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 June 13 in a 5-4 decision (Janus Capital Group, Inc., et al. v. First Derivative Traders, No. 09-525, U.S. Sup.).
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 ), 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 )] 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.
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