Securities Law Prof Blog

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

Tuesday, September 27, 2011

Court Dismisses Fraud Claims Against AOL Senior Managers Pursuant to Janus

A frequent question in the aftermath of the 2008 financial meltdown is: why aren't individual defendants being held accountable for their misdeeds?  Part of the difficulty is establishing securities fraud and the difficulty of pleading and proving scienter.  Another difficulty results from the definition of a "maker of a statement" the U.S. Supreme Court set forth in Janus Capital Group, Inc. v. First Derivative Traders.  In holding that a fund' investment adviser and administrator could not be held liable under Rule 10b-5 for misstatements in the Fund's prospectus, the Court defined a "maker of a statement" as "the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it....One who prepares or publishes a statement on behalf of another is not its maker."

In SEC v. Kelly (S.D.N.Y. Sept. 22, 2011), the court relied on that language to hold that two AOL senior managers could not be liable under Rule 10b-5 and 33Act section 17(a) for misstatements about advertising revenues.  As doubtful litigation strategy, the SEC conceded that Janus foreclosed a misstatement claim under Rule 10b-5(b), but argued that they could be liable under "scheme liability" based on Rule 10b-5(a) and (c) and section 17(a) of the 33 Act.  The court rejected both these arguments, because "this case is not about conduct that is itself deceptive -- it is about conduct that became deceptive only through AOL's misstatements in its public filings."  Moreover, since the elements of a 17(a) claim are essentially the same as those for Rule 10b-5 claims, the court also dismissed those claims.

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