Post-Janus Capital Group, Inc. v. First Derivative Traders, Uncertainty Lingers

In Janus Capital Group, Inc. v. First Derivative Traders,1 the United States Supreme Court held that a defendant must be the actual “maker” of a material misstatement or omission statement to be found primarily liable for securities fraud. The Supreme Court explained that, under Section 10(b) or 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,” and not just a participant in preparing or approving the content of the statement. The Court concluded that an investment adviser could not be held liable for false statements included in its client‟s prospectus because the investment adviser did not “make” any statement, as the adviser was a distinct legal entity that had no authority over the statement.

Sounds simple, right? Janus seemed to create a bright-line rule, significantly limiting those liable for securities violations. The decision opened the door to claims that corporate officers and other individuals could not be liable for misstatements or omissions because they lacked ultimate authority over the statement. Yet, in the year following the decision, the application of the “maker of the statement” standard has been less than straightforward in the lower courts. In fact, numerous issues have arisen that may have a substantial impact on liability, particularly in actions brought by the Securities and Exchange Commission (SEC).

The Reach of Janus Liability

While Janus appeared to create a bright-line rule, some courts have bypassed the maker of the statement standard and have found liability where the statement was not made or attributable to the defendant. These courts have focused on language in Janus which states that “attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by the party ... to whom it is attributed.” (Emphasis added.) (See, e.g., City of Roseville Employees’ Retirement System v. Energysolutions, Inc.). Applying this reasoning, some courts have found a parent company liable for statements made by an entity that it controls or by another entity where there is sufficient “surrounding circumstances” that evidence attribution. (See Allstate Insurance Co. v. Countrywide Financial Corp.).

Courts have rejected the argument that corporate officers may not be liable for statements made in their official capacity because the corporation retains ultimate authority over the statements. For instance, in In re Merck & Co., Inc. Securities, Derivatives & “ERISA” Litigation, the United States District Court of New Jersey found that a defendant who signed SEC forms and was quoted in articles in his capacity as Executive Vice President of the company was not in an analogous situation to the defendant in Janus because he maintained authority over the statements. The court noted that ruling otherwise “would absolve all corporate officers of primary liability for all Rule 10b-5 claims, because ultimately, the statements are within the control of the corporation which employs them.”

In addition, courts have held that corporate officers who sign and certify statements have ultimate authority over the content of those statements and are therefore considered the makers of the statements. (See, e.g., Monk v. Johnson & Johnson). Similarly, courts have held that a single statement may have multiple makers, and therefore each individual who signs and certifies the statement may be liable for its contents. (See City of Roseville Employees’ Retirement System v. Energysolutions, Inc.). Thus, it would appear that Janus has not fully shielded corporate officers from liability.

Courts, however, have also rejected the corollary argument that any individual who has control over an entity can be liable for statements made by that entity. In Kerr v. Exobox Technologies Corp., the court held that allegations that the defendant, a corporate official, controlled the corporation, owned a majority of the corporation, served as attorney for the corporation and prepared the filing statements at issue were insufficient to establish that defendant was the “maker” of the statement under Janus. The court reasoned that “Just because a person or entity may „control‟ the company filing the document does not mean that the control person can be liable under 10b-5 for making the statements.”

Application of Janus in SEC Actions

Does Janus apply to SEC enforcement actions? The Supreme Court‟s reasoning in Janus rested, in part, on the fact that the case involved a private cause of action, which is not expressly provided for under 10(b) or 10b-5. The Court showed reluctance to expand upon this implied right of action. The Court reasoned that allowing for primary liability for individuals who merely assisted in preparing a statement would render obsolete the issue of aiding and abetting liability which was addressed in a 1994 Supreme Court decision finding that there can be no 10b-5 private right of action against aiders and abettors. (Central Bank of Denver, N.A. v. First Bank Interstate of Denver). The Court noted, in a footnote, that for Central Bank to have any meaning, “there must be some distinction between those who are primarily liable ... and those who are secondarily liable ....” This logic strongly supports the argument that Janus must apply to SEC actions as well.

