On June 13, 2011, in a 5–4 decision, the United States Supreme Court reversed the Fourth Circuit Court of Appeals and limited primary liability under the federal securities laws. Janus Capital Group, Inc., et al. v. First Derivative Traders, No. 09-525, 564 U.S. ___ (2011). In particular, the Court ruled that Janus Capital Group, Inc. (JCG) and its wholly owned subsidiary, Janus Capital Management LLC (JCM), could not be held liable for false statements made in prospectuses issued by Janus Investment Fund (JIF), a business trust owned by mutual fund investors. Significantly restricting shareholders’ private right of action under SEC Rule 10b-5, the decision may have far-reaching implications.
Under SEC Rule 10b-5, it is unlawful for any person “[t]o make any untrue statement of a material fact in connection with the purchase or sale of securities.” 17 CFR § 240.10b-5(b). Whether a person “made” the statements was the focus of the majority’s analysis: “To be liable . . . [JCG and/or JCM] must have ‘made’ the material misstatements in the prospectuses.” Reasoning that neither JCG nor JCM “made” the misstatements in the prospectuses, the majority relied on the following reasons: (1) the narrow scope that must be given to an implied private right of action (Congress did not expressly authorize a private right of action under SEC Rule 10b-5); and (2) the Court’s prior decisions, Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 180 (1994) (persons cannot be held liable in a private action under SEC Rule 10b-5 for aiding and abetting another person’s fraud), and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 165–67 (2008) (expanding Central Bank’s protection of secondary actors).
Importantly, the majority found that “[o]ne ‘makes’ a statement by stating it.” “For purposes of 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.” Preparing or publishing a statement on behalf of another is not, according to the majority, “making” a statement under SEC Rule 10b-5.
JCG and JCM argued that, notwithstanding the overlap of officers of the entities, the statements made in the prospectuses were made by JIF, an investment fund that was a separate legal entity. Neither the parent company nor its subsidiary was responsible for the prospectuses, and they could not be held liable. The Court agreed. Although the majority acknowledged the intimate relationship between a mutual fund and its investment advisor, including the fact that in the case at bar all three entities’ officers were the same, JIF “maintain[ed] legal independence,” i.e., its respective board of trustees was independent (only one member overlapped with the other Janus entities).
There are broad implications of this decision. Liability of other secondary actors under the securities laws, including accountants, investment advisors, attorneys and even separate legal entities related to those with “ultimate authority,” may be limited under Janus. In turn, this limit on private actions may result in increased allegations of control person liability under section 20(a) of the Securities Exchange Act of 1934, as well as enforcement actions by the SEC.
Further, Janus may stimulate efforts of Congress to reconsider section 10(b) of the Securities Exchange Act of 1934, related securities fraud legislation (e.g., Private Securities Litigation Reform Act), and other legislation. In any event, Janus is a significant decision that has altered the landscape of securities law.