On June 13, 2011, the U.S. Supreme Court issued its ruling in Janus Capital Group, Inc. v. First Derivative Traders. In a 5-4 decision, the Supreme Court held that a mutual fund investment adviser cannot be held liable by the shareholders of the investment adviser‟s publicly-traded parent company for fraud under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, where the investment adviser did not “make” the false statements in its mutual funds‟ prospectuses.

The sole question before the Supreme Court was whether Janus Capital Management LLC (“JCM”), as investment adviser, could be held liable in a private action filed by the shareholders of the investment adviser‟s parent company under Rule 10b-5 for false statements included in its client Janus Investment Fund‟s (“Funds”) prospectuses. In their complaint, shareholders of parent company Janus Capital Group (“JCG”) sued both JCG and its subsidiary JCM for fraud under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, as well as control person liability under Section 20(a) of the Exchange Act.1 According to the complaint, the Funds managed by JCM issued prospectuses creating the “misleading impression” that JCG and JCM would implement measures to “curb market timing” in the Funds. Following revelations that the Attorney General of the State of New York had filed a complaint against JCG and JCM alleging that JCG had actually permitted market timing in several of the Funds managed by JCM, investors withdrew money from the Funds and JCG‟s stock price fell nearly 25%. The plaintiffs alleged that JCG and JCM made false statements in prospectuses filed by the Funds and that those statements affected the price of JCG‟s stock. The complaint, however, did not allege that defendants JCG or JCM actually issued the prospectuses containing the disclosures regarding the market timing policies.

The district court dismissed the complaint for failure to state a claim against JCG and JCM. The court concluded that JCM‟s dissemination of the prospectuses did not rise to the level of making a misstatement and that the plaintiffs failed to demonstrate that the alleged fraud occurred in connection with the purchase or sale of a security, since there was no nexus between plaintiffs as JCG shareholders and JCM. On appeal, the Fourth Circuit reversed—holding that the plaintiffs sufficiently alleged that “JCM, by participating in the writing and dissemination of the prospectuses, made the misleading statements contained in the documents” and that JCG could be held liable as a control person of JCM.  

The Supreme Court ruled that plaintiffs failed to state a Rule 10b-5 claim against JCM, because only the Funds were ultimately responsible for making the alleged misstatements. Rule 10b-5 makes it unlawful, in connection with the purchase or sale of any security, for a person to directly or indirectly “make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made . . . not misleading.” The Court focused on the meaning of the word “make” and determined that JCM, as investment adviser, did not “make” the allegedly material misstatements in the Funds‟ prospectuses. Specifically, the Court held “[f]or Rule 10b-5 purposes, 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.” The Court went on to note that “[o]ne who prepares or publishes a statement on behalf of another is not its maker.” The Court likened the relationship between an investment adviser and its mutual fund client to the relationship between a speechwriter and a speaker and rejected the analogy that an adviser is a “playwright whose lines are delivered by an actor.” Thus, even if an investment adviser assists with the drafting or distribution of a prospectus, the investment adviser is a mere speechwriter and the mutual fund, as the speaker, has the ultimate responsibility for statements in a prospectus. Further, the Court noted that the Funds had ultimate responsibility for statements in their prospectuses because the Funds, unlike the investment adviser, are required to file the prospectuses with the SEC.  

The Court acknowledged the plaintiffs‟ arguments that there is a “uniquely close relationship between a mutual fund and its investment adviser,” but noted that the Funds were a legally independent entity with their own board of trustees, separate and apart from JCG and JCM. Further, the Court opined that “[a]ny reapportionment of liability in the securities industry in light of the close relationship between investment advisers and mutual funds is properly the responsibility of Congress and not the courts.” Thus, the Court held that plaintiffs had not stated a claim against JCM under Rule 10b-5.

The dissent took issue with the majority‟s bright line test for primary liability and its finding that a maker of a statement is the person who had “ultimate authority” over the statement. In the dissent‟s view, neither common English nor the Court‟s earlier cases limit the scope of the word “maker” to those with “ultimate authority” over a statement‟s content. The dissent contended that the relationships (e.g., JCM‟s involvement in preparing and writing the relevant statements) alleged among JCM and the Funds and the statements in the Funds‟ prospectuses warranted a conclusion that JCM “made” those statements.