While the majority of courts addressing this issue have suggested implicitly that the Janus holding applies to SEC actions under Section 10(b), a few opinions from the Southern District of New York have suggested that Janus may not apply to SEC enforcement actions at all. (See, e.g., SEC v. Pentagon Capital Management PLC; SEC v. Landberg; SEC v. Book).

But regardless of whether or not Janus applies to SEC enforcement actions under Section 10(b), the SEC may avoid the “maker of the statement” standard by bringing actions under Section 17(a) of the Securities Act instead. While Section 17(a) claims are similar to Section 10(b) claims, an important difference between the language of Section 17(a)(2) and Rule 10b-5 has led to questions of whether Janus should apply to Section 17(a). Section 17(a)(2) makes it unlawful “to obtain money or property by means of any untrue statement of a material fact,” while Rule 10b-5 makes it unlawful “[t]o make any untrue statement of a material fact.” Other notable differences are that Section 17(a)(2) does not require proof of specific intent, unlike Rule 10b-5, and that there is no private right of action under Section 17(a)(2).

The question of Janus‟s application to Section 17(a) was recently considered by US District Judge Jed Rakoff in S.E.C. v. Stoker. Brian Stoker was a director in a Citigroup Global Markets Inc. division that structured and marketed collateralized debt obligations (CDOs). The SEC alleged that Citigroup structured and sold a CDO containing toxic assets without disclosing in the offering materials that Citigroup was betting on the failure of those assets. Stoker allegedly facilitated the structuring of the CDO and participated in the drafting of the CDO‟s offering documents.

Stoker argued that the complaint failed to allege that he was the person who “made” or was responsible for the alleged false statements in the offering materials, and therefore the Section 17(a)(2) claim had to be dismissed under Janus. However, Judge Rakoff rejected this argument, holding that Janus does not apply to claims under Section 17(a). Judge Rakoff noted that while the elements of a Section 10(b) claim and a Section 17(a) claim are essentially the same, Section 17(a) covers a broader range of activity because it prohibits obtaining money or property “by means of” an untrue statement, while Rule 10(b)-5 prohibits “making” an untrue statement. Therefore, Judge Rakoff held that Stoker could be liable under Section 17(a)(2), but not under Rule 10b-5.3

Other courts have split on whether Janus applies to Section 17(a) claims, though the trend appears to head in the direction of Judge Rakoff‟s reasoning. Five other decisions have held that Janus does not apply to Section 17(a), while two have held that it does apply. (Compare S.E.C. v. Pentagon Capital Mgmt., S.E.C. v. Sentinel Management Group, Inc., S.E.C. v. Mercury Interactive, LLC, S.E.C. v. Daifotis, and SEC v. Geswein with S.E.C. v. Kelly, and S.E.C. v. Perry.) Furthermore, while the SEC‟s Chief Administrative Law Judge Brenda Murray ruled that the Janus standard does apply to claims under Section 17(a)(2), the Commission granted a review of that decision in March 2012 and may overturn it.4


The issue of whether Janus applies to Section 17(a) claims will continue to be litigated and likely receive appellate review in the near future. Nevertheless, the SEC can continue to use other avenues to charge corporate officers with securities violations even if they are not the makers of statements. First, the SEC, unlike private litigants, has the ability to bring claims for aiding and abetting Section 10(b) violations. Second, the SEC may also bring claims for control-person liability under Section 20(a) of the Exchange Act. Yet the SEC may find these avenues somewhat thornier. While neither aiding and abetting liability or control-person liability requires that the SEC establish that the defendant was the maker of a statement, they do require a showing that some other person or entity is primarily liable for the statement at issue.

In sum, the cases following Janus have demonstrated that the “maker of a statement” standard is not the bright-line rule that it appears to be. While the standard will limit those liable for securities violations in private lawsuits, it does not provide corporate officers with a magic bullet to avoid liability. Determination of who is liable for misstatements continues to depend heavily on the facts of each situation.