The Supreme Court on Monday, in Janus Corp., Inc. v. First Derivative Traders (“Janus”), drew a bright line on an important question concerning who may be liable under the federal securities laws for “making” a false or misleading statement. In a 5-4 decision, the Court ruled that only those individuals and/or entities that actually “state” or issue the challenged statement may be liable under Rule 10b-5 for securities fraud, and that Rule 10b-5 liability does not extend to others involved in drafting the statement behind the scenes unless they possessed “ultimate authority” regarding whether and how the statement would be issued. As the Court put it:
Without control, a person or entity can merely suggest what to say, not “make” a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker.
This ruling has broad application to accountants, experts, lawyers and others who may be involved in the process of preparing corporate disclosures, but who would not be deemed to ultimately control the maker of those disclosures.
The broad principles articulated in Janus arose in the special setting of mutual funds. Plaintiffs were investors in the publicly-traded parent company, Janus Capital Group, Inc. which created the Janus family of mutual funds (the “Funds”). The Funds were managed by Janus Capital Management LLC (“JCM”). The Court acknowledged that there was a close relationship between JCM and the Funds; plaintiffs alleged that the Funds had no full-time staff of their own, and that JCM had participated in drafting the allegedly misleading disclosures that were contained in the Funds’ prospectuses. The question posed was whether JCM, as drafter of those disclosures, was liable under Rule 10b-5 as a “maker” of the statements.
The Court held that JCM had not “made” the statements and therefore could not be held liable. The Court found determinative that the Funds which issued the prospectuses were legally independent, had their own board of trustees (the majority of whom were not affiliated with JCM) and were ultimately the entities with the power to decide the content and manner of dissemination.
This is the latest in a line of cases where the Court has rejected attempts to impose securities fraud liability on non-issuers in private civil litigation, following on the Central Bank of Denver decision in 1994 (no “aider and abetter” liability) and the Court’s Stoneridge decision in 2008 (no liability for so-called “scheme” participants). Note, however, that these cases do not impact the SEC’s ability to pursue such so-called secondary actors in enforcement proceedings under aiding-and-abetting or other theories. In addition to SEC enforcement proceedings, entities that did not “make” statements under Janus may still face litigation exposure to private plaintiffs under the “control person” provisions of federal securities law and various state-law liability theories.
While a closely decided 5-4 decision, Janus nonetheless provides important guidance with respect to whether one is or is not likely to be found an actionable “maker” of misleading statements:
- Formalities Count. A key determinant in the Court’s reasoning was the JCM did not ultimately control what the Funds said; the Funds did. The fact that a majority of the Funds’ trustees were independent of JCM and that corporate formalities was observed was critical in determining that JCM was not the “maker” of the statements.1
- Attribution May Count. In a footnote, the Court mused about whether JCM could have been liable if it “made” the misleading statement “indirectly.” However, since there was nothing in the Funds’ prospectus that attributed any statement specifically to JCM (even if JCM had in fact drafted such statements) noting “[m]ore may be required to find that a person or entity made a statement indirectly, but attribution is necessary.”