By W. Brantley Phillips, Jr. and Shayne R. Clinton
Recently, the Supreme Court rendered its decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2302 (June 13, 2011), holding that no private right action is available under Rule 10b-5 unless “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.”
The Supreme Court explained that “[w]ithout control, a person or entity can merely suggest what to say, not ‘make’ a statement in its own right.” Id. Moreover, “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.
The Supreme Court 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 2303-04.
Recent lower courts have analyzed how to apply Janus with corporate insiders and the extent to which insiders have ultimate authority over any alleged false statements attributable to a company. SeeIn re Coinstar Inc. Sec. Litig., No. C11-133, 2011 WL 4712206 (W.D. Wash. October 6, 2011); Hawaii Ironworkers Annuity Trust Fund v. Cole, No. 3:10cv371, 2011 WL 3862206 (N.D. Ohio Sept. 1, 2011); Local 703, I.B. of T. Grocery & Food Employees Welfare Fund v. Regions Fin. Corp., No. 10-2847, 2011 U.S. Dist. LEXIS 93873 (N.D. Ala. Aug. 23, 2011); In re Merck & Co., Inc. Sec., Derivative & "ERISA" Litig., Nos. 05–1151 and 05–2367, 2011 WL 3444199 (D.N.J. Aug. 8, 2011); S.E.C. v. Daifotis, No. C 11-00137, 2011 WL 3295139 (N.D. Cal. Aug. 1, 2011).
Recently, in City of Roseville Employees’ Retirement System v. Horizon Lines, Inc., et al., No. 10-2788, 2011 WL 3695897, at *1, 4 (3d Cir. August 24, 2011), the Third Circuit divided the issue of scienter into two parts — namely, who made public certain statements versus who acted with scienter. In doing so, the Third Circuit affirmed the District Court’s determination that, although senior executives made false statements attributable to the company, they did so without scienter. In the court’s view, this separated the senior executives from other lower-level managers, who had acted with scienter but did not make any false statements attributable to the company.
The court held that in, deciding whether a corporation had the requisite scienter in making an alleged false statement, one must “‘look to the state of mind of the individual corporate official or officials who make or issue the statement . . . rather than generally to the collective knowledge of all the corporation’s officers and employees acquired in the course of their employment.’” Id. at *3 (citing Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004)).
The court also noted that “statements of executive officers may be attributed to a corporation when they are ‘made pursuant to their positions of authority within the company.’” Id. (citing citing Southland Sec. Corp.). And, although this decision does not reference Janus, it should assist other courts when analyzing the impact and reach of Janus on corporate insiders who make statements attributable to companies.
(Brant Phillips is a Member of Bass, Berry & Sims PLC, where his practice focuses on complex business litigation, including securities and shareholder class action defense, derivative actions and business fraud, as well as regular work in various administrative proceedings on behalf of education, healthcare and utility industry clients. Shayne Clinton is an attorney at Bass, Berry & Sims PLC, focusing his practice on corporate and securities litigation, including cases involving class action defense, officer and director liability, and corporate and partnership disputes).