Opinion analysis: Who â€œmakesâ€ statements under the federal securities laws?
on Jun 17, 2011 at 11:35 am
Mondayâ€™s decision in Janus Capital Group, Inc. v. First Derivative Traders provided a bright-line rule with respect to potential primary liability under Securities and Exchange Rule 10(b)-5, which prohibits â€œmak[ing] any untrue statement of material factâ€ in connection with the purchase or sale of securities: Â in a decision by Justice Thomas (joined by the Chief Justice and Justices Scalia, Kennedy, and Alito), the Court limited potential primary liability under the Rule to speakers and persons and entities with ultimate authority over statements.Â [For more background on the case, you can read my preview of the case here and my recap of the oral argument here.]
In doing so, the Court rejected broader readings of the statute from both the government â€“ which urged the Court to hold that the word â€œmake,â€ for purposes of the federal securities laws, should be defined as â€œcreateâ€ and that potential primary liability extends to parties who play a significant role in the creation of false statements â€“ Â and from the dissent, which argued that the â€œmakerâ€ of an allegedly false statement should be determined based on the facts and circumstances alleged in a particular case.
Petitioner Janus Capital Management LLC (JCM) served as an investment advisor and administrator to the Janus mutual fund family.Â The Janus mutual fund family was in turn created by publicly traded Janus Capital Group (JCG) and is organized in a Massachusetts business trust, the Janus Investment Fund.Â JCM and JCG are the petitioners here and are both separate legal entities from Janus Investment Fund.
Respondent First Derivative Traders alleged in the district court that both JCM and JCG bore primary liability for allegedly misleading prospectus materials issued by Janus Investment Fund because they â€œcaused mutual fund prospectuses to be issued for Janus mutual funds and made them available to the investing public, which created the misleading impression that [JCG and JCM] would implement measures to curb market timing in the Janus [mutual funds.]â€Â After the district court dismissed the action for failure to state a claim, the Fourth Circuit reversed, holding that First Derivative had sufficiently Â alleged that â€œJCG and JCM, by participating in the writing and dissemination of the prospectuses, made the misleading statements contained in the documents.â€
JCG and JCM filed a petition for certiorari, which the Court granted.Â On Monday it reversed the Fourth Circuitâ€™s decision, holding that only a party â€œwith ultimate authority over the statement including its content and whether and how to communicate itâ€ is the one that â€œmakesâ€ the statement within the meaning of Rule 10b-5.Â Accordingly, even allegations that JCG and JCM were â€œsignificantly involved in preparingâ€ the prospectuses fails to state a claim against them under Rule 10b-5.Â In so holding, the Court compared JCG and JCM to speechwriters: â€œEven when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it.Â And it is the speaker who takes credit â€“ or blame â€“ for what is ultimately said.â€
The Court also rejected as overly broad the governmentâ€™s contention that the wordÂ â€œmakeâ€ under Rule 10b-5 should be defined as â€œcreate.â€ That argument, the Court explained, was both unpersuasive and inconsistent withÂ its 2008 decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. And in any event, the Court continued, because it found the plain language of Rule 10b-5 to be unambiguous, it need not defer to the governmentâ€™s interpretation.Â Finally, the Court expressed skepticism regarding the need to ever defer to the governmentâ€™s broad interpretation of the private right of action.
In contrast to the bright-line rule requiring that the â€œmakerâ€ of an allegedly misleading statement must either be the actual speaker or have ultimate authority over the statement, Justice Breyer wrote in his dissent â€“ which was joined by Justices Ginsburg, Sotomayor, and Kagan â€“ that the language of Rule 10b-5 and case law require a more flexible approach.Â â€œNeither common English nor this Courtâ€™s earlier cases limit the scope of [â€˜makeâ€™] to those with â€˜ultimate authorityâ€™ over a statementâ€™s content.â€Â Instead, he would analyze the issue of which party or parties â€œmakeâ€ a statement based on the individual circumstances alleged; in this case, he concluded, â€œthe circumstances here are such that a court could find that Janus Management made the statements in question.â€
The practical effect of the opinion should be to narrow the non-speaking parties subject to potential primary liability under the federal securities laws and to focus litigants and counsel on potential theories of secondary liability for such non-speakers involved in same way with allegedly false statements.