WASHINGTON, D.C. - (Mealey's) A service provider cannot
be held liable in a private securities fraud class action for helping or
participating in another company's misrepresentations in a prospectus statement
for a stock offering because the misstatements were made by another party and
not the service provider or its wholly owned subsidiary, the U.S. Supreme Court ruled Jun. 13 in a
5-4 decision (Janus Capital Group, Inc., et al. v. First Derivative Traders,
No. 09-525, U.S.
Sup.; See January 2011, Page 6).
Shareholder Craig Wiggins sued Janus Capital Group Inc.
(JCG) and its wholly owned subsidiary Janus Capital Management LLC (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 alleged
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 JCG
appealed to the Fourth Circuit.
On May 7, 2009, a panel of the Fourth Circuit reversed
and remanded the decision, and 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, and oral argument was heard
Dec. 7.
In reversing, the majority, in an opinion written by Justice Clarence
Thomas and
citing the Supreme Court's ruling in Stoneridge Investment Partners, LLC v.
Scientific-Atlanta, Inc. (552 U.S. 148, 157 [2008]; See February 2008, Page
5), held
that
JCM and JCG cannot be held liable under Securities and Exchange Commission Rule
10b-5 because the alleged misrepresentations included in the prospectuses were
made by Janus Investment Fund, and not JCM or JCG.
"For Rule 10b-5 purposes, 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. Without control, a person
or entity can merely suggest what to say, not 'make' a statement in its own
right. . . . Reading 'make' more broadly, to include persons or
entities lacking ultimate control over a statement, would substantially
undermine [the Supreme Court's ruling in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. (511 U.S. 164, 180 [1994])] Central
Bank by rendering aiders and abettors almost nonexistent. The Court's
interpretation is also suggested by Stoneridge . . . and accords with
the narrow scope that must be given the implied private right of action," the
majority stated.
The majority also rejected the Government's contention
that "make" should be defined as "create," which would allow private plaintiffs
to sue a person who provides the misrepresentations that another person puts
into a statement, finding that "[a]dopting that definition would be
inconsistent with Stoneridge . . . , which rejected a private Rule 10b-5
suit against companies involved in deceptive transactions, even when
information about those transactions was later incorporated into false public
statements."
"First Derivative notes the uniquely close relationship
between a mutual fund and its investment adviser, but the corporate formalities
were observed, and reapportionment of liability in light of this close
relationship is properly the responsibility of Congress, not the courts.
Furthermore, First Derivative's rule would read into Rule 10b-5 a theory of
liability similar to - but broader than - control-person liability under
§20(a)," the majority explained.
Moreover, the majority ruled that "[a]lthough JCM may
have been significantly involved in preparing the prospectuses, it did not
itself 'make' the statements at issue for Rule 10b-5 purposes. Its
assistance in crafting what was said was subject to Janus Investment Fund's
ultimate control."
Chief Justice John G. Roberts Jr. and Justices Antonin
Scalia, Anthony M. Kennedy and Samuel A. Alito Jr. joined in the majority
opinion.
In a dissenting opinion, in which Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena
Kagan joined, Justice Stephen G. Breyer wrote that "[i]n my view, . . . the
majority has incorrectly interpreted [Rule 10b-5's] word 'make.'"
"Neither common English nor this Court's earlier cases
limit the scope of that word to those with 'ultimate authority' over a
statement's content. To the contrary, both language and case law indicate
that, depending upon the circumstances, a management company, a board of
trustees, individual company officers, or others, separately or together, might
'make' statements contained in a firm's prospectus - even if a board of
directors has ultimate content-related responsibility. And the
circumstances here are such that a court could find that Janus Management made
the statements in question," Justice Breyer said.
[Editor's Note: Full coverage will be in the July
2011 issue. In the meantime, the opinion is available at www.mealeysonline.com or
by calling the Customer Support Department at 1-800-833-9844. Document
#57-110711-001Z. For all of your legal news needs, please visit www.lexisnexis.com/mealeys.]
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