There
was resignation in David Frederick’s
voice Monday as he assessed the potential impact—in securities litigation and
beyond--of the U.S. Supreme Court’s 5-to-4 ruling in Janus Capital v.
First Derivative Partners. “This is a roadmap for fraud,” said Frederick, a
leading plaintiffs’ advocate at the high court. “That’s what the majority has
sanctioned. If the Court allows false statements to issue through
intermediaries, it will undoubtedly unleash bad actors.”
Frederick,
an appellate specialist at Kellogg,
Huber, Hanson, Todd, Evans & Figel, came out on the losing end of the
Supreme Court’s split decision Monday. As this
Reuters story explains, Frederick made the Supreme Court argument for First
Derivative, the lead plaintiff in a class action claiming Janus Capital was liable
for the allegedly-misleading prospectuses issued by its Janus Investment mutual
funds. The shareholders argued that Janus Investment, which technically put out
the prospectuses, was a mere shell for Janus Capital, which, as the mutual
funds’ investment adviser, actually created the allegedly-fraudulent offering
documents.
But
the Supreme Court, in a needle-thin interpretation of who “makes” a statement
for the purposes of securities fraud litigation, ruled that only Janus
Investment “made” the allegedly false statements, no matter how much of a
behind-the-scenes role Janus Capital had.
“The
Court adopted a very formalistic view,” Frederick told OTC. “Anyone who makes
statements through someone else gets a free pass. That does not promote
integrity in the markets.” Ira Press
of Kirby McInerney, who represented
the First Derivative in the trial court and the U.S Court of Appeals for the
Fourth Circuit, called the Supreme Court’s holding the “ventriloquist’s dummy
scenario,” in which “there can be unscrupulous entities playing something of a
shell game to mislead the public, like Edgar Bergen with Charlie McCarthy.”
The
five-Justice majority, in a ruling written by Justice Clarence Thomas, concluded Janus Capital was protected under the
same reasoning the Court previously applied in Central Bank of Denver v.
First Interstate and Stoneridge v.
Scientific-Atlanta, which offered broad protection to so-called secondary
actors, such as law and accounting firms that had a hand in a fraud defendant’s
allegedly false statements. First Derivative counsel Frederick had insisted
he wasn’t asking the Supreme Court to undo its Stoneridge and Central Bank
rulings and extend liability to such third parties as lawyers and
accountants. But a recap
of the December 7, 2010, oral argument at Scotusblog suggests the Justices
resisted Frederick’s depiction of his own case.
Monday’s
ruling confirms that. “A broader reading of “make,”
including persons or entities without ultimate control over the content of a
statement, would substantially undermine Central Bank,” Justice Thomas wrote
for the majority. “If persons or entities without control over the content of a
statement could be considered primary violators who ‘made’ the statement, then
aiders and abettors would be almost nonexistent.This interpretation is
further supported by our recent decision in Stoneridge.”
Janus
counsel Mark Perry of Gibson, Dunn & Crutcher said the
Court’s ruling completes the trilogy that began with Central Bank and continued
in Stoneridge. “Primary liability in class actions is limited to issuers,” he
said, speaking from Gibson’s New York offices. “All the people sitting around
me in tall buildings—lawyers, accountants, financial advisers—are not primary
actors.”
Interestingly,
the Supreme Court’s ruling Monday rejects the Securities and Exchange
Commission’s interpretation of Janus Capital’s liability under the securities
laws—a rare repudiation of an agency opining in its own area of expertise. (Brian Lehman of Bernstein Liebhard has a
provocative analysis of the Court’s usual deference to agency views at the
D&O Diary, although he guessed wrong on how the Justices would rule in
Janus.) The U.S. Solicitor General, on behalf of the SEC, submitted a brief
supporting First Derivative’s assertion of liability for Janus Capital, and
shared the oral argument with Frederick. (Scotusblog has all the briefs and
lower court rulings here.)
The
majority seems to go out of its way to reject the notion of deference to the
SEC. “We have previously expressed skepticism over the degree to which the SEC
should receive deference regarding the private right of action,” the opinion
says in a footnote. “This is also not the first time this Court has disagreed
with the SEC’s broad view of [securities fraud laws].”
To
First Derivative counsel Frederick, that’s adding insult to the injury the Court
wrought on securities plaintiffs. “Not only does the Court cut back on the
SEC’s enforcement authority, it gave the agency the back of its hand on its
interpretation of Rule 10b,” Frederick said. “This was not a good day for the
SEC.”
(Reporting
by Alison Frankel)