Last month, in Prousalis v. Moore (May 7, 2014), a criminal securities fraud case, the Fourth Circuit held that the Supreme Court’s interpretation of Rule 10b-5(b) in Janus Capital Group, Inc. v. First Derivative Traders (2011) is inapplicable outside the context of the implied private right of action for private plaintiffs. Rule 10b-5(b) imposes liability for those who “make” fraudulent misstatements in the offering or purchasing of securities. In Janus, the Supreme Court held that only those with “ultimate authority” over a fraudulent statement can be primarily liable for making it. Accordingly, even if someone is actively involved in the creation of a fraudulent statement, that person cannot be primarily liable if he/she lacks ultimate authority. Instead, a plaintiff would have to rely on a theory of secondary liability, which can be challenging given the Supreme Court’s decisions in Central Bank Denver, N.A. v. First Interstate Bank of Denver, N.A. (1994) and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. (2008).
While Janus was a case involving the private right of action, the Supreme Court did not clearly limit its interpretation to that context. Its application outside of private securities class actions has been ambiguous, resulting in uncertainty on whether the Securities and Exchange Commission (SEC) and DOJ must similarly prove that defendants had “ultimate authority” over any alleged misstatement. In some cases, the SEC has attempted to bypass this question by bringing misstatement actions under other securities law provisions, like Section 17(a) of the Securities Act. While not coextensive, Section 17(a) contains language nearly identical to Rule 10b-5. The SEC has also brought misstatement actions under a theory of scheme liability, which stems from Rule 10b-5(a) and (c), rather than subsection (b), which was the focus of Janus.
In Prousalis, the defendant was convicted of securities fraud and then filed a habeas petition after the Supreme Court’s decision in Janus was issued, claiming that the conduct was no longer criminal. The Fourth Circuit rejected that argument, emphasizing that “Janus concerned the ability of a private plaintiff invoking [Section 10(b)’s] . . . implied right to sue a mutual investment adviser” and that “[a]ny textual conclusion announced in this particular area of law would not be casually generalizable to the criminal context.”
Prousalis is significant because it unambiguously limits Janus to private rights of action. Thus, in criminal cases brought by the DOJ (and arguably in civil cases brought by the SEC), defendants may not be able to rely on Janusto avoid primary liability. While the concern for private litigation clearly underlies Janus, it remains to be seen whether other circuits will follow the Fourth Circuit’s lead and likewise limit Janus to the context of Rule 10b-5’s implied private right of action.
For a more in-depth discussion of Janus and its effect on public enforcement by the SEC of securities fraud, see John Patrick Clayton, The Two Faces of Janus: The Jurisprudential Past and New Beginning of Rule 10b-5, 47 U. Mich. J.L. Reform 853 (2014).
