By Scott T. Seabolt
and Brandi F. Walkowiak
Aug. 18, 2011
On June 13, 2011, the U.S. Supreme Court reaffirmed and built on its earlier precedents prohibiting a private action for aiding and abetting liability and establishing a clear rule regarding who may be held primarily liable under Securities and Exchange Commission (SEC) Rule 10b-5. Rule 10b-5 prohibits making any untrue statement of a material fact in connection with the purchase or sale of securities. In Janus Capital Group Inc. v. First Derivative Traders, the Supreme Court held that for purposes of 10b-5 liability, the maker of a statement is the person or entity with the ultimate authority over the statement, including “the content [of the statement] and whether and how to communicate it.” At issue in Janus Capital was whether a mutual fund investment adviser could be held liable in a private action under Rule 10b-5 for false statements included in the mutual fund prospectuses of its client. Reversing the Fourth Circuit, the U.S. Supreme Court held that it could not be held so liable.
In doing so, the Supreme Court upheld its earlier precedents that Rule 10b-5’s private right of action did not include suits against aiders and abettors, Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), and barred private securities cases against third-party companies or individuals. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008).
In
Janus Capital, shareholders filed a putative class action against Janus Capital Group, Inc. (JCG) and its wholly-owned subsidiary Janus Capital Management LLC (JCM), alleging violations of §10(b) and §20(a) of the Securities Exchange Act of 1934. The complaint alleged that JCM, the investment adviser to the Janus mutual funds, was responsible for misleading statements, which appeared in prospectuses for a number of the Janus funds, indicating that the funds took active measures to prevent market timing of the funds. The plaintiffs claimed that the prospectuses falsely represented that the Janus funds had policies to prevent market timing, when, in fact, fund managers actually permitted significant market timing and late trading to occur. The investors claimed that these statements regarding the policy to deter market timing fraudulently induced investors to buy shares in the mutual funds. The complaint also alleged that JCM was responsible for the day-to-day management of the investment portfolio and other business affairs of the fund and that, as such, JCM ran the Janus funds.