US Supreme Court "Makes" a Point in Janus Case

June 13, 2011

On June 13, 2011, the United States Supreme Court issued an intriguing Decision that wrestled with the issues of the legal fiction of seemingly independent entities that nonetheless operate with apparent common interests and connections.  In an Opinion that reads as much as a legal dissertation as a High School grammar lesson, the Court tries to determine what is meant by "making" a misstatement.

SIDE BAR: Janus Capital Group, Inc. (JCG), is a publicly traded company that created the the Janus family of mutual funds, which are organized in a Massachusetts business trust known as the Janus Investment Fund ("JIF"). 

JIF retained Janus Capital Management LLC (JCM) - a wholly owned subsidiary of JCG - as its investment adviser and administrator.

Although JCG created JIF, the latter is a separate legal entity owned entirely by mutual fund investors.

At all times relevant to this case, all of the officers of JIF were also officers of JCM, but only one member of JIF's board of trustees was associated with JCM.

Investor Losses

JIF issued prospectuses describing the investment strategy and operations of its mutual funds to investors; and among the representations were that the funds were unsuitable for market timing strategies.  However, in September 2003, a Complaint filed against JCG and JCM by the New York State Attorney General (NYSAG) alleged the two entities had entered into secret arrangements to permit market timing in several funds run by JCM.  On the heels of this negative news, investors withdrew significant amounts of money from the JIF funds, resulting in a depreciation of JCG's stock from about $17.68 on September 3rd to $13.50 by September 26th.  Moreover, in 2004, JCG and JCM settled  the NYSAG's allegations by a $125 million fee reduction, $50 million in civil penalties, and $50 million in disgorgement to the mutual fund investors.

First Derivative Traders represented a class of plaintiffs who owned JCG stock as of September 3, 2003 and filed a private action against both JCM and JCG under Securities and Exchange Commission (SEC) Rule 10b-5, which prohibits any person from making any untrue statement of a material fact in connection with the purchase or sale of securities. First Deriviative took the position that JCG and its wholly owned subsidiary JCM made false statements in mutual fund prospectuses filed by JIF.

Win Some, Lose Some

The District Court dismissed the complaint for failure to state a claim.

On appeal, 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.

The matter then proceeded on appeal to the US Supreme Court. JANUS CAPITAL GROUP, INC., ET AL. v. FIRST DERIVATIVE TRADERS  (564 U. S. ____ (2011)

In a 5 to 4 majority decision, the Court held that because the false statements included in the prospectuses were made by JIF (and not by JCM), that JCM and JCG cannot be held liable under Rule 10b-5. 

I commend the full-text of the Opinion, which is not overly focused on technical legal issues and provides an interesting insight into how the Court analyzed the issues.  Of note is this commentary on pages 6-7 of the Opinion:

One "makes" a statement by stating it. When "make" is paired with a noun expressing the action of a verb, the resulting phrase is "approximately equivalent in sense" to that verb. 6 Oxford English Dictionary 66 (def. 59) (1933)(hereinafter OED); accord, Webster's New International Dictionary 1485 (def. 43) (2d ed. 1934) ("Make followed by a noun with the indefinite article is often nearly equivalent to the verb intransitive corresponding to that noun"). For instance, "to make a proclamation" is the approximate equivalent of "to proclaim," and "to make a promise" approximates "to promise." See 6 OED 66 (def. 59). The phrase at issue in Rule 10b-5, "[t]o make any . . . statement," is thus the approximate equivalent of "to state." For purposes of Rule 10b-5, 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. This rule might best be exemplified by the relationship between a speechwriter and a speaker. Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit-or blame-for what is ultimately said.