In an opinion issued June 13, 2011, Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. __ (2011), the Supreme Court declined to adopt a broad interpretation of who can be considered to have “made” a statement under the federal securities laws. The Court’s ruling prevents those who assist in the preparation of another person’s or company’s public statements - such as attorneys, accountants, investment advisers, and investment bankers - from being named as defendants in private lawsuits as alleged primary violators of the securities laws.
In September 2003, investors brought suit against Janus Capital Group, Inc. (JCG) and its wholly owned subsidiary, Janus Capital Management LLC (JCM), for allegedly making misleading statements in prospectuses for the Janus family of mutual funds. The prospectuses were issued by Janus Investment Fund, a separate legal entity with its own board of trustees. JCM, as investment adviser to the funds, was responsible for the operations of the funds and allegedly participated in preparing the relevant portion of the prospectuses. All of the officers of Janus Investment Fund were also officers of JCM. The plaintiff investors sought to hold JCM liable for the alleged misstatements, arguing that it could be considered to have made the statements in the prospectuses.
The district court dismissed the complaint, relying on the Supreme Court’s 1994 ruling in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994), which barred aiding and abetting claims in private securities actions. The district court held that Plaintiffs’ 10(b) claim against JCG failed because the complaint did not allege that JCG had made or prepared the prospectuses or that any statements were directly attributable to JCG. The district court also dismissed the 10(b) claim against JCM, finding no nexus between Plaintiffs and JCM. The Fourth Circuit reversed and remanded on the claim against JCM, holding that it is sufficient in fraud-on-the-market cases for Plaintiffs to prove that interested investors would have attributed the misleading statements to the Defendants. The court found it sufficient that JCM had made public the fact that it was responsible for the daily operations of the funds. The allegations were insufficient as to JCG, the court found, because it would not be apparent to the public that a parent company would participate in drafting or approving prospectuses.
The issue before the Supreme Court was whether JCM could be considered to have “made” the statements in the mutual fund prospectuses.
Supreme Court Decision
In a 5-4 opinion, the divided Supreme Court answered the question presented with a “No,” reversing the Fourth Circuit and finding Plaintiffs had failed to state a claim.2 Concerned about broadening the judicially-created private cause of action under Rule 10b-5, the Court held that “the maker of a statement is the entity with authority over the content of the statement and whether and how to communicate it.” A broader reading, the Court reasoned, would substantially undermine its 1994 Central Bank decision by essentially eliminating the distinction between primary violators (against whom private lawsuits can be filed) and aiders-and-abettors (against whom only the SEC can bring suit). The Court accordingly rejected the U.S. Government’s argument that “make” should be defined as “create,” thereby allowing private suits against those who allegedly provide false information that another person then puts into a statement. The Court also rejected the Plaintiffs investors’ argument that an investment adviser should be understood to be the “maker” of a statement by its client because of the “uniquely close relationship” between the two, declining to disregard the separate existence of different legal entities.
Applying its standard for primary liability, the majority held that JCM was not the maker of the statements in the mutual fund prospectuses. Janus Investment Fund, not JCM, was the entity which had responsibility for filing, and did file, the prospectuses with the SEC. Nor was there anything on the face of the prospectuses attributing the statements to JCM. “Although JCM, like a speechwriter, may have assisted Janus Investment Fund with crafting what Janus Investment Fund said in the prospectuses, JCM itself did not ‘make’ those statements for purposes of Rule 10b-5.”
Implications of the Decision
The decision in Janus Capital has the most direct implications for attorneys, accountants, and other professionals who assist issuers in preparing SEC filings and public statements. Had the Court adopted the broader standard advocated by Plaintiffs and the U.S. Government, such service providers likely would have been routinely named as defendants in securities class actions. Depending on how it is interpreted by lower courts, the decision may also impact the potential liability of employees of issuers who do not have ultimate authority over the issuer’s public statements.
The Court’s decision also has important implications for the investment fund community. Under Janus Capital, legally separate advisers who provide advice pursuant to an investment advisory agreement generally should not face potential primary liability under Rule 10b-5 for statements in materials issued by the fund, such as offering materials or periodic reports.