For purposes of 17 C.F.R. § 240.10b-5(b), 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. One who prepares or publishes a statement on behalf of another is not its maker. And in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by -- and only by -- the party to whom it is attributed.
Investors filed suit, alleged that a mutual fund advisor and its parent fund creator, as a control person, violated 17 C.F.R. § 240.10b-5(b) and 15 U.S.C.S. § 78j(b) in connection with impressions created by prospectuses on measures to curb market timing in the fund. A district court dismissed the case for failure to state a claim. On appeal, the U.S. Court of Appeals for the Fourth Circuit reversed the district court’s decision, holding that the investors had stated a claim under 17 C.F.R. § 240.10b-5(b), making the advisor liable to misrepresentation?
Were the investors able to state a claim?
The Court ruled that in order to be liable, the advisor had to have "made" the material misstatements. The "maker" of a statement for purposes of § 240.10b-5(b)'s private right of action was the entity with authority over the content of the statement and whether and how to communicate it. Without such authority, it was not "necessary or inevitable" that any falsehood would be in the statement. According to the Court, the advisor and the fund were legally separate entities, and the fund's board was more independent than 15 U.S.C.S. § 80a-10 required. There was no allegation that the advisor filed the prospectuses and falsely attributed them to the fund. Nor did the prospectuses indicate that they came from the advisor rather than the fund--a legally independent entity with its own board of trustees. The Court opined that being involved in preparing the prospectuses, subject to the ultimate control of the fund, did not mean the advisor "made" any statements in the prospectuses. Although the advisor may have assisted the fund with crafting what the fund said in the prospectuses, the advisor itself did not "make" those statements for purposes of § 240.10b-5(b). Absent liability by the advisor, the creator was not liable as a control person, thus, the respondent investors had failed to state a claim under 17 C.F.R. § 240.10b-5(b).