By Joseph B. Crace and Matthew M. Curley
On June 13, 2011, the Supreme Court issued its long-awaited opinion in Janus Capital Group, Inc. v. First Deriv. Traders, --- S. Ct. ---, 2011 WL 2297762 (June 13, 2011), in which the Court granted certiorari to address whether an investment advisor can be held liable in a private action under Rule 10b-5 for false statements in a mutual fund’s prospectuses. In a 5-4 opinion delivered by Justice Clarence Thomas, the Court held that mutual fund investment advisers cannot be held liable for such statements, as the advisor did not make the statements in the prospectuses that formed the basis of the claims under Rule 10b-5.
The case involved whether, Janus Capital Management (“JCM”), an investment advisor, could be held liable under Rule 10b-5 for allegedly false statements in the prospectuses of Janus Investment Fund (“the Fund”), the mutual fund for which it served as investment advisor. Id. at *2-3. The district court dismissed the complaint for failure to state a claim. The Court of Appeals for the Fourth Circuit reversed, holding that plaintiffs adequately alleged that “[Janus Capital Group] and JCM, by participating in the writing and dissemination of the prospectuses, made the misleading statements contained in the documents.” In re Mutual Funds Inv. Litig., 556 F.3d 111, 121 (4th Cir. 2009).
The Supreme Court reversed the judgment of the Fourth Circuit, holding that JCM could not be held liable as a “maker” of a statement issued by the Fund. In so holding, the Court articulated the following standard for determining whether a defendant may be liable for statements included in a mutual fund’s prospectus under Rule 10b-5: “the maker of a statement is the entity with authority over the content of the statement and whether and how to communicate it.” Janus, 2011 WL 2297762 at *5. “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.” Id. Merely “participating in the writing and dissemination” of prospectuses is not enough to confer primary liability. Id.
The Court explained that “[o]ne ‘makes’ a statement by stating it,” and ultimately rejected the argument that one can ‘make’ a statement by either helping to create it, or by supplying false information that was adopted by or incorporated into the statement. Id. at *5. The Court expressed hesitation at expanding the scope of primary liability because “neither Rule 10b-5 nor § 10(b) [of the Securities Exchange Act of 1934] expressly creates a private right of action.” Id. at *4. Because a private right of action is implied under Rule 10b-5, “[c]oncerns with the judicial creation of a private cause of action caution against its expansion,” and “we must give ‘narrow dimensions . . . to a right of action Congress did not authorize when it first enacted the statute and did not expand when it revisited the law.’” Id. at *4 (quoting Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 167 (2008)).
At bottom, the Court reaffirmed the principles that informed the Court’s decisions in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), and Stoneridge Inv. Partners, cases in which the Court held that Rule 10b-5’s private right of action does not extend to suits against alleged aiders and abettors of securities fraud. In Janus Capital Group, the Court held that “[a] broader reading of ‘make,’ including persons or entities without ultimate control over the content of a statement, would substantially undermine Central Bank. If persons or entities without control over the content of the statement could be considered primary violators who ‘made’ the statement, then aiders and abettors would be almost nonexistent.” Janus Capital Group, 2011 WL 2297762 at *5.
This decision, in accordance with both Central Bank of Denver and Stoneridge Inv. Partners, makes clear that the current Court likely will continue to take a cautious approach when examining issues bearing on potential expansions of the private right of action under § 10(b) of the 1934 Act and Rule 10b-5. Absent a change in the Court’s current composition, expansion of such private rights of action will likely have to come through congressional action.
(Joe Crace is an attorney at Bass, Berry & Sims PLC, concentrating his practice on corporate and securities litigation, shareholder litigation and general commercial disputes. Matt Curley is a Member of Bass, Berry & Sims PLC, focusing his practice on complex commercial, securities and class action litigation and the representation of clients in connection with internal and governmental investigations and related proceedings).