Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, June 14, 2011

Janus Capital Group Majority: Adviser Did Not "Make" Statements in Fund Prospectuses

In a predictable outcome, a divided Supreme Court (5-4) held, in Janus Capital Group v. First Derivatives Traders, that a mutual fund adviser cannot be held liable in a private Rule 10b-5 action for false statements included in the prospectuses of mutual funds even though the funds and the adviser are affiliated entities within a fund family (in this case, Janus).  In finding that the adviser did not make the statements, Justice Thomas relied on the dictionary definition of "make," its previous precedent, Central Bank and Stoneridge,  and its policy of construing the scope of the implied remedy narrowly.  Moreover,

Although First Derivative and its amici persuasively argue that investment advisers exercise significant influence over their client funds, ... it is undisputed that the corporate formalities were observed here. JCM and Janus Investment Fund remain legally separate entities, and Janus Investment Fund’s board of trustees was more independent than the statute requires....  Any reapportionment of liability in the securities industry in light of the close relationship between investment advisers and mutual funds is properly the responsibility of Congress and not the courts.

Justice Breyer dissented, along with Justices Sotomayor, Ginsburg, and Kagan.

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Let's say that you invested in the fund itself, Janus Investment Fund, and you find out that the fund's advisors, contrary to the prospectus, have been allowing market timing. You sue the advisers, JCM/JCB, under 10b-5 alleging that they "made" a material misstatement. Under this case, mustn't you lose because the only entity that "made" a material misstatement is the fund, Janus Investment Fund, which is owned by you? So the only recourse investors in the fund have is to in effect sue yourself because the advisers didn't follow what was in the prospectus?

What am I missing? That can't be right.

Posted by: Greg | Jun 15, 2011 4:57:05 AM


You are 100% spot-on. This case was a huge blow to mutual fund investors. JCM was technically and legally a distinct operation and the only involved party with "authority" over any of the misrepresentations. The majority stretched stare decisis to Major League Baseball antitrust exemption extremes in its opinion.


Posted by: Max | Jan 22, 2012 9:41:18 AM

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