WASHINGTON, D.C. - (Mealey's) The U.S. Supreme Court heard
oral argument on Tuesday, Dec. 7, in a securities class action lawsuit challenging whether a
service provider can be held liable in a private securities fraud action for
helping or participating in another company's misrepresentations in a
prospectus statement for a stock offering (Janus Capital Group, Inc., et al.
v. First Derivative Traders, No. 09-525, U.S. Sup.; See November 2010, Page
25).
Arguing for petitioners Janus Capital Group Inc. (JCG)
and its wholly owned subsidiary Janus Capital Management LLC (JCM), Mark A.
Perry said the petitioners cannot be held liable for the misrepresentations
made in the prospectuses that they helped draft because the statements made
were those of the JCG mutual funds that issued the prospectuses.
Upon direct questioning from Justice Sonia Sotomayor,
Perry said that the petitioners cannot be held liable because "the challenge
statements appear in the prospectuses for the Janus Funds, separate legal
entities not parties to this lawsuit."
Perry further averred that none of the federal courts to
hear the merits of the instant action has found there to be any scienter on the
part of either JCG or JCM and that the investors in the instant action, First
Derivative Traders, "did not purchase the securities offered by the - the
prospectus they challenge."
Justices Elena Kagan and Ruth Bader Ginsburg also each
questioned Perry as to what parties actually controlled the funds and whether
JCM's officers and directors or its in-house lawyers wrote the
prospectuses.
Attorney David C. Frederick, who argued on behalf of
First Derivative, asserted that because "JCM was responsible for the
prospectuses in all their various aspects:
In writing, preparing, et cetera," the petitioners can and should be
held responsible for the misrepresentations.
Justice Antonin Scalia questioned Frederick as to how JCM
could actually "make" the misstatements at issue, to which Frederick replied
that "under the SEC's interpretation," make means to "create or to compose or
to accept as one's own."
U.S. Department of Justice attorney Curtis E. Gannon also
argued on behalf of First Derivative as amicus
curiae.
Shareholder Craig Wiggins sued JCG and JCM in the U.S.
District Court for the District of Colorado in November 2003. The case was transferred to the Mutual Funds
multidistrict litigation in the District of Maryland for coordination with
similar cases. The MDL judge appointed
First Derivative Traders as lead plaintiff for the class.
First Derivative then filed a second amended complaint in
which it alleges that on Sept. 3, 2003, shares of common stock in JCG dropped
when the New York attorney general filed a complaint in a separate action,
stating that JCG had market timing arrangements with a number of investors for
its "Janus Funds," which the company admitted.
The District Court dismissed the complaint, and a Fourth
Circuit U.S. Court of Appeals panel reversed and remanded the decision.
JCG filed a petition for a writ of certiorari with the Supreme Court on Oct. 30, 2009, arguing that
the Fourth Circuit erred in finding that a service provider can be held
primarily liable in a private securities fraud action for helping in another
company's misstatements. The Supreme
Court granted the petition on June 28.
[Editor's Note:
Full coverage will be in the January issue. In the meantime, the transcript is available
at www.mealeysonline.com or by
calling the Customer Support Department at 1-800-833-9844. Document
#57-110111-001T. For all of your legal
news needs, please visit www.lexisnexis.com/mealeys.]
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