June 13, 2011
Primary Liability Under Rule 10b-5: The Janus Capital Decision
The Supreme Court released its opinion in Janus Capital Group, Inc. v. First Derivative Traders today. The plaintiffs in the case were attempting to hold mutual funds’ investment adviser liable for alleged misstatements in the funds’ prospectuses. In a 5-4 decision, the Supreme Court held that the adviser “cannot be held liable because it did not make the statements in the prospectuses.”
Justice Thomas wrote the majority opinion, which noted that, in order to be liable under 10b-5, one must “make” a false statement. According to Justice Thomas, “one who prepares or publishes a statement on behalf of another is not its maker,” only the person who has “authority over the content of the statement and whether and how to communicate it.” The prospectuses were issued by the funds themselves, not by the adviser, so only the funds made the statements.
Justice Breyer, who wrote the dissent, noted that the adviser was actively involved in preparing and writing the allegedly fraudulent statements; among other things, the complaint alleged that the adviser drafted and reviewed the prospectuses, and disseminated them through its parent company’s web site. Breyer believed this was enough to conclude that the adviser “made” the fraudulent statements.
If this opinion does nothing else, it puts to rest the argument that lawyers might be liable as primary violators under Rule 10b-5 because they draft a document for a client that the lawyer knows to be false. The client in that case would have the ultimate authority over the statement, not the lawyer, so the lawyer would not be making any false statement. The Janus Capital opinion is also going to make it harder to impose primary liability on corporate employees for corporate statements they did not directly make.
The majority saw its decision as a logical progression from the Central Bank decision rejecting liability for aiding and abetting and the Stoneridge Investment Partners decision rejecting liability for tangential participants in the fraud on whom injured investors did not rely. Justice Breyer’s dissent argued that neither Central Bank nor Stoneridge compelled the majority’s conclusion. I think Breyer may be right on this point, but Central Bank, Stoneridge, and Janus Capital certainly present a consistent theme. And, like the other two opinions, Janus Capital is going to be required reading in every Securities Regulation course.