The Commission is again asking the Supreme Court to adopt
an expansive reading of Exchange Act Section 10(b). The argument is in its amicus
curiae brief filed in Janus Capital Group., Inc. v. First Derivative
Traders, No. 09-525 (S.Ct.) in support of Respondent. The case presents a critical
issue of primary and secondary liability in private securities fraud actions
Section 10(b) (here).
This will be the third time the High Court has considered
the question. Previously, in Central Bank of Denver, N.A. v. First
Interstate Ban of Denver, N.A., 551 U.S. 164 (1994) the Court held that
Section 10(b) does not include a claim for aiding and abetting. Subsequently,
in Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S.
148 (2008), the Court rejected a claim that scheme liability is covered by the
antifraud provision.
Janus again focuses on the reach
of Section 10(b). The action was brought against Janus Capital Group, Inc. and
Janus Capital Management LLC. The former is the publicly traded
asset-management firm that sponsors a family of mutual funds known as the Janus
Funds. The latter is a wholly owned subsidiary of Janus Capital and is the
investment adviser to the Janus Funds. The complaint claims that the defendants
made false statements regarding the market timing policies of the Janus Funds.
Specifically, plaintiff claims the prospectus gives the impression that market
timing is not permitted. This is false since certain traders were permitted to
use the practice, according to plaintiff. The complaint does not state that
either defendant actually wrote the statements in the prospects or that they
were publicly attributed to them. The district court dismissed the complaint.
The Fourth Circuit reversed.
In the Supreme Court, the SEC argues for a reading of the
Section 10(b) which would support plaintiff's claim that the investment adviser
is primarily liable. Stressing the language of the statute, the Commission
begins its analysis focusing on the word "make," contending that its
traditional interpretation of this statutory term encompasses the conduct here.
That interpretation, the Commission argues, is predicated on the ordinary
meaning of the term and is entitled to deference. It includes those who create
or write a statement. Since it is clear that an issuer can speak "indirectly"
to the markets and be liable under Section 10(b), it "follows that someone else
can make a statement indirectly by creating it and having it appear in a
prospectus formally issued in the name of another entity." Under this
interpretation of the word, the investment adviser here "made" the false
statements about market timing here.
The Commission goes on to distinguish between those who
aid and abet a violation and those who may be secondary actors, but commit a
primary violation. The former are not within the ambit of Section 10(b) while,
as Stoneridge made clear, the latter are covered. Thus, even if
Respondent here is viewed as a secondary actor, the allegations in the
complaint constitute a primary violation. Therefore, they are sufficient. In
this regard, the Court need not decide when an outside accountant or lawyer may
be subject to liability under the Section the SEC argued.
The Commission concludes it arguments by disputing
Petitioner's claim that the complaint fails to satisfy the causation
requirements of a Section 10(b) cause of action. Under Basic v. Levinson,
485 U.S. 224 (1988), the fraud-on-the-market presumption is sufficient,
according to the SEC. Neither that case nor Stoneridge contain an
attribution requirement which some circuit courts follow and which requires
that the statement be attributed to the speaker to be held liable. Here, in
view of the nature of the relationships in a mutual fund complex it is clear
that Respondent can be held liable under Section 10(b), according to the
Commission.
The SEC's argument here is consistent with its historic
expansive reading of Section 10(b). The agency's position is, however,
reminiscent of its argument regarding scheme liability. Under that theory, the
Commission claimed that those who participate in a scheme to defraud under
certain circumstances may be held primarily liable. A variation of the
Commission's theory was adopted by the Ninth Circuit in Simpson v. AOL Time
Warner, Inc., 452 F.3d 1040 (9h Cir. 2006).
The Stoneridge Court did not adopt the
Commission's scheme liability theory. There, the High Court focused on the
element of reliance and the remoteness of the conduct of the third party
vendors who were alleged to have participated in a "scheme" with Charter
Communications to falsify its financial statements.
Underlying the Court's analysis in Stoneridge are
two key points. First, the cause of action for damages under Section 10(b) was
created by the courts and not Congress. The Supreme Court has repeatedly cited
this fact in limiting private claims under the Section. Second, the Court
prefers a bright line test. Like its theory of scheme liability, the
Commission's arguments in Janus do not appear to fully address these
points. And, the Commission is advancing it theory of liability at a time when
Congress just refused to extend aiding and abetting to private damage actions
in favor of a study on the question by the SEC (here). On the
other hand, perhaps the third time is the charm.
Argument is scheduled for December 7, 2010 at 10:00 a.m.
For
more news involving securities issues, visit SEC Actions, a
blog by Thomas Gorman