Tuesday, June 29, 2010
Supreme Court Grants Certiorari in Securities Fraud Class Action Involving Market-Timing Statements in Fund Prospectuses
The Supreme Court accepted certiorari in a securities fraud class action based on alleged misstatements in mutual fund prospectuses that market-timing was not permitted. In Janus Capital Group v. First Derivative Traders, 566 F.3d 111 (4th Cir. 2007), First Derivative appealed the dismissal of its putative class action complaint, which it filed, individually and on behalf of certain shareholders of Janus Capital Group Inc. (JCG), against JCG and Janus Capital Management LLC (JCM), the investment advisor to the Janus mutual funds. The complaint alleged that JCG and JCM were responsible for certain misleading statements appearing in prospectuses for a number of the individual Janus funds during the class period. These statements represented that the funds' managers did not permit, and took active measures to prevent, “market timing” of the funds. First Derivative alleged that class members (plaintiffs) bought JCG shares at inflated prices and thereafter lost money when market timing practices authorized by JCG and JCM became known to the public. The district court had concluded that plaintiffs had failed to sufficiently plead certain elements of a § 10(b) securities fraud action against either JCG or JCM and also dismissed plaintiffs' claim of control person liability against JCG under § 20(a). The Fourth Circuit, however, held that plaintiffs' § 10(b) primary liability claim against JCM and plaintiffs' § 20(a) control person liability claim against JCG were sufficiently pled to overcome defendants' motion to dismiss. It reversed the district court's order granting defendants' motion to dismiss and remanded the case for further proceedings.
The Fourth Circuit stated that:
Here, the allegedly misleading statements about market timing appearing in the Janus funds prospectuses are unquestionably public. The real question is whether these statements were sufficiently attributable to JCG and JCM. While the prospectuses did not explicitly name JCG and JCM as the drafters, plaintiffs nevertheless allege in their complaint that JCG and JCM may be held responsible for the statements in the prospectuses because “as a practical matter [JCM] runs” the Janus funds, defendants disseminated the prospectuses on a joint Janus website and, consequently, the public would attribute the misstatements in the prospectuses to defendants.
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The courts of appeal have diverged over the degree of attribution required to plead reliance.
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Consequently, for the public attribution element of the reliance inquiry, we hold that a plaintiff seeking to rely on the fraud-on-the-market presumption must ultimately prove that interested investors (and therefore the market at large) would attribute the allegedly misleading statement to the defendant. ...At the complaint stage a plaintiff can plead fraud-on-the-market reliance by alleging facts from which a court could plausibly infer that interested investors would have known that the defendant was responsible for the statement at the time it was made, even if the statement on its face is not directly attributed to the defendant. ...
Direct attribution of a public statement, while undoubtedly sufficient to establish fraud-on-the-market reliance, is an inexact proxy for determining whether investors will attribute a publicly available statement to a particular person or entity. We conclude that the attribution determination is properly made on a case-by-case basis by considering whether interested investors would attribute to the defendant a substantial role in preparing or approving the allegedly misleading statement....
We conclude, at the Rule 12(b)(6) stage, that given the publicly disclosed responsibilities of JCM, interested investors would infer that JCM played a role in preparing or approving the content of the Janus fund prospectuses, particularly the content pertaining to the funds' policies affecting the purchase or sale of shares. It was publicly known that JCM furnished advice and recommendations concerning the Janus funds' investment decisions and even made NAV determinations, which in part enabled market timing. In light of the publicly available material, interested investors would have inferred that if JCM had not itself written the policies in the Janus fund prospectuses regarding market timing, it must at least have approved these statements. This circumstance is sufficient to support the adequacy of plaintiff's pleading of fraud-on-the-market reliance as to JCM...
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The Question Presented in the petition for certiorari is as follows:
There is no aiding-and-abetting liability in private actions brought under Section 10
(b) of the Securities Exchange Act of 1934. Central Bank of Denver, N.A. v. First
Interstate Bank of Denver, N.A., 511 U.S. 164 (1994). Thus, a service provider who
provides assistance to a company that makes a public misstatement cannot be held
liable in a private securities-fraud action. Stoneridge Inv. Partners, LLC v. Scientific-
Atlanta, Inc., 128 S. Ct. 761 (2008). In the decision below, however, the Fourth
Circuit held that an investment adviser who allegedly "helped draft the misleading
prospectuses" of a different company, ''by participating in the writing and
dissemination of [those] prospectuses," can be held liable in a private action "even if
the statement on its face is not directly attributed to the [adviser]." App., infra, 17a-
18a, 24a (emphases added). The questions presented are:
1. Whether the Fourth Circuit erred in concluding-in direct conflict with decisions of
the Fifth, Sixth, and Eighth Circuits-that a service provider can be held primarily
liable in a private securities fraud action for "help[ing]" or "participating in" another
2. Whether the Fourth Circuit erred in concluding-in direct conflict with decisions of
the Second, Tenth, and Eleventh Circuits-that a service provider can be held
primarily liable in a private securities-fraud action for statements that were not
directly and contemporaneously attributed to the service provider.