The plaintiffs, on behalf of shareholders of a company which owned various mutual funds, alleged, among other things, that the mutual funds’ investment advisor was responsible for certain misleading statements appearing in prospectuses for a number of the funds in violation of Section 10(b) of the Securities Exchange Act of 1934. The plaintiffs alleged that the defendant misrepresented that the funds’ managers did not permit, and took active measures to prevent, market timing of the funds. The district court held that plaintiffs had failed sufficiently to plead certain elements of a Section 10(b) claim. The Fourth Circuit reversed, holding that plaintiffs adequately alleged the reliance element of a Section 10(b) claim which requires that plaintiffs allege they relied on the defendant’s false or misleading statements in the purchase or sale of securities. The plaintiffs argued that they adequately alleged reliance pursuant to the “fraud-on-the market” doctrine, which presumes reliance when the statements at issue become public. The defendant argued that the plaintiffs failed to allege that they made any public misrepresentations because the plaintiffs did not allege that the defendant made the statements in the prospectuses and did not allege that the statements in the prospectuses were attributable to the defendant.  

The Fourth Circuit found that, although statements in the individual fund prospectuses were not attributed, the “clear essence” of the plaintiffs’ complaint was that the defendant helped draft the allegedly misleading prospectuses. The Fourth Circuit also found that the plaintiff adequately alleged facts from which a court could 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 was not directly attributed to the defendant. (In re Mutual Funds Investment Litigation, 2009 WL 1241574 (4th Cir. May 7, 2009))