Janus Capital: What it means to ‘make’ a statement under Rule 10b-5

Janus Capital Grp. v. First Derivative Traders, 2011 WL 2297762 (U.S. June 13, 2011), created a shield to liability for investment fund advisors by narrowing the reach of Rule 10b-5, the antifraud provision in the Securities Exchange Act of 1934.  17 CFR 240.10b-5.  The decision allows advisors to circulate prospectuses for investment funds even when they know the document contains false statements.  The Court reached this result by concluding that the fund rather than the advisor had ultimate control over the statements in the prospectuses.

First Derivative Traders (“First Derivative”), a group owning stock in Janus Capital Group (“JCG”), brought a class action suit under Rule 10b-5 for securities fraud.  First Derivative alleged that a subsidiary of JCG known as Janus Capital Management LLC (“JCM”), distributed prospectuses for Janus Investment Fund while knowing that the prospectuses contained false statements.

Under SEC Rule 10b-5, a plaintiff must show that the defendant made a material misrepresentation or omission, with scienter, a connection between the misrepresentation or omission and purchase or sale of a security, reliance, economic loss, and loss causation.  Defendants, however, asserted that they were not responsible for the allegedly false information in the prospectuses because they had not “made” the statements.  Instead, the statements had been made by the Funds, the entities legally responsible for drafting, issuing and filing the prospectuses.

The Court agreed with the defendants.  The Court focused its analysis on the word “make” contained in Rule 10b-5 (providing liability for those who “make any untrue statement of a material fact”).   It stated, “[f]or purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.”

This ruling narrowed the scope of private action under SEC Rule 10b-5 by only allowing private action against those who actually “make” the “untrue statement of material fact.”  To the Court, those were the persons with “ultimate authority” over the statements.  Id. (“For purposes of Rule 10b–5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.”).  As the Court elaborated:

• “Without control, a person or entity can merely suggest what to say, not ‘make’ a statement in its own right.  One who prepares or publishes a statement on behalf of another is not its maker.”

The majority went on to explain that contributing substantial assistance will not be seen as making a statement under SEC Rule 10b-5.  The Court decided that Janus Investment Fund had final say over what was published in its prospectuses.  This meant that the fund, not JCM, was “making” the statements contained in its prospectuses. In arriving at the conclusion, the Court emphasized that Janus Investment Fund and JCM were separate and that “the two entities maintain[ed] legal independence.”

Commentators see this as a blow to primary liability to non-speaking advisors of investment funds.  Some speculate this will lead to the SEC taking action to alter primary liability or result in more suits relying on theories of secondary liability.

Commentary regarding this case can be found here.

The dissenting Justices outlined the problems with this ruling, which we have previously discussed here.

The primary materials for this case may be found on the DU Corporate Governance website.