Oral Argument Heard In Securities Class Action Challenging Primary Liability Of Service Providers

Oral Argument Heard In Securities Class Action Challenging Primary Liability Of Service Providers

WASHINGTON, D.C. - (Mealey's) The U.S. Supreme Court on Dec. 7 heard oral argument 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.).

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 of Mealey's Emerging Securities Litigation.  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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