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Supreme Court Limits Who Can Be Found Liable in Private Securities Fraud Claims
(June 2011) By Imran O. Shaukat, Summer Associate
For more information, contact Paul
Farquharson.
Janus Capital Group, Inc. et al. v. First Derivative Traders,
No. 09–525 (U.S. Supreme Court, June 13, 2011) |
View pdf
In this recent private securities fraud case, the Supreme
Court of the United States held that alleged false statements made by a parent
corporation’s wholly owned subsidiary were not attributable to the parent
corporation. Specifically, Janus Capital Group, Inc. (“JCG”) did not violate
Securities and Exchange Commission (SEC) Rule 10(b)(5) (“Rule 10(b)(5)”) for
making false statements in mutual fund prospectuses when the statements were
made by JCG’s subsidiary, a separate legal entity.
Rule 10(b)(5) prohibits making any untrue statement of
material fact in connection with the purchase or sale of securities. Here, First
Derivative Traders (“First Derivative”), representing a class of stockholders in
JCG, alleged that JCG and its wholly owned subsidiary, Janus Capital Management
LLC (“JCM”), made false statements in mutual fund prospectuses, in violation of
Rule 10(b)(5). The prospectuses were filed by Janus Investment Fund, which
retained JCM to be its advisor and administrator. First Derivative argued that
because JCG controlled its subsidiaries, JCG should be held liable for making
the false statements in the mutual fund prospectuses. JCG argued that because
Janus Investment Fund was a separate legal entity, neither JCG nor JCM could be
held liable in a private securities fraud action.
The District Court dismissed First Derivative’s
Complaint for failure to state a claim. The Fourth Circuit reversed, holding
that First Derivative had sufficiently alleged that JCG and JCM, by
participating in the writing and dissemination of the prospectuses, made the
misleading statements contained in the documents.
In reversing the decision of the Fourth Circuit, the
Supreme Court clarified that the maker of a statement, under Rule 10(b)(5),
is the entity with authority: (1) over the content of the statement; and (2)
as to whether and how to communicate that statement. The Court relied on
Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511
U. S. 164 (1994), where the Court held that Rule 10(b)(5) does not allow for
private securities fraud claims against aiders and abettors. To include
persons or entities without ultimate control over the content of a statement
would substantially undermine Central Bank. The Court reasoned that without
control, a person or entity can merely suggest what to say, not “make” a
statement in its own right. Because the statements in the prospectuses were
made by JIF, the Court concluded that First Derivative failed to state a
claim against JCG or JCM under Rule 10(b)(5).
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