “interested investors…would attribute the allegedly misleading statement to the defendant.” The Fourth Circuit noted, among other things, plaintiffs’ claims that JCM was “responsible for the day-to-day management of [the] investment portfolio and other business affairs of the funds” and statements in the prospectuses describing JCM’s management role. Therefore, the Fourth Circuit concluded that “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.” Accordingly, the Fourth Circuit reinstated plaintiffs’ securities fraud claim against JCM. As to JCG, the Fourth Circuit held that it would not “be apparent to the investing public that [JCM’s] parent company, which sponsors a family of funds, participates in the drafting or approving of prospectuses issued by the individual funds.” However, while the Fourth Circuit held that JCG could have no direct federal securities fraud liability, it could be held liable as a “control person” for JCM’s securities fraud. JCG and JCM then filed a certiorari petition with the Supreme Court, seeking review of the Fourth Circuit’s decision.

In its petition to the Supreme Court, defendants argued that the case presents a split of authority among the circuits regarding the scope of primary liability in private securities actions. Defendants certified the following questions to the Court: (1) whether the Fourth Circuit erred in concluding – in direct conflict with decisions of the Fifth, Sixth, and Eighth Circuits – that a service provider can be held primarily liable in a private securities fraud action for “help[ing]” or “participating in” another company’s misstatements; and (2) whether the Fourth Circuit erred in concluding – in direct conflict with decisions of the Second, Tenth, and Eleventh Circuits – that a service provider can be held primarily liable in a private securities fraud action for statements that were not directly and contemporaneously attributed to the service provider.

Because a private cause of action may result in liability for only “primary” actors under the antifraud provisions of the securities laws, this case will determine whether many groups – including parent corporations, officers, directors and service providers like investment advisers, attorneys, and accountants – are “primary” defendants who can be privately sued. Accordingly, the Supreme Court’s decision may significantly expand the class of defendants that can be sued in private class action securities litigation.

The case will be heard during the Court’s next term, beginning October 4, 2010. It will likely be decided during the first half of 2011.